WAR IN UKRAINE AND ITS GLOBAL FALLOUT

Russia invaded Ukraine on February 24, 2022, after a sustained military buildup along their border. The invasion triggered the gravest European security and refugee crisis since the Second World War.[1] Almost immediately, Western nations, led by the United States, enacted severe economic sanctions on Russia to dissuade it from its aggressive behavior, essentially cutting it off from the international banking system.[2]

However, the situation is complex because many Western European nations, in particular Germany, rely on Russia for much of their energy and commodity needs, such as crude oil and natural gas as well as metals like nickel, titanium, and aluminum for industrial applications.[3] In addition, the fertile farmlands of southern Russia and Ukraine are considered the world’s breadbasket, but the war has disrupted farming and stopped vital wheat exports.

In short, besides the obvious security crisis the conflict has triggered, the economic consequences of the clash are reverberating throughout the global economy and will be felt far away from the battlefields.

SPILLOVER EFFECTS ON THE MONETARY UNION

Although the conflict is geographically remote from the Caribbean, and neither country are important trading partners for the monetary union, both Cura?ao and Sint Maarten will likely experience the adverse effects of the economic shockwave caused by the war and sanctions as it ripples through global supply chains and financial system linkages. These would likely be channeled via:

HIGHER FOOD PRICES

Russia and Ukraine together supply as much as 30% of all the world’s grain exports, providing much of Africa, the Middle East, and Asia with wheat.[4] Ukraine is also the world’s biggest sunflower oil producer, followed by Russia, accounting for nearly 70% of all sunflower oil exports. The conflict effectively ceased production and export of these goods from the region, putting upward price pressure on available supplies elsewhere. This will translate into higher prices in local supermarkets of wheat-based products, such as bread, pasta, flour, and cereals as well as products made with sunflower oil.

RISING ENERGY COSTS

Russia is a major supplier of energy products, including crude oil and natural gas, which are essential to the industrial economies of Europe. The conflict is driving up international oil and gas prices (see Graph 1) and, as a result, domestic energy bills for local consumers will rise reflecting the upward pressure on international oil and gas prices.

Graph 1 World commodity prices (average % change from December 2021 to April 2022)

Source: World Bank Commodity Price Data

*For fertilizers, the % increase denotes the difference between the monthly index for December and the monthly index for April. For all other items, it denotes the difference between the average price for December 2022 and the average price for April 2022.

VITAL COMMODITY SHORTAGES

Russia is a key producer and global exporter of vital commodities, such as metals like nickel and zinc as well as fertilizers critical for agricultural production in the euro area. However, the sanctions have crippled Russia’s ability to export or for importers to buy its commodities. The effects of this sudden shortage on world markets are already being felt. For example, neon gas production—necessary in making silicon chips—is concentrated in Russia and Ukraine, compounding silicon chip shortages, which have already caused production bottlenecks in the manufacture of vehicles and electronics. Global car production is also affected by the war and has already contributed to automobile plant shutdowns in Germany.[5] ?These shortages and price hikes will eventually make their way to the small, open economies of Cura?ao and Sint Maarten.

The sharp increase in international food prices and energy costs and the shortage of vital commodities are prolonging already elevated inflation that began in early 2021.[6] The elevated inflation in countries like the Netherlands and United States could adversely influence the tourism-reliant economies of Cura?ao and Sint Maarten because high inflation erodes Dutch and American consumers’ purchasing power and may inhibit them travelling abroad for leisure.

STEEPER BORROWING RATES

Another spillover effect is that as major central banks tighten their monetary policy to curb inflation, it could lead to higher borrowing costs within the monetary union as upward rate adjustments reverberate throughout the global financial system.

SHARP CURRENCY ADJUSTMENTS

Since the invasion began, the euro has depreciated vis-à-vis the U.S. dollar, making both Cura?ao and Sint Maarten relatively more expensive as tourist destinations for Europeans compared to other places within the euro area. Furthermore, a weakening euro means less incentive for Saint Martin consumers to purchase goods and services across the border in Sint Maarten as the Dutch side becomes relatively more expensive because of a stronger dollar.

CONSEQUENCES OF ECONOMIC SANCTIONS

In addition to the above spillovers, there are the economic sanctions imposed on Russia for the monetary union to consider maintaining its reputation as a compliant international financial center. The current sanctions against Russia are unprecedented in their scale and scope and can be grouped into three broad categories. First, those that prohibit financial institutions from engaging in any transaction involving the Russian central bank (Bank of Russia), therefore hindering its ability to access much of its foreign reserves. Secondly, many Russian banks have been banned from the SWIFT international payment system. And all non-energy sector-related Russian banks have effectively been banned from doing business in countries that participate in the sanctions, such as the Kingdom of the Netherlands. Finally, a rather large group of entities and individuals have faced sanctions such as a freezing or seizing of their assets, including mega-yachts.

The CBCS is tasked with safeguarding financial stability and the integrity of the financial sector. Non-compliance with the sanctions, therefore, will pose a threat to the integrity and reputation of the monetary union.

This article also appeared in the CBCS' Economic Bulletin - June 2022.

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[1] The UNHCR, the UN refugee agency, estimates that up to 6.8 million people, mostly women and children, have been displaced since the conflict began.

[2] For more details on the sanctions, see OECD: EFI Policy Note 3, April 2022: Implications of the War in Ukraine for the Global Economy. ?

[3] In 2021, Russian natural gas accounted for 32% of Germany’s pipeline gas supply. Russia also supplied about 34% of Germany’s crude oil and 53% of its coal needs. See Eckert, Vera and Abnett, Kate. “Factbox: How dependent is Germany on Russian gas?” Reuters. 24 February 2022. https://www.reuters.com/world/europe/how-much-does-germany-need-russian-gas-2022-01-20/

[4] See IMF: World Economic Outlook, April 2022: War Sets Back the Global Recovery.

[5] See IMF: World Economic Outlook, April 2022: War Sets Back the Global Recovery for more details, esp. chapter 1, pg. 10.

[6] Ibid.?