18:13 04.03.2022

Russia's military actions in Ukraine create risks for global economy – Moody's

3 min read

Russia's military actions in Ukraine and the subsequent economic sanctions against Moscow have increased risks for the global economy, according to a review by the international rating agency Moody's.

The scale of the consequences will depend on the duration and depth of the crisis, experts say.

"Further escalation of the Russia-Ukraine conflict would put Europe's economic recovery at risk," Vice President and Senior Credit Officer at Moody's Kelvin Dalrymple said. "There will be spillover effects on the rest of the world through three major channels: commodity price shocks at a time when inflation is already high and supply constraints remain a challenge globally; financial repercussions from the sweeping new sanctions against Russia and financial market volatility."

Russia and Belarus will feel the direct impact of large-scale sanctions imposed by the United States and its allies, the agency said. These sanctions will have an indirect impact on foreign companies doing business with Russia, as well as a domino effect on the global economy, analysts said.

"The Russia-Ukraine conflict has resulted in sharp rises in commodity prices globally. Since the invasion, oil prices have soared above $100 per barrel, which will exacerbate the high inflation environment if they remain at that level. Possible retaliation by Russia in response to sanctions could also cause further energy price shocks, particularly in Europe. Exhibits 1-2 show oil price projections under two different scenarios developed by Moody's Analytics. A sustained global oil price shock, were it to occur, would pose significant economic risks," Moody's said in a review.

Russia and Ukraine play a critical role in the global production of neon, a key component for microchip production, and war and conflict could exacerbate semiconductor component shortages as well as supply shortages in the automotive industry, experts said.

"Together, Russia and Ukraine provide roughly 14% of the world's wheat supply and 25% of global wheat exports. Wheat and other grain prices have risen sharply since the invasion began, but the impact on food supply is mitigated to some extent because these events are unfolding during the winter and not during harvest season. Rising corn prices could also lead to higher costs for animal feed and trigger further price increases for meat. Russia is also a leading producer of soybeans, which are increasing in price," the expert said in the review.

Analysts at Moody's also note increased volatility in global financial markets after the start of the conflict.

"The combination of geopolitical uncertainty, higher commodity prices, escalating sanctions and regional business disruptions will weigh on market sentiment. If this translates into a significant and extended squeeze on liquidity, it would weaken funding conditions for global high-yield issuers, and for emerging market countries that are reliant on global capital flows, some of which are already experiencing constrained access to financing. Against this backdrop, the dollar continues to strengthen," Moody's said in the review.