VENDREDI 18 MARS 2022 BIZWEEK ÉDITION 386 AUTHORS Alfred Kammer, Jihad Azour, Abebe Aemro Selassie, IIan Goldfajn and Changyong Rhee – International Monetary Fund (IMF) 15 March 2022 POST SCRIPTUM ANALYSIS How War in Ukraine Is Reverberating Across World’s Regions Beyond the suffering and humanitarian crisis from Russia’s invasion of Ukraine, the entire global economy will feel the effects of slower growth and faster inflation Impacts will flow through three main channels. One, higher prices for commodities like food and energy will pushup inflation further, in turn eroding the value of incomes and weighing on demand. Two, neighboring economies in particular will grapple with disrupted trade, supply chains, and remittances as wellas an historic surge in refugee flows. And three, reduced business confidence and higher investor uncertainty will weigh on asset prices, tightening financial conditions and potentially spurring capital outflows from emerging markets. Russia and Ukraine are major commodities producers, and disruptions have caused global prices to soar, especially for oil and natural gas. Food costs have jumped, with wheat, for which Ukraine and Russia makeup 30 percent of global exports, reaching a record. Beyond global spillovers, countries with direct trade, tourism, and financial exposures will feel additional pressures. Economies reliant on oil imports will see wider fiscal and trade deficits and more inflation pressure, though some exporters such as those in the Middle East and Africa may benefit from higher prices. Steeper price increases for food and fuel may spur a greater risk of unrest in some regions, from Sub-Saharan Africa and Latin America to the Caucasus and Central Asia, while food insecurity is likely to further increase in parts of Africa and the Middle East. Gauging these reverberations is hard, but we already see our growth forecasts as likely to be revised down next month when we will offer a fuller picture in our World Economic Outlook and regional assessments. Longer term, the war may fundamentally alter the global economic and geopolitical order should energy trade shift, supply chains reconfigure, payment networks fragment, and countries rethink reserve currency holdings. Increased geopolitical tension further raises risks of economic fragmentation, especially for trade and technology. Europe The toll is already immense in Ukraine. Unprecedented sanctions on Russia will impair financial intermediation and trade, inevitably causing a deep recession there. The ruble’s depreciation is fueling inflation, further diminishing living standards for the population. Energy is the main spillover channel for Europe as Russia is a critical source of natural gas imports. Wider supply-chain disruptions may also be consequential. These effects will fuel inflation and slow the recovery from the pandemic. Eastern Europe will see rising financing costs and a refugee surge. It has absorbed most of the 3 million people who recently fled Ukraine, United Nations data show. European governments also may confront fiscal pressures from additional spending on energy security and defense budgets. While foreign exposures to plunging Russian assets are modest by global standards, pressures on emerging markets may grow should investors seek safer havens. Similarly, most European banks have modest and manageable direct exposures to Russia. Caucasus and Central Asia Beyond Europe, these neighboring nations 5 Cont’d on page 6