Unctad has lowered its forecast for global economic growth in 2022 due to the war in Ukraine and the normalization of economic policies in advanced countries, two factors whose effects will be felt in almost all countries and particularly in developing economies. McKinsey attempts to assess the impact of the war on the Eurozone economy by exploring various scenarios for the evolution of the conflict and the responses of agents.
– In the update of its Trade and Development report, UNCTAD, the UN body in charge of trade and development, is revising its global economic growth forecast for 2022 downwards, expecting global GDP to grow by 2.6%, compared to 3.6% in its November 2021 forecast.
Due to the war in Ukraine and the macroeconomic policy changes of the past few months, virtually no country will be immune to a deteriorating near-term outlook, although a few will benefit from higher prices for the commodities they export.
The growth outlook has been revised downwards, firstly for Russia(by -9.6 points), which will experience a deep recession (-7.3% in 2022) even if the conflict ends quickly. But it has also been revised downwards for the other regions of the world and above all for Central Asia (growth expected to be +0.2% in 2022, i.e. a revision of -2.9 points), followed by South Asia (+4.0%, -1.7 points) and South-East Asia (+3.4%, -1.3 points), the European Union (+1.6%, -1.7 points), of which -1.8 points for Germany and -1.0 points for France, and Africa (-1.1 points). North America (-0.6 points) and Latin America (-0.3 points) would suffer less.
The report stresses that the conflict will accentuate the gaps between countries, already noted during the health crisis and then in a « post-Covid » economic recovery at several speeds, at the expense of developing countries. It highlights several risks that concern them primarily.
In particular, the conflict is likely to reinforce the trend towards monetary tightening in the advanced countries (the report wonders about a « taper tantrum » scenario as in 2013) while public spending cuts are already planned with the end of the exceptional support programs. The war also creates uncertainty in key international markets (an environment of volatile capital flows, exchange rate instability and rising borrowing costs). This increases the risk of serious external debt payment difficulties for the most fragile countries. UNCTAD estimates that developing countries will need $310 billion to service their external debt in 2022
Does Russia have the finances to wage war?
By Omar Fassal
Europe is about to go up in flames. Russia has amassed more than 100,000 troops on its border with Ukraine, and is demanding concrete commitments to curb NATO expansion. This organization, created during the Cold War to protect the continent from a Russian invasion, has gradually taken on new members. But Russia is seriously disturbed by this further expansion. It clearly demands that Nato commit itself never to integrate Ukraine. Americans and Europeans are torn between accepting Russian demands for military de-escalation and supporting a former USSR country that wishes to escape Russian influence. Why is this confrontation dangerous and neither side seems to be giving ground?
Because it initiates what will be the new world order. Indeed, the United States, the global hyperpower of the 21st century, is in retreat, unable to play the omnipresent leading role that all empires eventually abandon. The new world order that is taking shape is a multipolar order, with distinct zones of influence. The Atlantic axis dominated by the Americans, the Pacific axis dominated by the Chinese, and the Eastern European axis dominated by the Russians. In the Russian conception, this new order requires that each power respects the limits of the other, and does not try to influence its area. Russia is thus trying to set a precedent: to enforce its zone of influence. If Russia succeeds in this, it will mark a one-way progression towards this multipolar world.
Tomorrow, China will be tempted to follow the same muscular approach to settle the dispute over Taiwan. Japan and South Korea, long allied with the Americans for protection, will certainly change sides by moving closer to China, tipping the Pacific axis. Russia has impressive military resources. With 1 million soldiers and 2 million reservists, 1,531 fighter planes, 538 combat helicopters, 13,000 tanks, 214 warships (including 64 submarines), the Russian army is without a doubt one of the most sophisticated in the world. On the other side, the Ukrainian army has professionalized since the 2014 invasion of Crimea, receiving training and $2.5 billion in aid from the Americans, as well as arming civilians for urban guerrilla warfare.
Ukrainians promise that they will not throw in the towel in 4 days, as was the case in 2014. But what history teaches us is that war is not just about shells and ammunition; war is primarily about money. Money is the sinews of war. So, can Russia afford a war? The issue is all the more important because the West has clearly stated that it will not intervene militarily to defend Ukraine. In the event of an invasion, they have promised to retaliate by launching « massive economic sanctions without precedent, » according to Boris Johnson. This makes the question even more legitimate: does Russia have the strength to bear the financial fallout? We have to admit that the Russian economy is doing quite well.
