Interest rates

How the conflict with Russia may raise Australian interest rates and inflation

Australia is already feeling the economic impact of Putin’s wrath on Ukraine and high petrol prices could be just the start.

In Australia’s relatively quiet little corner of the South Pacific, things are slowly returning to normal after two years of closed international borders and Covid restrictions. But in distant lands far beyond our shores, seismic geopolitical and economic shifts are underway that will reverberate around the world, potentially impacting Australia significantly.

Following Russia’s full-scale invasion of Ukraine, the West rolled out a series of harsh sanctions against Moscow, targeting everything from the foreign assets of the oligarchs to Russian access to the SWIFT payment system that underpins much of world trade.

In the words of European Commission President Ursula von der Leyen: “I will now propose new measures to EU leaders to strengthen our response to Russia’s invasion of Ukraine and cripple the ability to Putin to finance his war machine”.

These sanctions could prompt a similar economically damaging response from Moscow. Earlier this month, Russian Foreign Minister Sergei Lavrov held a press conference in response to the British sanctions proposals, during which he warned against a tit for tat response from Moscow.

“If this law fully comes into force, I have no doubt that our parliament will have every reason, and it will even be necessary, to pass a similar law,” Lavrov said.

Going forward, there will be a number of other factors that will determine the impact of war and subsequent trade/diplomatic sanctions on Australia and the world.

Supply chain issues

Prior to the Russian invasion of Ukraine, the world was just beginning to see supply chains begin to improve, but as it becomes clear exactly how many key raw materials are coming from Russia and Ukraine, supply chain issues have entered a new phase.

For example, around 50% of the world’s neon gas is made in Ukraine, as well as 70% of world exports. Neon gas is an incredibly vital element in the modern world, it is used to power lasers that etch patterns into computer chips.

With the world still grappling with a shortage of computer chips due to pandemic-induced supply chain issues, a major disruption in supplies from Ukraine could plunge the high-tech manufacturing sector into crisis.

At the other end of the spectrum, Russia and Ukraine account for 29% of global wheat exports, with 90% of Ukraine transiting through four key Black Sea ports that have been the target of Moscow’s advance since the start of the war.

In recent days, shipping in the Black Sea has been attacked by Russian forces, leading to delays and cancellations of exports across the region.

Russia strikes back?

As the West rolls out far more damaging sanctions than Russia anticipated, Moscow has been reeling from the unexpected blow.

So far, the Russian response has focused on assets held by foreigners in Russia. On Wednesday, Russia’s central bank banned coupon (interest) payments to foreign owners of ruble-denominated bonds.

Dmitry Medvedev, deputy head of the Russian Security Council, warned that Russia would respond to the seizure of funds from Russian residents and businesses by seizing those held by foreigners and foreign companies in Russia.

Yet despite escalating rhetoric from Moscow on asset seizures and a potential military clash with NATO forces, Russia has yet to deploy the economic weapon that most analysts expected, its ability to militarize its energy exports (gas and oil).

If Russian President Vladimir Putin decides that Russia is able to deal with the pain of limiting some of its major exports, there are options other than force with which he could hit back at the West.

With broad commodity price indices at record highs and pandemic-related supply issues affecting everything from aluminum to wheat, further supply disruptions by Russian trade actions could significantly worsen the problems. .

For example, Russia is the world’s largest fertilizer exporter, and supply disruptions could have a significant impact on already high prices.

Currently, there is already a ban on Russian exports of certain types of fertilizers in order to keep prices affordable for Russian farmers. However, if this ban were to be extended, it could put additional upward pressure on global fertilizer prices.

Perspectives

Whether driven by the direct impact of Russia’s invasion of Ukraine or a potential Russian response to Western sanctions, the global supply chain crisis and inflation concerns have become much more difficult in recent weeks.

In this, Australia is not immune.

With oil prices recently soaring more than 15% to an eight-year high of US$110 a barrel, Australian motorists are expected to experience much more pain at the gas pump in the weeks ahead.

Longer term, if price pressures in commodity markets persist, Australia and the world will face further widespread inflationary pressures and the RBA may face growing calls for higher interest rates. interest.

Nicholas Glinsman, co-founder of Intelligence Quarterly and macro hedge fund manager, perhaps summed it up best in a recent report: “The world has changed. It’s not just about Ukraine anymore. The ground war is only a front. We are now all in an economic war.

Tarric Brooker is a freelance journalist and social commentator | @AvidCommentator