Blaming inflation on the Russian invasion

Two international agencies last week succinctly bared their dire assessments of the world’s economic health, and it should serve as a warning for the Philippines to brace for worsening days ahead.

The World Bank slashed its global growth forecast to 2.9 percent this year from an earlier prediction of 4.1 percent. In the next two years, it warned that the world’s economic performance would continue to hobble at about the same level. It also warned of the risk of stagflation.

The Organization for Economic Cooperation and Development (OECD), composed of 38 member countries mostly from Europe, similarly had ill tidings. It downgraded its forecast for the world’s economy to 3 percent from 4.5 percent, and estimated that member-countries’ inflation rates would double to over 9 percent. Additionally, it warned that growth would even be lower in 2023 at 2.8 percent.

Minding the old saying that when France sneezes, the rest of Europe catches a cold, some countries in Asia are already feeling the chills. Singapore’s inflation rate in March and April was already at 5.4 percent, almost double the full year 2021 rate of 2.3 percent.

Thailand is currently grappling with a 7.1 percent inflation rate, definitely a runaway compared to the 2021 rate of 1.2 percent. South Korea is similarly trying to cope with inflation, which was at 5.4 percent last month. The 2021 average was only at 2.5 percent.

The Philippines’ economic team remains alert in employing all possible interventions to tame a similarly rampaging inflation, which was at 5.4 percent in May, and expected to inch up further in the coming months as a result of high fuel prices and disruption of commodity supply chains.

Support for Ukraine

Both the World Bank and OECD have put the blame squarely on the Russian invasion of Ukraine, which started in late February as a blitzkrieg attack meant to end in a matter of days. The Russian offensive has since shifted to securing instead a southern portion of Ukraine and a large part of the east.

The Ukrainians are fiercely fighting back, quite a change from when Russia successfully launched an offensive to annex the Crimean Peninsula in 2014 by seizing the local parliament and conducting a referendum affirming its allegiance to Russia.

Ukraine, of course, had found support from several countries in Europe, foremost being Germany, and the United States through the supply of weaponry that the Ukrainian army could use to counter Russia’s wanton use of missiles to pummel cities and towns to the ground.

But the more significant weapon that European countries and the US have wielded are financial and trade sanctions, and eventually the decision to stop buying Russian oil, as a protest against the blatant northern attack by Russia on Ukraine’s capital, Kyiv.

Such sanctions, however, have painfully disrupted the global oil supply network, and Europe’s resolve to wean its heavy use of Russian gas and oil has resulted in the current high prices of energy fuels.

Because a fairly large amount of grains and commodities are sourced from Russia and Ukraine, the trade embargoes and a Russian blockade in the Black Sea where most of Ukraine’s goods shipments pass have also resulted in shortages and high prices.

The Ukrainian defensive is nearing four months, and the cost of keeping up the flow of expensive military artillery from sympathetic European countries and the U.S. is now at breaking point, such that suggestions about compromises to end the Russian aggression are now popping up.

Ukraine has been defiant about continuing to defend its sieged territories, but the unspoken grim reality is that without continued support from Western allies, a huge swathe of territory comprising about 20 percent of the Ukraine from Crimea through the southeastern and eastern lands bordering Russia will have to be given up.

Crippled Russia

The possible good news is that Russia would claim victory and end its military campaign, at least for a few years, to replenish its depleted stock of weapons as well as loss of military personnel, but more importantly, find a way out of the crippling international sanctions on oil, gas, and other export commodities.

The Institute of International Finance (IIF), made up of representatives from some of the world’s largest finance firms, recently came out with an estimate of the damage on Russia’s economy from the collapse of export incomes, the pullout of companies from Russia, the layoff of workers, and the exodus of talented Russians from the country.

It estimates that Russia’s economy will shrink by 15 percent this year, plus another three percent in 2023 to roughly its size 15 years ago. Russia’s growing isolation in most parts of the world will have a long-lasting effect on its economy throughout the rest of the decade.

The IIF’s paper also talks about Russia at the brink of a historic debt default after spooked European countries and the US agreed on financial and trade sanctions, not only to punish it for invading Ukraine, but also to prevent it from gaining further global power.

Russia’s Vladimir Putin has been more open about reclaiming lands that had been part of the Union of Soviet Socialist Republics (USSR), which had been disbanded in 1991. A successful takeover of Ukraine, formerly a USSR satellite, would have thrown many bordering European countries in a truly nervous state of anxiety.

Putin had written in July last year: “I am confident that true sovereignty of Ukraine is possible only in partnership with Russia. Together we have always been and will be many times stronger and more successful. For we are one people.”

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