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Russia-Ukraine Conflict Affects Worldwide Economy
There was so much oil in April 2020 that the price of a barrel of oil in the American state of Texas fell below $0 for a short time. Sellers had to pay buyers to take it.
Less than two years later, the international price of a barrel of oil rose above $100 Thursday. The increase followed the Russian invasion of Ukraine. And it came at a time when the world’s economy is slowly recovering from the COVID-19 pandemic.
Russia and Ukraine together produce less than two percent of the world’s gross domestic product - the total market value of both countries’ finished goods and services. But the conflict has increased existing inflation. This has frightened investors and affected everyone from Europe to Asia and Africa.
Higher fuel prices
Russia is the world’s third-biggest oil producer and is a major exporter of natural gas. Ukraine’s farms provide food for millions of people around the world.
Europe receives about 40 percent of its natural gas from Russia. The price of gas is now four times higher than it was at the start of 2021. And Germany, on Tuesday, suspended approval of the Nord Stream 2 gas pipeline as part of Western nations’ economic sanctions against Russia.
A mild winter and liquefied natural gas from the United States have helped ease some of Europe’s concerns about a possible loss of Russian gas supplies.
High gas prices, however, have led to higher costs for home heating fuel and cutbacks by heavy industrial users. The yearly rate of inflation also rose to 5.1 percent in January in the 19 countries that use the euro. That is the highest rate since record-keeping began for the group in 1997.
FILE - Pipes at the landfall facilities of the Nord Stream 2 gas pipline are pictured in Lubmin, northern Germany, Feb. 15, 2022.
Reduced wheat export
Ukraine is the world’s fifth-largest wheat exporter. The threat to farms in eastern Ukraine and exports through Black Sea ports could reduce wheat supplies at a time when food prices are at their highest level since 2011. Some countries are suffering from food shortages.
Agriculture expert Alex Smith wrote about the threat in the publication Foreign Policy last month. Many countries that depend on Ukraine’s wheat, he wrote, “already face food insecurity from ongoing political instability or outright violence.” Yemen, for example, imports 22 percent of its wheat from Ukraine, Libya about 43 percent and Lebanon about half.
Inflation
Rising energy and food prices will increase pressure on policymakers and central banks struggling to control inflation. The London-based research firm Capital Economics estimated that the Ukraine crisis could force higher natural gas prices and send oil prices up to as much as $140 a barrel.
That combination would add two percentage points to yearly inflation in the world’s rich countries, Capital Economics said.
In the United States, prices of goods, not including energy and food, rose at a rate of 7.5 percent for the 12 months ending in January. It was the highest yearly increase in 40 years.
On Tuesday, American President Joe Biden announced several new sanctions against Russian banks and powerful leaders for what he called “the beginning of a Russian invasion of Ukraine." Biden also warned Americans, "As I said last week, defending freedom will have costs, for us as well and here at home.”
As of Thursday, the American Automobile Association said the national average gasoline price in the U.S. is $3.54 a gallon, about 3.8 liters. A gallon of gasoline cost $2.66 just one year ago.
Currency traders watch monitors at the foreign exchange dealing room of the KEB Hana Bank headquarters in Seoul, South Korea, Thursday, Feb. 24, 2022. Asian stock markets followed Wall Street lower Thursday as anxiety about a possible Russian invasion of Ukraine rose. (AP Photo/Ahn Young-joon)
Lower stock prices
The values of stocks, however, dropped in most financial markets around the world.
In Russia, the Moscow stock exchange dropped nearly 45 percent Thursday following President Vladimir Putin’s announcement of a “military operation” against Ukraine. And the nation’s currency, the ruble, dropped to a record low against the American dollar.
Market indexes in Europe, Asia and the U.S. all fell. In the face of international political worries, Michael Taylor, managing director at Moody’s Investors Service, warned that investors may switch to safe investments. If that happens, it could drive up the costs of borrowing for riskier businesses.
“Chinese property developers would be particularly exposed to this risk” as they try to deal with large amounts of foreign debt this year, Taylor said.
Some fear that financial markets could become riskier if the U.S. bans Russia from the worldwide financial payment network SWIFT. The network links thousands of banks and permits them to exchange payments around the world.
Such a move would cut off oil payments to Russia which add up to 40 percent of the country’s revenue. But it could also hurt U.S. and European companies that do business with Russian companies.
Elina Ribakova is an economist with the Institute of International Finance in Washington, D.C. She said risk is not limited to Russia.
“There is a risk for global finance as much as there is for Russia,” said Ribakova.
I’m Jill Robbins.
Paul Wiseman and David McHugh reported this story for the Associated Press. Hai Do adapted it for VOA Learning English with additional material from Reuters.
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Words in This Story
sanctions – n.(pl.) actions taken to force a country to obey international law by limiting or stopping trade or cutting economic aid
instability –n. the state of being likely to change
expose –v. to be affected by something; to experience something
add up to –v. to put together or count (the number or amount of something) to find the total
revenue –n. money that is made by or paid to a business or an organization
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