Russian invasion piles on economic uncertainty in an already confusing time
Despite explicit warnings, the invasion of Ukraine adds more economic confusion
You might have thought that with thousands of Russian troops lined up on the Ukraine frontier and certain warnings from the U.S. State Department of an imminent invasion, despite the enormous human cost, markets would have taken Thursday's attack in stride.
But as we've seen, for a world economy already in a state of considerable turmoil, there is a big difference between thinking something is likely to happen and it actually happening.
"Putin's War Will Shake the World," said a headline in London's Financial Times a few hours after Russian troops had launched their full-scale onslaught on their smaller neighbour. The Economist magazine forecast higher inflation and lower economic growth.
Global certainties turn to risks
Oil soared, stocks crashed, then many bounced back. Currency markets were in a tizzy as traders tried to decide which countries would be the most affected by a new war at the heart of Europe. Suddenly all the rules had changed — and even what had seemed like business certainties turned into new risks.
Here in Canada, traders struggled to calculate how the war would affect them for good or ill. From oil to potash to grain, Russia sells many of the same products into world markets that Canada does — suggesting commodities exporters could benefit as Russian exports are blocked by closed ports and as sanctions come into force.
But for Canadian consumers already facing the highest inflation in 30 years, higher gas and food prices will just bring more pain. Canadian industries that export to Russia and to Ukraine have no way of knowing when, if ever, their contracts will be completed.
Canadian economist and security specialist Dane Rowlands said that while we can't know for sure, it is likely that Russian President Vladimir Putin's attack was timed to take advantage of a period of economic and political turmoil in Western countries. He said the Russian leader's misleading statements only added to that turbulence.
"Until quite recently, there were people who thought he was bluffing," said Rowlands, a professor at Carleton University's Norman Paterson School of International Affairs who heads the Infrastructure Protection and International Security program.
In some ways, he said, the biggest uncertainty — whether Putin would actually invade Ukraine — has been settled. And in the short term, he said, a lot of market confusion would have been caused by people rushing to catch up with events that happened more quickly than they had expected.
"Some people probably thought, 'Maybe this will occur, but I may have a few days to unwind my positions,'" Rowlands said, noting that the impact on the wider global economy will take time to resolve itself and could be more disruptive in the long term.
The Russian invasion comes at a time when the global economy was already facing many other uncertainties.
The COVID-19 pandemic, a disruption in shipping and supply chains, and a growing rift between Washington and Beijing as Chinese leader Xi Jinping challenges the United States for global economic leadership had already clouded the future.
Partly due to the fiscal and monetary medicine used to fight the effects of COVID-19, the global economy is at a once-in-a-generation turning point as inflation emerges after decades out of the picture. Markets have been increasingly nervous, as central banks seemed certain to push interest rates sharply higher.
Some say soaring commodity prices following the Russian attack will require stronger action from the Bank of Canada and the U.S. Federal Reserve. Just Thursday, economists at the C.D. Howe Institute, a Canadian think-tank, called on Bank of Canada governor Tiff Macklem to raise interest rates by a full half percentage point next week to quell inflation.
And that is not just a Canadian point of view. As oil prices soared on world markets, financial analysts expected rate increases that were faster and higher.
"The oil price run-up will intensify the pressure on central banks worldwide to bring forward their tightening cycle and hike rates more aggressively to contain inflation risks," Chua Hak Bin, senior economist at Maybank in Singapore, told Bloomberg.
Faster rate hikes? Or the opposite?
But there is another view. If the disruptions caused by war in Ukraine further impede world trade, the central banks may need to extend stimulus a little longer, as sanctions bite not just on Russia but on the counter-parties to defunct Russian trades.
"If we're going to try to hurt Russia through financial means, it may require some willingness on the part of central banks and Western countries to help bail out countries that end up — at least in the short term — in some degree of difficulty," Rowlands said. Of course, not knowing which way the central banks will jump adds to uncertainty.
The destabilizing effects of the Russian invasion are still being enumerated, but one of the unexpected impacts may be on cryptocurrencies. With worries that Russia will be able to bypass sanctions by enacting trades in bitcoin or a digital ruble, the U.S. and other Western governments may have a new reason to crack down on the entire crypto sector.
"Russia has had a lot of time to think about this specific consequence," Michael Parker, a former U.S. prosecutor and anti-money-laundering expert, told the New York Times. "It would be naive to think that they haven't gamed out exactly this scenario."
But the biggest disruption of all from this week's Russian attack will likely be on the fossil fuel sector, which many say has been at the heart of the Russian action. Some say fossil fuels will be the cause of Putin's downfall.
Dependent on oil and gas as the country's main export, Putin has used fossil fuels as a weapon against European countries that depend on it. With the long-term prospect of oil losing its lustre in a climate-change world, causing revenues to fall, Rowlands said Putin may have felt he had to make his move on Ukraine while the country's oil economy was still strong.
But the attack will have consequences. As global prices rise, Europeans and everyone else will be motivated to find alternatives to fossil fuels, especially those sourced from Russia.
"It's going to have long-term repercussions, and they're probably not going to be very good for Russia," Rowlands said.
But once begun, so long as a major shooting war continues, nothing is for sure, he said. Expect more uncertainty.
Follow Don on Twitter @don_pittis