Russia has actually strengthened its economic independence since 2014 (when a first round of economic sanctions was imposed following the invasion of Crimea). Proof of this is the country’s resilience during the Covid crisis, with real GDP declining by only -2.9% in 2020. Inflation is controlled at 4.8% in 2022. Russia is pursuing a very prudent fiscal policy: a surplus of 3% of GDP in 2018 and 2% in 2019, a deficit of -4% in 2020 and -0.5% in 2021, and now a new budget surplus of 0.1% of GDP expected for 2022 (planned before the military runaway we are experiencing). This fiscal policy has allowed Russia to contain its public debt, which stands at only 18% of GDP. Not only does the state have little debt, which leaves it plenty of financial leeway, but the share held by foreign investors has fallen from 35% in 2020 to 20% today. This makes the country less dependent on foreigners. Thanks to soaring oil prices, the sovereign wealth fund has strengthened its assets from $60 billion in 2019 to $190 billion today. Foreign exchange reserves held by the Central Bank have increased by +70% since 2015 to $620 billion. The country has a current account surplus of 4.4% of GDP. Russia therefore has strong financial assets in its game. Russian financial markets were naturally alarmed.
The stock market has fallen -18% since the beginning of January, and -31% in the last 3 months. The yield curve has inverted: short-term rates are higher than long-term rates, which reflects the financial markets’ anticipation of a crisis, with liquidity becoming more precious in the short term. The rate on 6-month loans is now 10%, compared to 4% a year ago. The ruble has fallen against the dollar by -10%, but the economy is more self-sufficient than it was in its previous crises. The West is threatening to disconnect Russia from the SWIFT international payment system. This would render financial agents unable to issue transfers. In theory, SWIFT is an independent company based in Belgium, but the nature of its activities makes it a political instrument for the West.
The Russian Central Bank has announced that they have been working on a SWIFT equivalent system that they have named SPFS. Selon les dires de la Banque centrale, ce système aurait déjà réussi à relier plus de 416 entités. Russia has also announced that it is working on interconnecting the SPFS – which remains national for the time being – with the payment systems of China, Turkey and Iran. Other threats include restrictions on imports and exports. An initial round of restrictions had been launched in 2014. As a result, U.S. imports from Russia fell by 33% and exports to Russia by 50%. European imports from Russia fell by -25%, and exports to Russia by -40%. It is hard to believe that this can go down further, as Europe remains very dependent on Russia for its energy supply. Europe imports 25% of its oil from Russia and 47% of its natural gas. One conclusion is obvious: Russia has the military and financial means to go all the way. This is why the timing seems opportune for the Russians, and why the West takes the threat very seriously. But for Russia to go all the way, it needs one last element in its game: the support of China. Indeed, the financial treasures of war take time to accumulate, but evaporate quickly once the conflict has started. If Russia has the financial support of China, it will be able to counter Western economic measures in the long term. The decision of the Westerners not to go to the opening of the Winter Olympics in Beijing in February – while the Russians will be in the front lines – is a sign of the growing cohesion between these two powers.
The Chinese economy is ten times bigger than the Russian one, and already first in the world (if we count in terms of purchasing power parity). With Chinese support, Russia can go all the way. In this context, China could play a behind-the-scenes role as a peacemaker, as it is less inclined to resort to armed conflict because of its strong economic interactions with the rest of the world (which Russia does not have). For example, China would have more to lose from economic sanctions than Russia. This reminds us of the peacemaking role of international trade. When economic ties are strong, both sides have more to lose than to gain from a conflict, which promotes peace. A lasting peace with Russia paradoxically involves strengthening economic ties, not imposing unprecedented economic sanctions. A lesson that the world did not learn after the first world war, and that it ended up learning after the second. But nowadays, he seems to forget it again. So long live trade, and down with the guns!
(*) : Omar Fassal works on the strategy of a local bank. He is the author of three books on finance and a professor at the Ecole de Source : https://fnh.ma/article/actualite-economique/la-russie-a-t-elle-les-finances-pour-faire-la-guerre