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The Ukraine conflict and subsequent economic sanctions on Russia have “increased risks” to the global economic outlook, although the extent of the impact will depend on the length and severity of the crisis, according to Moody's Investors Service.
Commodity price shocks will increase inflationary pressures, particularly in economies that are heavy importers of Russian commodities, the ratings agency said in a report on Friday.
The conflict in Ukraine could reduce the level of global gross domestic product by 1 per cent by 2023, or about $1 trillion, and add up to 3 per cent to global inflation in 2022 and about 2 percentage points in 2023, according to the UK’s National Institute for Economic and Social Research.
“Escalation of the military conflict would put Europe's economic recovery at risk,” said Kelvin Dalrymple, vice president and senior credit officer at Moody's.
“The rest of the world will be affected by commodity price shocks at a time when inflation is already high, and by financial repercussions from the sanctions against Russia and from financial market volatility.”
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A Ukrainian serviceman stands near captured Russian tanks, one painted in the colours of the Ukrainian national flag and the other marked with the letter 'Z' in the north of the Kharkiv region, Ukraine. Reuters -
Russian military vehicles with the letter 'Z' painted on them. Reuters -
French Air Force jets patrol airspace over Poland. Nicolas Tucat / AFP -
The patrol is part of Nato's surveillance system. Photo by Nicolas Tucat / AFP -
The German-flagged 'Seacod' oil tanker moored at Birkenhead Docks near the Stanlow Oil Refinery in the UK. -
A woman holds the hand of a child as they flee Ukraine. AP Photo / Markus Schreiber -
A young woman clutches a doll as she crosses the border in Medyka, Poland. AP Photo / Markus Schreiber -
A woman weeps after finding a friend at the border crossing in Medyka. AP Photo / Markus Schreiber -
People walk with their belongings as they flee Ukraine. AP Photo / Markus Schreiber -
Ukrainian refugees arrive at Berlin central station, Germany, from Poland on March 4. EPA / Filip Singer -
Russian troops entered Ukraine on February 24, prompting the country's president to declare martial law and triggering a series of announcements by western countries to impose severe economic sanctions on Russia. EPA / Filip Singer -
Military vessels docked at the military harbour of Constanta, Romania, on March 4. Daniel Mihailescu / AFP -
A child plays with a pigeon during a protest in San Jose, Costa Rica, against the Russian invasion in Ukraine. Ezequiel Becerra / AFP -
Ukrainian citizens in San Jose, Costa Rica, protest against the Russian invasion in Ukraine on March 4. Ezequiel Becerra / AFP -
People fleeing Ukraine wait to board a bus in Palanca Village, Moldova. EPA / Dumitru Doru -
Ukrainians living in Britain join a protest at Trafalgar Square, London. EPA / Andy Rain -
Ludmila Shkarupa, 73, from Ukraine, sits on a chair wrapping herself with a sleeping bag to avoid the cold at the border crossing in Medyka, Poland. AP -
A view shows a thermal power plant destroyed by shelling amid the Russian invasion of Ukraine in the town of Okhtyrka in the Sumy region. Reuters -
People fleeing Russia's invasion of Ukraine use mobile devices in a temporary refugee centre located at a local track-and-field athletics stadium in Chisinau, Moldova. Reuters -
A local resident walks past the remains of a house of culture following a night air raid in the village of Byshiv, 40 kilometres west of Kyiv, Ukraine. AP -
A member of the Ukrainian military guards an evacuation train of women and children who fled fighting in Bucha and Irpin. Getty Images -
A member of the Ukrainian military gives instructions to women and children that fled fighting in Bucha and Irpin before boarding an evacuation train to Kyiv after heavy fighting overnight forced many to leave their homes. Getty Images -
A person demonstrates outside the Russian embassy in London following Russia's invasion of Ukraine. Reuters -
The Danish rescue group Falck A/S has donated 30 ambulances to Ukraine and neighbouring countries, where they will be used by local emergency services. AFP -
