World food and oil prices.  Source: Organization for Economic Co-operation and Development

Putin’s price hike is real and huge

It seemed silly, in March, when President Biden started calling persistent inflation “Putin’s price hike.” Gasoline prices and many other things had skyrocketed long before Putin ordered Russia’s invasion of Ukraine on February 24, and blaming Putin for it all of a sudden was a game changer. of opportunistic blame.

More than 100 days into the war, however, the Russian president’s belligerence has clearly had the most pronounced effect on world prices of any geopolitical development since the oil shocks of the 1970s. Organization for Economic Co-operation and Development compares current forecasts for inflation, growth, income and living standards with forecasts at the end of 2021, to present a before and after perspective of how Russian warmongering is affecting the entire global economy. The impact is brutal and likely to get worse, not better.

The year-on-year pre-war forecast for the 38 OECD member countries was 4.4%. It is now double, at 8.8%. The US, struggling with 8.3% inflation, is actually doing better than many other countries. Eastern European countries close to the war zone, such as Poland, Latvia and Estonia, are on track for double-digit inflation. The UK inflation forecast is 8.8%. In Turkey, already plagued by monetary policy mistakes, inflation soared from 24% before the war to 72% today.

World food and oil prices.  Source: Organization for Economic Co-operation and Development

World food and oil prices. Source: Organization for Economic Co-operation and Development

War in one country causes economic hardship almost everywhere for several reasons. The United States and many countries in Europe and elsewhere have imposed severe sanctions on the Russian economy, to punish Russia for its barbarism, which is causing considerable collateral damage. Russia is the world’s largest oil and gas producer, and although Russia still exports energy, sanctions have reduced Russian sales, leaving a supply shortfall just as the global economy shrinks. recovering from the COVID pandemic, which is driving energy demand.

“We were already in a tighter market last year,” says Raoul LeBlanc, vice president of the energy practice at S&P Global. “The COVID pandemic has reduced a lot of capacity and the rebound has happened quickly. It’s hard to reboot a system, and meanwhile people want to get back on planes and go on vacations by car.

Oil markets could tighten, driving up prices further. Europe plans to eliminate 90% of its purchases of Russian oil by the end of the year, turning to different suppliers or other types of energy. Russia will be able to sell some of this product, at a reduced price, to other buyers, such as China and India. But S&P Global estimates Russia’s supply of oil and petroleum products to global markets could fall 20% to 25%, as demand in China picks up as strict COVID lockdowns end there. . Other countries may slowly increase production to take advantage of high prices, but there is no tap anyone can turn that will flood the market with new oil.

A “cost of living crisis”

Energy is an important input in transportation, manufacturing, food production and many other things. Thus, rising energy costs drive up the cost of other commodities, including basic necessities such as food. This problem is compounded by the Russian blockade of Ukrainian Black Sea ports, which blocks shipments of cooking oil, barley, wheat and corn to regions such as Africa and the Middle East that depend on Ukrainian food exports.

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Russia is also a major food exporter, and although no one directly sanctions food products, financial sanctions prevent Russia from exporting almost everything. The sanctions also affect Russian exports of certain fertilizer compounds, which have more than doubled the cost of fertilizers and added to the cost of growing food away from Russia or Ukraine.

The OECD calls it a “cost of living crisis” and says: “The war in Ukraine has dashed hopes for a quick end to rising inflation due to supply bottlenecks linked to the COVID-19 observed in the global economy in 2021 and early 2022. Consumer price inflation will peak later and at higher levels than previously expected.

The World Bank recently warned of global “stagflation” with many countries entering recession this year. The main cause is the Russian war. Most economists see slowing US growth, but not a recession, as unemployment remains extremely low. Europe, which is more dependent on Russian energy, is likely to fare worse, and developing countries could face real crises. A May report from Eurasia Group and DevryBV Sustainable Strategies estimates that the loss of food exports from Ukraine and Russia will increase the number of food insecure people by 101 million by the end of 2022, and the number of people living in extreme poverty of as much as 201 million.

That probably doesn’t bother Putin, and some analysts believe destabilizing countries seeking to punish Russia with sanctions is part of his war strategy. Putin is also likely aware that it could become politically more difficult to maintain sanctions on Russia as it results in painfully high energy and food costs for consumers unaccustomed to such hardship. In this sense, the sanctions are a battle of attrition in which Russia hopes to show that it can endure more pain, longer, than the nations trying to punish it.

Here in the US, Biden’s rhetoric about Putin’s price hikes is becoming more legitimate as the damage mounts. That may not help her, though. Polls show Americans think Putin’s war in Ukraine is driving up prices, but they think Biden’s policies are the #1 cause, which is a big reason for Biden’s low approval rating. . Russia, for its part, is also suffering from inflation, with some consumer goods costing 50-60% more than before the war. But it would probably have to be much worse than that for Putin, a dictator, to have a problem with the public. Russia can take the pain, at least for a while.

Rick Newman is the author of four booksincluding “Rebounders: how winners go from failure to success.» Follow him on Twitter: @rickjnewman.

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