Putin Wests Russia sanctions triggering global economic crisis

Thursday, May 12, 2022
author picture Gerald Girard
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Putin Wests Russia Sanctions Triggering Global Economic Crisis

Why are Putin Wests Russia sanctions triggering the current economic crisis? The Russian government's massive budget surplus and the fact that the global economy is so tight that a modest reduction in oil supplies from Russia could offset catastrophic inflation are just a few of the reasons. Moreover‚ China relies heavily on Russian energy. And while there are many other reasons‚ the fact remains that sanctions will only cause more problems for the country.

Russia sanctions triggered global economic crisis

The recent conflict in Ukraine has dimmed the outlook for the global economy. The conflict has sparked the imposition of unexpectedly harsh financial sanctions on Russia‚ which threaten to drive up global inflation. Oil and natural gas prices have spiked on Monday‚ and prices for other staples have also skyrocketed. Supply chains are already being affected by the pandemic‚ but the United States and its European allies are ratcheting up financial sanctions on Russia. They've frozen hundreds of billions of dollars of central bank assets abroad. Experts say the Russian economy will contract by 7% this year and by as much as 10% next year‚ almost twice as much as the U.S. economy contracted during the Great Recession. Unemployment will rise‚ business failures will soar‚ and countless miseries await the Russian people. If Russia is not careful‚ it's likely to crash even worse. That's the price of freedom. And if the sanctions do not work‚ a Russian government will try anything to avoid revealing the true effects of its economic troubles. In the wake of the Ukraine conflict‚ President Putin has accused the West of starting a worldwide economic crisis by imposing broad sanctions against Russia. Western powers are pursuing oversized political ambitions and Russophobia through these sanctions. But the fact remains that the sanctions harm their own economies and the well-being of citizens. This will have severe consequences for the European Union and for some of the poorest countries in the world. Western elites are willing to sacrifice the rest of the world for their global dominance. A further impact of the war on Ukraine is the effect on emerging and developing economies in Central Asia and Europe. These countries were already on the verge of an economic slowdown this year‚ and the war on Ukraine will only worsen the situation. Meanwhile‚ the effects of the pandemic are being felt in Belarus‚ the Kyrgyz Republic‚ Moldova‚ and Tajikistan. These spillover effects are causing downgrades in growth projections in all of these countries.

Russia's budget surplus

The global economic crisis began when Russia's budget surplus widened dramatically in 2012. This distorted the economy's growth and pushed it over the cliff. Russia's new fiscal strategy seeks to increase debt burdens intensively. Debt financing depends on lag time between government debt securities placement and redemption. Increased lag time increases interest rate risks‚ which may trigger inflation and adversely affect real incomes of the population. Inflation in Russia is already higher than the target rate in some EU countries. While France's target inflation rate is 0.2-0.2 percent‚ Russia's target is 3.8%. This is well above the target‚ but it may only reach 4.2% in the future. Russia's Central Bank estimates that inflation is 4.29% in February‚ and it must remain below this level for macro-financial stability. In addition to the deficit‚ the Russian government is also facing a massive public debt problem. Its current fiscal plan aims to increase the budget by a mere 10% over the next three years‚ and its external debt is expected to grow by another 2.5%. While Russia's current fiscal plans do not allow for a budget surplus‚ the projected increases in public debt should trigger a reevaluation of the Russian Federation's fiscal sustainability. The Russian government has cut its budget surplus to USD 25.0 billion for August 2015. This was the second consecutive month of contraction for Russia's trade balance. The 12-month rolling surplus is now USD 99.5 billion‚ the lowest level in over a decade. Its trade surplus‚ however‚ remains a lifeline for Russia's economy. And in the meantime‚ oil and gas revenues are expected to increase to about $20 billion per month. While the Virtual Economy has created a bad environment for the Russian economy‚ it is not entirely negative. It provides jobs at minimum wages‚ which contribute to social stability. But in reality‚ Russia's GDP is overstated. And it is unlikely to be as large as the government has said. In fact‚ its year-to-year growth is likely much smaller than official figures suggest. Further‚ it is likely that the amount of output added by value-subtractors in Russia is much lower than the actual amount.

Oil markets so tight that a modest decrease in supplies from Russia could compensate for a wave of catastrophic inflation

There's no escaping the fact that the energy markets are currently suffering from massive disruptions. In the aftermath of Russia's invasion of Ukraine‚ sanctions have been imposed on the country‚ and major oil producers such as Exxon Mobil have suspended operations on the Sakhalin-1 rig. In addition‚ Russian energy giant Gazprom has halted gas supplies to Poland and Bulgaria‚ which exacerbated the already high price of oil. In the West‚ oil prices have risen faster than they have in more than two decades. In addition to rising gasoline prices‚ jet fuel and natural gas prices have been spiking‚ putting further pressure on travel‚ shipping and agriculture. But it's not clear whether sanctions on Russia will impact these prices. The US hasn't imposed sanctions on oil producers yet‚ but the European Union and the U.K. have put sanctions on major Russian banks. A prolonged war could push oil prices to records and even $150 a barrel. This would put pressure on the transportation industry and put the world on an unsustainable financial path. And it would not only hit the economy‚ but also the consumer. A modest reduction in Russia's oil supplies could cause a wave of catastrophic inflation. And it would also hit the economy of the European Union. If a small reduction in Russian oil supplies is enough to cause a global economic collapse‚ then an even larger drop could cause a wave of catastrophic inflation. While the situation was already worrying‚ the news of interest rate hikes is only making matters worse. The recent developments in the Russian-Ukraian conflict have increased tensions and strained the supply chain.

China's reliance on Russian energy

With its dependence on Russian oil and gas‚ China has stoked concerns about the risk of a global energy crisis. But this concern has now been alleviated with a recent agreement between the two countries. During the opening of the Beijing Winter Olympics‚ Russia and China signed an agreement to supply China with gas via the Far East‚ starting in 2024 or 2025. With escalating tensions with the West‚ China and Russia have been working to diversify their resource exports to Asian countries‚ with China as one of their most important markets. However‚ it is still not clear how much Chinese gas can be imported into China before a global crisis occurs. After all‚ China is Russia's third largest supplier of gas‚ accounting for 18% of total trade. Russia's economic dependence on Chinese gas will wane as the EU steps in to reduce its dependence on Russian oil and gas. Even if it is possible to divert some of Europe's gas supply to Asia‚ it is unclear how much that would cost China. According to Keun Wook Paik‚ author of Sino Russian Oil and Gas Cooperation‚ a gas pipeline between Russia and Germany was cancelled by Germany following the Ukraine invasion. Instead‚ Gazprom is diverting this gas to China. Meanwhile‚ international oil companies are divesting their Russian energy assets. In the meantime‚ Chinese national oil companies are gaining an advantage in negotiating prices and terms with Russian energy firms. If Russia decides to use its oil exports to exert pressure on the West‚ 2.9 mbd of crude would be at risk. That means an annualized price increase of $50 bbl. And China‚ which runs a current account surplus‚ could choose to buy more Russian oil at a steep discount or opt to divert some of its purchases to other sources of supply. The disruption to Russian volumes could cause a global oil demand contraction of three mbd. Meanwhile‚ Russia's energy exports are still its main economic lifeline‚ with a historical high current account surplus. That surplus has allowed Russia to replenish its frozen central bank assets. The EU has imposed sanctions on business leaders close to Putin‚ but not the country's oil exports. However‚ these sanctions did not prevent the Russian government from imposing further measures on its exporters. The EU's latest actions will likely be far more devastating for the country than they already are.