I think it’s fair to say that when Vladimir Putin invaded Ukraine, most observers thought he would get away with it. Surely the huge Russian Army would take Kiev and other major cities within a few days, and surely the West would respond with its usual timid response, merely giving Russia a slap on the wrist. Instead, here we are, 16 days later, with Kiev and Kharkiv still standing and the invading forces bogged down by fierce Ukrainian resistance (aided by rapid Western arms supplies) and disastrous logistical problems. On the other hand, it is clear that Western sanctions on the Russian economy are already having significant effects, and could become even more severe.
Of course, all this could change: Russian forces could regroup and resume the offensive, and faint-hearted Western governments could start lifting sanctions. For now, however, Putin is facing consequences far worse than he could have imagined. Unfortunately, dealing with aggression does not come for free. Events in Ukraine and Russia will impose significant costs, particularly on the world economy. The question is how important?
My tentative answer is that they will be bad, but not catastrophic. In particular, it seems unlikely that the Putin crisis will be anywhere near as severe as the oil shocks that rocked the world economy in the 1970s. As then, the blow to the world economy comes mainly from oil prices. of the raw materials. Russia is a major exporter of oil and natural gas, and it and Ukraine are—or were—major exporters of wheat. Consequently, the war is having major consequences for energy and food prices.
Let’s start with energy. For now, the sanctions applied by Europe against Russia do not affect oil and gas exports, which is striking. The US has banned oil imports from Russia, but this won’t matter much, because the US can buy and Russia can sell elsewhere. However, markets are reacting as if supplies are going to be cut off, either because of future sanctions, or because global energy companies, fearing a public backlash, themselves impose “sanctions” on their purchases of Russian crude. In fact, Shell, which the other day bought Russian oil at a discount, has apologized and says it won’t do it again. Consequently, the inflation-adjusted real price of oil has soared almost to the level reached during the 1979 Iranian revolution.
I’m a bit taken aback by the magnitude of this price hike. It is true that Russia is a major oil producer, but it only accounts for about 11% of world production, while in the 1970s Persian Gulf producers extracted a third of the world’s crude. And Russia will surely find ways to sell a sizeable chunk of its oil despite Western sanctions. The world economy is much less dependent on oil than it was. What’s more, oil “intensity,” that is, the number of barrels consumed per real dollar of gross domestic product, is half what it was in the 1970s.
And what about natural gas? Europe depends heavily on Russia for its supplies. However, gas consumption is highly seasonal. Therefore, the effect of the Russian disturbance will not be so great until the end of this year, which will give Europe time to adopt measures that make it less vulnerable.
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So overall, the energy crisis caused by Putin will be serious, but probably not catastrophic. My main concern, at least as far as the US is concerned, is political. It would be inconceivable for Republicans to demand that we stop buying Russian oil and at the same time attack President Biden over high gas prices. In fact, that is what is about to happen.
Food can be a bigger problem than energy. Before the war, Russia and Ukraine together accounted for more than a quarter of world wheat exports. Now Russia is sanctioned and Ukraine is a war zone. Not surprisingly, wheat prices have soared from less than $8 a bushel to around $13. In rich regions like North America and Europe, this price increase will be painful, but mostly tolerable, simply because consumers in advanced countries spend a relatively small percentage of their income on food. For the poorest countries, where food represents a huge part of the family budget, the blow will be much harder.
Finally, what consequences will the war in Ukraine have on economic policy? Rising oil and food prices will push up the already uncomfortably high rate of inflation. Will the Federal Reserve respond by raising interest rates, which will affect economic growth? Probably not. The Federal Reserve has long focused its attention not on “headline” inflation, but on “core” inflation, which excludes volatile food and energy prices, a policy that has served it well in the past. . So the Putin coup is exactly the kind of event the Fed would have missed in the past. And for what it’s worth, I’ll tell you that investors seem to think this is what he’s going to do: Market expectations for Fed policy over the next few months don’t seem to have changed. Russia’s blow to the world economy will be unpleasant, but surely not unpleasant. If Putin figures out that he can hold the world to a ransom, it will probably end up being another fatal miscalculation.
Paul Krugman He is a Nobel laureate in economics. © The New York Times, 2022. Translation of News Clips.
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