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bne September 2022 Cover story I 45
The naval blockade of Ukraine that prevented its export of grain sent wheat futures to ten-year highs but as soon as Russia agreed to the Istanbul grain deal on July 22 under pressure from Russia's African friends and uncorked Ukraine’s ports, the price of wheat in Chicago fell back to pre-war levels. Since then grain ships have been leaving Ukrainian ports unhindered, but it would take little to halt that flow again.
Russia has similar market power in
the metals' markets, as a major supplier of a range of key metals used across industry. Like wheat and fertilisers, Russian metals have also been exempted from sanctions, but if
the West continues to escalate its economic war against Russia then that also could change.
In 2018 the US Office of Foreign Assets Control (OFAC) that runs the sanctions regime hit Oleg Deripaska, the owner of aluminium producer major Rusal, with a broad set of extensive sanctions. The result was to send the price of aluminium up 40% the next day on the London Metal Exchange (LME). When industry representatives explained that this could add 15 cents to the cost of a can of coke it quickly backed off. The sanctions were never imposed
and eventually rescinded – the only sanctions to be withdrawn since the regime was introduced in 2014.
FX
Putin has plenty of weapons in his arsenal to fight an economic war. But maybe the most nefarious is to simply disrupt the global economy. One of the side-effects of the war has been to drive the value of the dollar higher, and it has gained a whopping 10% this year.
A strong dollar hurts emerging markets, and currencies from Ghana to Chile have plunged to record lows against
it. Worldwide, 36 currencies have lost
at least 10% of their value and ten of them more than 20%. And it's not just emerging markets that are feeling
the pain of the strong dollar. The euro plunged to parity with the greenback for the first time in 20 years in July, pound sterling has been deeply devalued and
the Japanese yen tumbled to its weakest since 1998 in the same month.
The currency collapses have exacer- bated a global spike in inflation, impov- erishing already poor populations and fanning simmering unrest that had been stoked by two years of economic malaise brought on by the pandemic.
Sri Lanka has gone into full-scale meltdown after crowds drove the president out of the country on the back of a fuel crisis. In Africa half a dozen countries have been driven into the arms of the International Monetary Fund (IMF) for emergency relief after it
The stage is set for more FX pain for everyone. In June the World Bank issued a gloomy report downgrading its global growth forecast yet again and issuing a stringent warning of possible stagflation for the world in the rest of this year.
US Inflation hit a decades-long high
of 9.1% in July that is putting pressure on the Fed to jack up rates that will inevitably send more global currencies tumbling and could trigger a global crisis. With reserves already dropping, if a country looks like it is running out of dollars, that could shut the weaker countries out of capital markets and trigger a full-scale and contagious
“Putin has plenty of weapons in his arsenal to fight an economic war. But maybe the most nefarious is to simply disrupt the global economy”
became impossible to cover their budget expenditure. Ghana in particular has been trying to go to the IMF for years, but in August put in a desperate plea
for help and doubled its request for an immediate bailout to $3bn. Egypt has also become the IMF’s largest single debtor and together with Ghana is in the front line for possible defaults.
Across Africa millions of people have already been pushed below the poverty line and several countries have reported their first food riots. Europe has also seen its first protests in Albania in July demonstrating against the rising cost of living. Tensions there remain high, with fresh protests threatened this week.
Observers have already drawn parallels between the current ropey state of
the global economy and the Latin America debt debacle in the 1980s or the currency crisis in Asia in 1997 that triggered a global economic crisis and caused Russia to collapse a year later in its first really big post-Soviet crisis that wiped out the top tier of the banking sector, amongst other things.
meltdown, similar to the Asian crisis in 1997. Dollar capital flows into emerging markets have fallen this year to their lowest level since the period following the onset of the pandemic,
a Bloomberg gauge shows.
There is still hope that stagflation
can be avoided after US inflation fell
to 8.5% in August. As bne IntelliNews reported, the tightening cycle in Europe also appears to be coming to an end after central banks across the region acted fast and aggressively. However, the economic war with Russia is
still escalating and that could have unforeseen consequences for the global economy, as it is in Putin’s power to
fuel more inflation via restricting
more commodities.
The Central Bank of Russia is certainly planning for the worst. CBR governor Elvia Nabiullina included in a much talked about macroeconomic outlook released last week a “global crisis” scenario, so Russia at least will be ready.
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