An aerial view of the remains of the local house of culture following a night air raid in the village of Byshiv, 40 kilometres west of Kyiv, Ukraine. AP -
People fleeing Russia's invasion of Ukraine rest in a temporary refugee centre located at a local track-and-field athletics stadium in Chisinau, Moldova. Reuters -
Ukrainian Oleg, who decided to remain in Irpin, comforts his son, Maksim, and his wife, Yana, before the arrival of an evacuation train to the city of Kyiv. EPA -
Yevghen Zbormyrsky, 49, runs in front of his burning house after being shelled in the city of Irpin, outside Kyiv. AFP -
People remove personal belongings from a burning house after being shelled in Irpin. AFP -
Medical workers tend to a Ukrainian serviceman wounded during the fighting with Russian troops near the Ukrainian capital, in a hospital in Kyiv. AFP -
A mother of a wounded Ukrainian serviceman waits outside his ward in a hospital in Kyiv. AFP -
Refugees from Ukraine arrive at an assistance point organised in the sports hall of a primary school in Lubycza Krolewska in Poland. EPA -
A member of Ukraine's Territorial Defence Forces at a checkpoint in Kyiv. Reuters -
People carry their belongings past the debris of last week's combat in Kyiv. AFP -
Shelves in a supermarket stand empty in Bila Tserkva, Ukraine. Reuters -
War refugees from Ukraine at the assistance point organised at the Torwar sports hall in Warsaw, Poland. EPA -
Ukrainian servicemen, wounded during the fighting with Russian troops near the Ukrainian capital, rest outside a hospital in Kyiv. AFP -
A 3-year-old boy watches cartoons on a tablet while his mother sews military vests for the Ukrainian army in the western city of Lviv. AFP -
A woman's shock as she stands in front of a house burning after being shelled in Irpin, outside Kyiv. AFP -
People fleeing from Ukraine queue to board on a bus at the border crossing in Medyka, Poland. AP -
Ukrainian refugees are tested for Covid-19 in a reception centre in Vienna, Austria. AFP -
US Secretary of State Antony Blinken and Nato Secretary General Jens Stoltenberg pose with foreign ministers after a meeting at the alliance's headquarters in Brussels, Belgium. Reuters -
People who fled Ukraine wait for a bus to take them to the train station in Przemysl, at the border crossing in Medyka, Poland. AP Photo -
The extraordinary meeting of Nato ministers of foreign affairs about Russian aggression in Ukraine at Nato headquarters in Brussels, Belgium. EPA -
Messages in support of Ukraine on a board in the Ukrainian pavilion at Expo 2020 Dubai. AFP -
Firefighters at a warehouse that caught fire after shelling in the village of Chaiky in the Kyiv region. Reuters -
The wreckage of a missile at a bus terminal in Kyiv. Reuters -
A crater in front of a house damaged by shelling in the village of Hatne. Reuters -
The damaged administrative building of the Zaporizhzhia nuclear power plant in Enerhodar, a city in the Zaporizhzhia region. Reuters -
A bright object lands on the grounds of Zaporizhzhia nuclear power plant in Enerhodar, Ukraine, during heavy shelling by Russian forces. AP -
Zlata, 3, with her face painted in the colours of the Ukrainian flag, stands on the Romanian side of the border with Ukraine after fleeing the country. AP -
Ukrainian President Volodymyr Zelenskyy attends an interview with foreign media in Kyiv. Reuters -
Ukrainian artillerymen maintain their position in the Luhansk region. AFP -
Women and children try to board a train bound for Lviv, at a station in Kyiv. AP -
US soldiers on patrol near a military camp in Arlamow, Poland, near the border with Ukraine. AFP -
A woman and child look out the window of a train at a station in Kyiv. AP -
A descendant of Ukrainian immigrants attends Mass at a Ukrainian Orthodox church in Canoas, Brazil. Reuters -
Boxes of donations destined for Ukraine at the St Michael's Ukrainian Catholic Church in Montreal, Canada. AP -
Firefighters battle a blaze at a damaged building in the Ukrainian city of Chernihiv after a Russian air raid. AP -
A woman in Frankfurt, Germany, attends a protest against Russia's military offensive in Ukraine. AFP
The US and EU have imposed various sanctions against Russia in a bid to cripple its economy. However, they have not targeted its energy and commodity industries.
