The shadow of conflict

The actions of the above participants that have a great influence on the global economy include:

First, the European Union (EU) on Mar 2 removed 7 Russian banks from the SWIFT international payment system, including: VTB Bank - Russia's second largest bank, Otkritie Bank, Novikombank, Promsvyazbank, Bank Rossiya , Sovcombank and VEB (Vnesheconombank). Notably, the list above did not name two major Russian banks, Sberbank and Gazprombank, because these are the main payment channels for Russian oil and gas that EU countries are still importing despite conflicts.

Second, the world's three largest shipping lines, including MSC, Maersk and CMA-CGM, announced plans to suspend cargo transportation to and from Russia.

Third, the US and EU announced plans to close the airspace to Russian aircraft. Immediately, Russia also retaliated by announcing the closure of its airspace to 36 unfriendly countries.

Fourth, the US and EU also prevented the Bank of Russia (BOR) from accessing half of the country's US $630 billion in foreign exchange reserves.

According to Oxford Economics, the above measures could reduce Russia's GDP by 6%. However, these sanctions have side effects on the global economy. World commodity prices rose to a 14-year high on March 2, 2022. The Russian-Ukrainian conflict had a major impact on the markets for several commodities:

For crude oil and natural gas, Russia is the second largest crude oil exporter behind Saudi Arabia with export volume of crude and condensate by 5m barrel/day. Russia is the leading supplier of natural gas and crude oil to Europe. On average, the EU relies on Russia for 35% of its natural gas and 11% of its crude oil.

Oil and wheat prices have increased sharply since lateFeb due to the Russia-Ukraine crisis

As for fertilizer, Russia accounts for 16.5% of the global nitrogen fertilizer export market (in the top 2 countries) and is the largest exporter of NPK fertilizers. Furthermore, Russia produces ammonium nitrate, a key ingredient in fertilizer production and accounts for nearly 66% of the global supply.

As far as steel is concerned, according to the World Steel Association (WSA), Russia and Ukraine produced 97.4 million tonnes and exported about 57 million tonnes of steel in 2021. Especially in the EU, Russia and Ukraine are the 2nd and 4th largest steel exporters to this region, respectively, in the first 11 months of 2021 with about 21% of total Euro’s import, according to Eurofer.

With regard to other metals, Russia is also a major producer and exporter of aluminum, nickel, platinum, palladium, and copper. Meanwhile, Ukraine is the world’s ninth largest producer of uranium and sixth in titanium.

With agricultural products, Russia and Ukraine combined produce 14% of global wheat and supply 29% of world wheat exports. The two countries account for 14% of worldwide barley production and one-third of global exports. They also contribute 17% of all corn exports. Russia and Ukraine combined export 76% of global sunflower supplies.

Stagflation risks

The conflict in Ukraine is unlikely to tip the global economy into a recession. But VNDirect said a combination of commodity price shock and risk of further escalation poses increasing downside risks, especially in the US and EU. The rise in inflation could weaken consumer demand in developed countries that have not yet fully recovered from the COVID-19 pandemic. This would result in stagflation risks.

In addition, supply chain disruption, an increase in input material costs, and logistics costs will hurt the world manufacturing sector, especially in Europe. As a result, the world's major central banks, including the FED and the ECB have to face difficult choices that are on the one hand to contain the current high inflation, but on the other hand, must support the economy against the negative effects of the Russian-Ukraine conflict.

VNDirect thinks that the FED and the ECB may choose a path of tightening monetary policy that is less aggressive than the market expected before the conflict between Russia and Ukraine. Following a 0.25 percent rate hike at its March meeting, the market now predicts that the Fed will raise its policy rate at least five times in 2022.