As Ukraine is under fire, the crisis will derail global recovery and increase the risk of stagflationary recession. Yet, the crisis was avoidable.
Not so long ago, the International Monetary Fund projected global growth rate will slow to 4.4% in 2022. But as I have warned, it is overshadowed by the global risk of U.S. stagflation.
After the disastrous failure of international diplomacy over Ukraine, global recovery is fading and the world economy must cope with the risk of stagflationary recession
Energy risks amplify stagflation threats
For a long while, the geopolitical risk of Ukraine has been discounted, due to seemingly low economic contagion risks. Russia represents less than 2% of global economy and global trade, and Ukraine’s role is fractional.
Nonetheless Russia is the world’s second-largest oil exporter. And the oil market is ill-equipped for major supply disruptions after two years of COVID-19, low inventories and diminished spare capacity. Worse, as supply concerns spur oil stockpiling, price increases escalate.
Moreover, Russia is the world’s largest natural gas exporter. In 2021, it exported around $55.5 billion natural gas to other countries worldwide. The sanctions will suppress supplies and drive-up prices worldwide. And the EU is the largest importer of natural gas in the world
Currently, the US is an oil exporter accounting for almost 6% of global oil exports, while producing nearly all of the natural gas it uses. Hence, Washington’s penchant for severe sanctions rather than bold multilateral diplomacy.
By contrast, Russian gas is vital to U.S. NATO allies Germany (49% of gas supply), Italy (46%), and France (24%). It accounts for much of Europe’s gas imports (42%) via pipeline alone. Overall, energy makes up two-thirds of Europe’s imports from Russia. Perceived supply threats may create painful economic fallout for European countries already grappling with the specter of high inflation.
Supply disruptions compounding commodity risks
Together, Russia and Ukraine account for a quarter of global wheat exports. The crisis will have an adverse impact especially in the poorest developing economies. What happens in the Black Sea region will also reverberate across Africa, particularly major importing countries, such as Egypt, followed by Sudan, Nigeria, Tanzania, Algeria, Kenya and South Africa.
Since 2020, global grains have been among the key drivers of global food price increases. Now commodities prices will escalate further. Emerging Asia will have to cope with increasing energy and commodity prices and new inflation spikes.
Starting in March or soon thereafter, the U.S. Fed’s impending rate hikes, even if they would prove fewer than initially expected, will compound new macroeconomic vulnerabilities.
The huge economic and geopolitical risks we are witnessing today represent a massive failure of international diplomacy. But why did Russia opt for a path that will hurt it the most in the short-term?
Russia’s allegations: NATO expansion, far-right paramilitaries
Neither the demonization of president Putin nor the vilification of Russia and its people can nullify some of the allegations, particularly the role of NATO expansion and that of far-right extremists in Ukrainian paramilitary.
As declassified files evidence, a series of security assurances were given to Soviet leaders against NATO expansion from all major US, European and NATO leaders. In 2017, these declassified assurances were posted online by the National Security Archive, an independent US NGO.
More recently, the Orwellian denials of the role of far-right and neo-Nazi paramilitaries entered an ominous phase. Before Christmas, Russia’s UN motion against the “glorification of Nazism” was passed by more than three of four UN member countries. Yet, EU members abstained en masse from the UN resolution. Worse, Ukraine, Canada, and even the United States rejected the motion. In Moscow, this was seen as a carte blanche for the Ukrainian far-right against Russia.
During World War II, Ukraine’s far-right forces collaborated with Nazi-Germany; during the Cold War, with Washington. After the 2014 crisis and increased Western military aid, the groups became increasingly active. Last September, a US watch-group reported a far-right group Centauria had made its home in Ukraine’s major Western military training hub, built ties with the far-right Azov movement and infiltrated the Armed Forces, to reshape Ukraine’s military along white supremacism.
In the past year, repeated warnings by fellow Democrats that these groups sought to radicalize Ukrainian military were ignored by Biden’s secretary of state Antony Blinken and national security adviser Jake Sullivan. Instead, Western training, financing and arming prevailed for violent regime change in Ukraine. When Putin gave his TV address, even Facebook decided to allow praise of Ukrainian neo-Nazis, as long as they fight Russian invasion.
Ukraine’s three decades of plunging living standards
Despite repeated efforts to capture the parliament, the far-right groups enjoy only fringe democratic support in Ukraine. Most Ukrainians want peace and development. But that’s not what they’re getting.
From 1991 to 2014, the U.S. provided Ukraine with $4 billion in military assistance, according to the U.S. Congressional Research Service. Over $2.5 billion has been added after 2014, plus over a billion provided by the NATO Trust Fund. That’s only part of the total NATO military investments in Ukraine. But as Iraq and Afghanistan have shown, military and so-called economic aid seldom foster consumer welfare.
In 2014, Ukrainian military spending was about 3% of GDP, increasing to 6% in 2022, corresponding to more than $ 11 billion. So, following the 2014 crisis Ukrainian military expenditures have doubled. At the same time, economic growth has tanked to negative territory. As a net effect, Ukrainian living standards have collapsed.
Economic growth and military expenditures in Ukraine, 2010-2021
After the implosion of the Soviet Union, Ukrainian per capita incomes were still almost at par with Poland and ahead of Latvia. Today, they are more than 60% behind them. Ukrainian living standards are barely ahead of Libya, which Western intrusions have turned into a failed state.
Colossal failure of diplomacy; edge of nuclear calamity
In an interview done two months ago, US Army Colonel Douglas Macgregor, former US Ambassador to Germany and ex-Pentagon adviser, expected Russian forces to invade Ukraine “towards the end of January, beginning of February in all likelihood.”
The Ukrainian crisis and its timing were well-known in the West. It was allowed for a purpose. Macgregor charges “US war lobby” for “fueling conflicts from Ukraine to Syria.” As he puts it, “our goals should be that Ukraine remains independent, sovereign, free, and that may or may not have anything to do with membership in NATO. But we haven’t been willing to consider that.”
The colossal failure of international multilateral diplomacy has taken us all closer to the abyss. Russia and the US own 90% of more than 13,000 nuclear warheads. Since 1947, the atomic scientists’ Doomsday Clock has served as a barometer of the likelihood of a human-made global catastrophe. A few weeks ago, it was set at just 100 seconds to midnight, again. One fatal mistake away from planetary calamity.
If international diplomacy will continue to fail, the problems of Ukraine will pale in comparison to what’s ahead. War is the realm of uncertainty.