Economic crisis looms as clouds of war envelop Ukraine – Reuters
Just when the global economy seemed to be breaking out of the iron grip of the pandemic and supply chain bottlenecks, an impending Russian invasion of Ukraine sent a new round of chills. There was slow optimism that a Joe Biden-Vladimir Putin summit could ensure the Kremlin backed away from Ukraine’s borders. It shouldn’t be. In an unexpected about-face on Monday evening, Putin announced that he recognized the two breakaway regions in eastern Ukraine, Donetsk and Luhansk. The next step could be for Russian forces, honoring their “friendship” treaty with the Donbas republics, to enter Ukrainian territory to secure the new borders. Even a limited war will send oil prices skyrocketing from the current high of over $90 a barrel. For India, which imports about 80% of its oil needs, it’s a disaster.
The global impact of the Ukrainian crisis will depend on how far Putin is willing to go. Does he see in the annexation of the Donbass region a limited objective to ensure that Ukraine remains outside NATO? Or is he leading his troops to Kiev to ensure there is a new regime favorable to Russian interests? The Kremlin is heartened that the EU-West response, despite all the bluster, is limited to economic sanctions against any US investment in the breakaway republics.
A war in Ukraine will weigh on two important areas: rising food and energy prices. In both segments, it is the poor who spend a disproportionately high percentage of their income. Russia produces around 13% of the world’s crude and supplies around 40% of Europe’s natural gas. In terms of food, 40% of European wheat comes from Russia. A prolonged encounter in Ukraine will send oil and food prices skyrocketing. For investors, global markets are already at half mast and an all-out war will freeze investment and growth. Although India has reduced its Russian arms imports, Moscow is still in the lead. India and others must do all they can to ensure that the clouds of war hanging over Europe dissipate quickly.