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Andreas Cervenka

The economic war against Putin - who blinks first?

PUBLISHED: LESS THAN 2 HOURS AGO

UPDATED: LESS THAN 50 MIN THEN

COLUMNISTS

Vladimir Putin chose to strike when the Western world's economy was most vulnerable after the pandemic. The sanctions hit Russia hard, but the risks also increase because the crisis throws the world into a financial horror scenario.

Why did Vladimir Putin choose to invade Ukraine in February 2022? After all, the conflict has been going on ever since Russia annexed Crimea in 2014.

One answer may be the economy. The western world has built up a mountain of debt for decades. First came the financial crisis. Thereafter, borrowing rose further. So the pandemic arrived. Central government debt in the so-called G20 countries has grown by a staggering SEK 136,000 billion since the beginning of 2020, according to the Bank for International Settlements. And the world's total debt, including households and businesses, is now over $ 300,000 billion, or nearly $ 380,000 per world citizen, according to the Institute of International Finance. That's a record.

At the same time, inflation was already at its highest levels before the war since the early 1980s.

Possibly Vladimir Putin calculated that this sensitive situation would cause the United States and the European Union to refrain from harsh sanctions in response to the war. It turned out to be a misjudgment.

Russia is becoming increasingly isolated every day. Several banks have already been thrown out of the international Swift network, with large foreign companies leaving on the assembly line, most recently McDonalds and Coca Cola. Factories are closed and deliveries to the country have been frozen. Russia has been thrown 30 years back in time.

Mastercard and Visa have now left Russia.

Mastercard and Visa have now left Russia.

Photo: MARK LENNIHAN / AP

The imports that are still possible have become 40 percent more expensive after the fall of the Russian ruble. In an attempt to prevent hoarding, Russian authorities have introduced restrictions on how much stores may sell certain basic goods and how much prices may be raised.

Credit rating agencies have in recent days lowered the rating for Russia at record speeds. The Russian central bank has banned the export of capital from the country and introduced rules requiring foreign lenders to be paid in rubles instead of dollars or euros. Assessors believe that a state bankruptcy is getting closer.

Economists predict that the Russian economy's GDP will fall 9 percent this year according to the news agency Bloomberg, a race twice as large as during the country's crisis in 1998. The Moscow Stock Exchange is still closed and Russian banks such as Sberbank and VTB have been forced to abandon their branches in Europe. in the wake of the sanctions. A collapse of the Russian banking system threatens.

At the same time, experts have warned that the offensive against Russia's economy could have unforeseen consequences as the problems spread in the closely linked systems of the financial world. It can be compared to the classic game picking stick. Anyone who starts pulling a stick never really knows what will happen next.

The only part of the Russian economy that has so far been spared in the sanctions is Russia's oil and gas. The United States and Britain announced on Tuesday that they are banning the import of Russian oil. The EU, especially Germany, does not want to go as far in fear of what this means for energy supply at home.

There are already signs that energy traders do not want to take in Russian oil and gas, not even at a big discount. Banks, shipping companies and insurance companies are worried about violating the sanctions.

All this contributes to driving up prices. One barrel of North Sea oil now costs almost 130 dollars per barrel, the highest level since the financial crisis in 2008. Gas prices in Europe are also rising, up 80 percent only on Monday.

On top of this, the prices of food raw materials are rising rapidly, as Russia and Ukraine are major producers of agricultural products but also fertilizers. On Tuesday, trade in the nickel metal, of which Russia is a major producer, was halted after doubling in price in a few hours.

All in all, this means a global price shock in the short term.

This in turn triggers stock market turmoil. In the US, the S&P 500 index fell by 3 percent on Monday and 0.7 percent on Tuesday.

The International Monetary Fund warns that the war will have "serious consequences" for the world economy. Economists lower their forecasts for global GDP growth.

Thus, the world is facing a horror scenario which in economic parlance is usually called stagflation. This means an economy with low growth but high inflation. The last time this happened was in the 1970s.

As long as Putin can find buyers for his oil, rising prices are his lifeline.

As long as Putin can find buyers for his oil, rising prices are his lifeline.

Photo: Michael Probst / AP

The difference is that the high mortgage

The difference is that the highly leveraged world economy is in many ways much more vulnerable today than then. At the same time, central banks such as the Riksbank cannot stimulate the economy because they have already made maximum efforts during the pandemic.

So far, market interest rates have not risen during the war, on the contrary, they have fallen. But if inflation begins to spiral out of control and interest rates follow upwards, the situation can quickly derail.

It also risks putting the support of citizens and politicians in Europe and the United States to the test. High inflation has never been an election winner.

At the same time: as long as Putin can find buyers for his oil, rising prices are his lifeline. The same with the value of the gold reserve that the country has accumulated, the price of the precious metal has gone up in the war anxiety.

The crisis is not over us yet, and much depends now on what happens on the battlefield in the next few days, both militarily and economically.

Russia and the Western powers are now in an eye-to-eye situation with enormous efforts. Who flashes first?

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Andreas Cervenka