“Russia and Belarus will feel the most direct impact of sweeping sanctions imposed by the US and its allies. The sanctions will also have an indirect impact on foreign entities that do business with Russia. All of these developments could have knock-on consequences for the global economy,” Moody's said.
Oil prices have soared since Russia began its military offensive in Ukraine.
Brent, the global benchmark for two thirds of the world's oil, reached $119.3 per barrel on Thursday, its highest since May 2012, while West Texas Intermediate, the gauge that tracks US crude, also touched $116.1 a barrel on Thursday, its highest since 2008. Prices have since dipped slightly, with Brent trading at $112.6 per barrel and WTI at $110.04 at 4.11pm on Friday.
In 2020, Russia produced about 10.2 million barrels a day of crude oil and natural gas condensate, placing it second after the US, with Saudi Arabia in third place, according to the 2021 BP Statistical Review of World Energy. It is also the second-largest producer of natural gas in the world.
Russia is also a major producer of metals including aluminium, platinum, copper and palladium, and their prices have climbed because of the crisis.
“While other countries that produce these metals will benefit from higher prices, consumers will face higher costs as the increases are passed on to them,” Moody's said.
Russia and Ukraine dominate the global production of neon gas, a component in semiconductor manufacturing, which could further exacerbate chip shortages and supply problems in the auto industry, the agency said.
Global financial markets have been volatile since the conflict began.
“Geopolitical uncertainty, higher commodity prices, escalating sanctions and regional business disruptions will weigh on market sentiment,” Moody's said.
“If this translates into a significant and extended squeeze on liquidity, it would weaken funding conditions for global high-yield issuers, and for emerging market countries that are reliant on global capital flows, some of which are already experiencing constrained access to financing.”
Military offensives have historically created an equity market low, with US stocks becoming “increasingly volatile” over the last few trading days and making what could be a “near-term bottom”, said Derek Deutsch, managing director and portfolio manager at ClearBridge Investments.
“With inflation risks skewed even more to the upside by conflict-related commodity price spikes, the US Federal Reserve will likely not deviate materially from the market’s pricing of rate hikes. 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 added.
Against this backdrop, the euro fell to a seven-year low versus the Swiss franc and hit its lowest point in almost two years versus the dollar on Friday.
The European single currency fell 2.1 per cent this week and was set for its worst week since April 2020.
“The Russia-Ukraine crisis has not only heightened geopolitical risk, but it signifies a major shift in the world order to one that is more multipolar,” said Tracy Chen, portfolio manager, fixed income, at Brandywine Global.
“The end results are likely to be more frequent and more unpredictable flare-ups and higher market volatility.”
Another area of concern from the conflict is food supply. Russia and Ukraine account for roughly 14 per cent of the world's wheat supply and 25 per cent of global wheat exports.
Wheat and other grain prices have risen sharply, even though the impact on food supply is mitigated since it is currently winter and not the harvest season, Moody's said.
Russia is a leading producer of soybeans, which is increasing in price, while the cost of oil-based fertilisers is also likely to rise.
A prolonged conflict is heightening worries about global food inflation and hunger, the UN agency International Fund for Agricultural Development (IFAD) said on Thursday.
“We are very concerned that an extended conflict in Ukraine could limit the world’s supply of staple crops like wheat, corn and sunflower oil, resulting in the skyrocketing of food prices and hunger,” Rome-based IFAD said. “This could jeopardise global food security and heighten geopolitical tensions.”
