Economic crisis looms large as war clouds envelop Ukraine
Just when the global economy seemed to be stepping out of the iron grip of the pandemic and supply chain bottlenecks, a looming Russian invasion of Ukraine has sent a new set of shivers. There was slow optimism that a Joe Biden-Vladimir Putin summit may ensure that Kremlin backs off from the borders of Ukraine. That was not to be. In an unexpected Monday evening about-turn, Putin announced he was recognising the two breakaway regions of eastern Ukraine, Donetsk and Luhansk. The next step could be Russian forces, honouring their ‘friendship’ treaty with the Donbas republics, entering Ukraine territory to secure the new borders. Even a limited war will send oil prices spiralling from the current high of over $90 a barrel. For India, which imports around 80% of its oil needs, this spells disaster.
The global impact of the Ukraine crisis will depend on how far Putin is prepared to go. Does he see the annexation of the Donbas region as a limited goal to ensure that Ukraine keeps out of NATO? Or does he drive his troops all the way to Kyiv to ensure there is a new regime sympathetic to Russian interests? Kremlin is egged on by the fact that the West-EU response, despite all the bluster, is limited to economic sanctions against any investment by Americans in the breakaway republics.
A war in Ukraine will bear down on two important areas—higher food and energy prices. On both these segments, it is the poor that spend a disproportionately high percentage of their income. Russia produces about 13% of the world’s crude and supplies about 40% of Europe’s natural gas. On the food front, 40% of Europe’s wheat comes from Russia. A prolonged encounter in Ukraine will send oil and food prices spiralling. For investors, the world markets are already taking a knocking, and an all-out war will freeze investment and growth. Though India has cut back on Russian arms imports, Moscow is still at the top. India and others must do all they can to ensure that the war clouds over Europe recede quickly.