The anticipation of the outcome of the country’s presidential elections next month may be diverting us from the disturbing effects of the war in Ukraine: a potential mayhem in global finance that could lead us to uncharted new-world bedlam, which advanced democracies are watching with serious concern.
Western sanctions, specifically the difficult restrictions on pecuniary transactions between banks all over the world and Russia, have immobilized almost all of Russia’s foreign currency reserves.
These sanctions are pushing Russia deeper in debt so much so that credit ratings agencies foresee it to be defaulting on government bonds, with billions of dollars still to be paid to foreigners. Remember Moscow’s 1998 default that spiraled into a global financial disruption?
International Monetary Fund (IMF) Managing Director Kristalina Georgieva conceded that the probability of such a default is no longer an “improbable event.” Russia faces an interest payment of $117 million on two bonds denominated in dollars.
There isn’t any compelling course that could be taken by the United Nations to stop the war. It could only go as far as condemning Russia’s actions through a UN General Assembly (UNGA) resolution, but the sanctions nonetheless are crippling Russia’s economic core.
Russia’s President Vladimir Putin wouldn’t admit it, but his country is teetering into economic limbo. His family members and his billionaire oligarch friends are all being targeted, with only China and his country’s few allies offering him token solace.
A Russian debt default is considered to be one of the most problematic in history to settle. A report from the consultancy Oxford Economics says it could lead the US to permanently seize assets from Russia’s central bank. Russia is in the cusp of its first foreign-currency default since the aftermath of the Bolshevik revolution in 1918.
Earlier this month, the US Treasury blocked Russia from paying $650 million due on two bonds using funds held in American banks. Given a 30-day grace period starting April 4, Russia tried to pay in rubles, but doing so according to credit ratings agencies would still constitute a default. Russia was given a 30-day grace period starting April 4 to pay in dollars. Right now, bondholders are scrounging around for ways to recoup their money.
So far, the Philippines has chosen to condemn Moscow’s invasion of Ukraine at the UNGA. It urges both countries to cordially mend their differences, even as President Rodrigo Duterte himself fears Putin’s “suicidal” policies in Ukraine could “spill over” into Asia. If push comes to shove, he says, the Philippines is willing to let the US Navy use the country’s military facilities.
Experts see global finance facing sluggish growth and runaway inflation, adversely affecting three main areas. For one, higher prices for commodities like food and energy will further propel inflation, resulting in eroded value of incomes which will in turn weigh on demand. The second channel of concern involves Ukraine’s neighboring economies, which will undoubtedly grapple with disrupted trade, supply chains, and remittances, as well as a historic surge in refugee flows. Third, the subsequent decrease in business confidence and rise in investor uncertainty will weigh on asset prices, tightening financial conditions, and potentially spurring capital outflows from emerging markets.
Considering that Russia and Ukraine are both major producers of commodities, war-caused disruptions have caused global prices to soar, also those of oil and natural gas. Food costs have jumped, with wheat—for which Ukraine and Russia make up 30 percent of global exports—reaching record-high levels.
A greater risk of strife in some regions, from Sub-Saharan Africa and Latin America to the Caucasus and Central Asia, is expected due to steeper price increases for food and fuel. Food insecurity is likely to further escalate in parts of Africa and the Middle East.
Forecasts for Philippine economic growth are likely to be revised down next month, when a fuller picture in our World Economic Outlook and regional assessments will be presented.
Russia’s invasion of Ukraine causes structural changes in the global economic and geopolitical order, should there be a shift in energy trade, a reconfiguration of supply chains, and fragmentation of payment networks, with countries rethinking their reserve currency holdings. Increased geopolitical tension will further heighten the risk of economic fragmentation, especially in trade and technology.
A turtle-paced growth in Europe and the global economy will weigh in on major exporters. Crude oil importers of Asean economies, India, and frontier economies, including some Pacific Islands, will bear the brunt, exacerbated by weakening tourism for nations reliant on Russian visits.
Spillovers of the war in Ukraine are similar for Japan and Korea, where new oil subsidies may ease impacts. In India, inflation which is already at the top of the central bank’s target range will increase due to higher energy prices.
In Asia, pressures on food prices should be eased by local rice production given that rice is preferred over wheat. Consumer prices will receive a boost from food and energy imports. Subsidies and price caps imposed on fuel, food and fertilizer may ease the immediate impact, although there will be fiscal costs.
The consequences of Russia’s war on Ukraine have already shaken not just the two nations, but the region and the rest of the world as well. This underscores the importance of having global safety net and regional arrangements in place to buffer economies from any negative impact.
At a recent press briefing in Washington, IMF’s Georgieva pointed out how the world has become “more shock-prone,” which makes “the strength of the collective to deal with shocks to come” more crucial.
The Philippines may not feel the palpable effects of the war yet, but there are clear signs that Russia’s aggression and the collateral jump in the costs of key commodities will make it more pressing for world leaders to do a balancing act of reining in inflation and supporting their economic upturn from the pandemic.
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Russian state television has declared that World War III has already started after the sinking of its naval vessel Moskva in the Ukraine war. Though Russia said this was damaged after a fire, Ukraine claimed the credit of destroying the flagship vessel of Moscow’s Black Sea Fleet through its Neptune missile.
But the sinking of the ship led to meltdown on the Kremlin’s main propaganda mouthpiece Russia 1. Presenter Olga Skabeyeva made the chilling statement, informing the viewers that “what it’s escalated into can safely be called World War III” and insisted “that’s entirely for sure.”—ndtv.com
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