The evolution of the Russia – Ukraine conflict remains uncertain. At this stage the clearest economic impact on developed markets is via food and energy prices. Oil, gas, grain and base metals’ supply are prone to disruption from the conflict. The imminent shortages of these soft and hard commodities stem not only from the war and its direct impact on production, infrastructure, and trade and transit routes, but also in the form of economic sanctions by governments and the voluntary actions of companies.
There are also concerns that newly-imposed sanctions on Russian banks could hurt the European economy. Some Russian banks now have limited access to the Swift payment system, designed to facilitate international transfer of money. That means some European banks or other businesses might not get paid in full, or on time, by Russian banks. Western countries’ sanctions on Russian oil remain a possibility, which would reduce the global supply, lift the price and cause even higher inflation.
We shall take a nuance look at the commodity supply chain (especially on energy) and economic sanctions and its impact on the global economic growth. At the moment oil supply continues to be free from sanctions and gas supply from Russia to Europe continues to flow. On the other hand, supply of oil from major producing countries of the world are in some instances sold at a discount to the prevailing spot price in the market to Asian consumers. It is reasonable to expect that Russian exports would be diverted to Asia in the short term. In the meantime, grain and base metals supply would be curtailed as both Ukraine and Russia are major producers in the world, as supply chains are disrupted. We are of the view that once the conflict subsides and there is semblance of truce, the prices of these commodities should decline sharply.
On the issue of limited access to the Swift payment system, there are alternative payment systems in the world or Russia could choose to settle their payments through other currencies besides the US dollar. This would be inefficient in the short term, especially for the trading parties, predominantly the European countries and Russia. Anecdotally, there are also assets owned by Russian individuals, seized and frozen by governments. There are long term ramifications in capital flows resulting from these government actions as private ownership rights, a significant hallmark of capitalism economy, have been infringed. Individuals seeking safety for their assets would have to rethink where to park their funds in safety.
In the face of rising inflation, central banks have started to normalize policies in spite of the uncertainty that renewed war-related global disruptions posed for growth. The Federal Reserve has shifted its focus away from stimulating economic recovery and toward managing prices. A flattening yield curve in US has heightened fears of recession. In the euro area, the ECB announced faster tapering and moving to a regime of policy being set meeting-by-meeting. In China, despite being the world's largest consumer of food, we think upward pressure on inflation will be broadly contained given high self-sufficiency ratios, and small exposure to Ukraine and Russia.
We are still assessing the inflationary picture globally. In the medium term, global growth remains above trend and various economies are lifting COVID-19 restrictions. Russia remains a relatively small player in the global economic landscape, and the combination of geopolitical unrest and mounting sanctions appears unlikely at this point to derail the current positive trajectory of global growth materially. Global supply chain pressures are also beginning to ease for most goods.
On the whole, the way we see the world economy, is one where the Asian economies should not be as adversely impacted as compared to US and Europe.