Economic fallout of Ukrainian crisis

Baku, Azerbaijan, March 21

By Aygun Badalova -Trend:

The side effects of the Ukrainian crisis are starting to be felt. In particular the deterioration of relations between Russia and the West have already affected the global economy market. The consequences of the crisis though are not yet severe, however the risks is very much present.

The most vivid example of the global market's sensitiveness to occurring events is the reaction of the world oil market. Imposing sanctions by the U.S. and EU against Russia has led to the sharp rise in global crude oil benchmarks prices.

The sanctions have also affected the Western investor's mood in light of the crisis, which has increased the geopolitical risks in their eyes.

However, the global market could face much more serious challenges if sanctions against Russia become stricter.

Analysts of the British economic research and consulting company Capital Economics believe that there are a number of ways in which the crisis might evolve.

"For a start, there is ample potential for violence in Crimea and contagion to the rest of Ukraine," analysts said in a report obtained by Trend and devoted to the influence of Ukrainian crisis on the rest of the world.

The other major risks concern relations between Russia and the West.

Analysts said that it is far from certain what will happen next, and the most likely outcome may be a prolonged stalemate.

Even if military conflict remains highly unlikely, the limited sanctions imposed so far could still be a prelude to a major trade war, analysts said. The balance of economic and financial power lies overwhelmingly with the West, but much of Europe is of course heavily dependent on supplies of Russian energy.

Economic fallout on Ukraine

The economic fallout from the crisis is likely to be most severe for the two countries that are directly involved - Ukraine and Russia, Capital Economics' analysts believe.

Ukraine's economy is by far the most fragile and is now teetering on the brink of a balance of payments crisis, analysts said in a report. Foreign currency reserves have fallen to just 15 billion dollars, compared to an external financing requirement this year of 80 billion dollars. Ukraine needs a bailout program of at least 20-25 billion dollars and it needs it quickly - probably within the next month.

As it happens, analysts suspect that the further the political conflict with Russia deepens, the more likely it is that the West will step in to prevent a financial collapse in Ukraine.

Some steps in this direction have already been taken. The International Monetary Fund dispatched an initial mission to Ukraine and in the meantime the US has suggested that it will provide Kiev with one billion dollars in loan guarantees. The European Union has suggested that it could ultimately contribute as much as 15 billion dollars to a joint rescue package.

Economic fallout on Russia

Analysts believe that Russia, particularly Russian economy will not escape unscathed as well.

The rouble has already fallen by 10 percent against the dollar this year and that is the worst performance of any major EM currency, they noted. The Central Bank has responded by raising interest rates to seven percent and further hikes are clearly a possibility if the political crisis deepens and the ruble comes under renewed pressure.

"What's more, the crisis has hit at a time when the Russian economy was already struggling," analysts said.

The forecast of Capital Economics is for GDP to grow by just one percent this year, which would be the second weakest performance since the 1998 financial crisis.

Given this, it should go without saying that it would not take much to tip the economy into recession, analysts stressed.

The global fallout

The world economy could be undermined by the crisis in Ukraine in several ways, analysts believe.

The first is simply the negative impact of an extended period of geopolitical uncertainty on investor, business and consumer confidence. "However, without any major new developments, a prolonged stalemate could soon see the crisis drop out of the headlines (as has, regrettably, the ongoing tragedy in Syria)," analysts' report said.

More tangible risks include the knock-on effects of a collapse in the Russian economy or financial system, perhaps under the threat of Western sanctions, and the impact of any disruption to the supply of Russian energy. The financial costs of supporting Ukraine are also likely to fall heavily on the US and the EU, analysts believe.

The risk of disruption to the supply of Russian energy is potentially much more serious, analysts believe. Russia exports more than seven million barrels per day of oil and oil products

(fuel oil and diesel), representing around eight percent of global consumption. The vast majority is sold to the EU, mainly Germany, the Netherlands and Poland, making Russia the dominant supplier to these countries. Russia is also a major exporter of natural gas, particularly to Germany, Turkey and Italy.

Overall, analysts believe that the crisis in Ukraine still has the potential to have a significant and prolonged impact on the global economy and financial markets, even though their current judgment is that the fallout is likely to be limited and short-lived.

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