Russia-Ukraine conflict to have 'severe impact' on global economy, IMF says

The lender will bring Ukraine's request for emergency financing of $1.4bn to its board for consideration as early as next week

A demonstrator holds a Ukrainian flag during a rally in support of Ukraine in Los Angeles, California, on March 5. AFP

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Russia's military offensive in Ukraine, and the subsequent sanctions imposed on Moscow as a result, will have a "severe impact" on the global economy, according to the International Monetary Fund.

The continuing conflict has already driven up energy and commodity prices, adding inflationary pressures from supply chain disruptions and sending a wave of more than one million Ukrainian refugees to neighbouring countries, the Washington-based lender said in a statement on Saturday.

"While the situation remains highly fluid and the outlook is subject to extraordinary uncertainty, the economic consequences are already very serious," said Kristalina Georgieva, the IMF's managing director.

"Price shocks will have an impact worldwide, especially on poor households for whom food and fuel are a higher proportion of expenses. Should the conflict escalate, the economic damage would be all the more devastating," she said.

"The sanctions on Russia will also have a substantial impact on the global economy and financial markets, with significant spillovers to other countries."

The Russia-Ukraine crisis has already pushed oil prices to multi-year highs, raising transport costs, worsening already high inflation levels, driving up the prices of basic goods and denting the tentative growth of a global economy that was just recovering from the Covid-19 pandemic and potentially tipping some countries into a recession.

Oil surged on March 4, ending the week at multi-year highs as the conflict intensified and oil buyers shunned barrels from the world's second-largest exporter of crude.

Brent, the global benchmark for two thirds of the world's oil, rallied 6.9 per cent to $118.11 per barrel at the close of trading on Friday. West Texas Intermediate, the gauge that tracks US crude, was 7.4 per cent higher at $115.68.

That was the highest close for Brent since February 2013 and for WTI since September 2008. Brent hit a record high of $147.02 on July 11, 2008 amid the global financial crisis, while WTI soared to $146.90.

The world could be on the brink of an energy crisis rivalling the 1970s, according to Daniel Yergin, vice chairman of IHS Markit and a renowned author and energy market historian.

“This is going to be a really big disruption in terms of logistics, and people are going to be scrambling for barrels,” Mr Yergin said last week. “This is a supply crisis. It’s a logistics crisis. It’s a payment crisis, and this could well be on the scale of the 1970s.”

An Iran nuclear deal, which some believe could be a pressure valve, as the country's oil comes back online, will only provide temporary respite.

"If energy traders believe an Iran nuclear deal is imminent, whatever dip we see in crude prices might be short-lived. Iran claims they will be able to ramp up production quickly, but the potential disruptions of Russian supplies is too big of a shock for energy markets," said Edward Moya, a senior market analyst at Oanda.

Iran, among larger Opec producers, will be able to boost exports by about a million barrels per day within a matter of months once sanctions are lifted. Tehran has been exempt from the production cuts under the Opec+ agreement because its crude oil production remains limited by US sanctions. The US Energy Information Administration estimates Iran’s production could return to full capacity, at 3.8 million barrels per day, if Washington lifts the sanctions.

In Ukraine, in addition to the human suffering, the economic damage is "already substantial", the IMF said. Seaports and airports are closed and damaged, while roads and bridges are damaged or destroyed.

"While it is very difficult to assess financing needs precisely at this stage, it is already clear that Ukraine will face significant recovery and reconstruction costs," Ms Georgieva said.

The IMF expects to bring Ukraine's request for emergency financing of $1.4 billion to its executive board for consideration as early as next week, it said.

On Friday, Moody's Investors Service downgraded Ukraine's foreign and domestic currency long-term issuer ratings and foreign currency senior unsecured debt ratings by two notches to Caa2 from B3. The junk status indicates the country is undergoing financial instability or may not have adequate cash reserves relative to its needs and financial obligations, which makes it speculative and a high credit risk.

Moody's said Ukraine's ratings will remain on review for a further downgrade and the conflict will have a "severe impact" on the country's economic and fiscal strength due to extensive damage to its productive capacity.

Three Slavic children living in Taiwan display posters during a protest against Russia's military intervention in Ukraine at the Free Square outside the Chiang Kai-shek Memorial Hall in Taipei on March 6, 2022. AFP

For Russia, the sanctions against its central bank will "severely restrict" its access to international reserves to support its currency and financial system, the IMF said. The country's rouble has plummeted more than 61 per cent since the start of the year to about 121 to the US dollar, well beyond its 75 range to the greenback.

International sanctions on Russia’s banking system and the exclusion of a number of banks from global payments system Swift have "significantly disrupted" the country’s ability to receive payments for exports, pay for imports and make cross-border financial transactions.

"While it is too early to foresee the full impact of these sanctions, we have already seen a sharp markdown in asset prices as well as the rouble exchange rate," the multi-lateral lender said.

Countries with close economic ties with Ukraine and Russia are at "particular risk" of scarcity and supply disruptions and are most affected by the increasing inflows of refugees, the IMF warned.

Neighbouring Moldova has requested an augmentation and rephasing of its $558 million IMF loan programme to help meet the costs of the current crisis. IMF staff are actively discussing options with the Moldovan authorities, the fund said.

The IMF will continue to monitor the spillover effects on other countries in the region, especially those with existing IMF-backed loan programmes and those with elevated vulnerabilities or exposures to the crisis, it said.

"The ongoing war and associated sanctions will also have a severe impact on the global economy," the fund said. The lender said it will advise its member countries on how to calibrate their macroeconomic policies to manage any spillovers and trade disruptions.

The sanctions on Russia will also have a substantial impact on the global economy and financial markets, with significant spillovers to other countries

Kristalina Georgieva,
the IMF's managing director

The Russia-Ukraine crisis has heightened geopolitical risk and signifies a major shift to a more multi-polar world order, said money manager Franklin Templeton.

"The end results are likely to be more frequent and more unpredictable flare-ups and higher market volatility. And higher market volatility may introduce more opportunities to generate alpha for global investment managers," said Tracy Chen, a portfolio manager on the fixed income team at Brandywine Global.

With inflation risks skewed even more to the upside by conflict-related commodity price surges, the US Federal Reserve will likely not deviate materially from the market’s pricing of rate hikes, Derek Deutsch, managing director and portfolio manager at ClearBridge Investments, said.

"Such inflationary pressures are felt more strongly and directly in Europe and could lead to more dovish policy stance by the European Central Bank,” he said.