The Russia-Ukraine War ushered in a period in which risks for the global economy are increasing with every passing day. The rise in the prices of many commodities, especially those of energy products, further exacerbated the already existing inflationary pressure on all economies. Will these risks be alleviated when the war is over?
Energy crisis stems from supply, not war
Although the recent increases in energy prices are partially linked to the Russia-Ukraine War, we expected higher prices in 2022 in our pre-war projections. For example, long before the war, JP Morgan's oil price forecast was announced as $125 per barrel.
The underlying issue is that the world has plans to move away from fossil fuels, which are called "the green transformation", "zero-carbon" or "Zero-Net Economy". With this transformation planned to reduce carbon emissions, the expectation that the demand for oil and its derivatives will decrease in the future has led to a decrease in investments in these areas. Few companies are now willing to explore, develop and supply oil. This means a decrease in supply in the medium-long term. So the main problem when it comes to energy is not war. Of course, there are short-term effects associated with the war. However, the reason for all these price increases is not due to the war, but to the supply that does not meet the global demand.
FED policies to only make things more difficult
Although its throne has started to tremble recently, the U.S. dollar is still the global dominant currency. Central banks still hold dollars as reserves, and global trade is still predominantly conducted in dollars. Moreover, many commodities are priced in dollars in the relevant exchanges. In this respect, the value of the dollar is always important for economies whose currency is not the greenback. Because all these pricing in dollars cause both inflation and current account deficits in cases where the local currency depreciates.
The U.S. Federal Reserve, the owner of the dollar, finished the asset purchases that it started due to the Covid-19 pandemic at the beginning of last month. It even carried out the first rate hike. Now it plans to shrink its balance sheet, which has expanded to $8.9 trillion. All these developments translate into an increase in the Dollar Index. This situation increases the pressure on other currencies, especially in emerging economies.
Commodities and logistics costs rising
Disruptions in global supply chains and production plans during the Covid-19 period resulted in deterioration in commodity pricing. Additionally, global transport indices are still at elevated levels. In particular, we see that the increases in energy prices are directly reflected in logistics costs. As such, the effects of these prices on economies will continue to be a problem for a while.
There are plenty of other sectors and examples that back up this projection. However, in general, the picture I tried to paint above shows that even if the Russia-Ukraine War ends, things will remain very difficult for the global economy. In fact, it may sound ambitious to you, but even if the war had never happened, these risks were certain to strain the