The toll of the Russian-Ukrainian crisis on global economy and energy markets

Dr Nakhle argues that at the moment, all scenarios are possible, each with different implications on energy markets. A military action of any kind initiated by Russia will most likely lead to sanctions on the country. However, what these sanctions will entail remains a question. The effectiveness of sanctions is questionable, particularly in the short term and unlikely to target energy supplies otherwise they risk exacerbating the economic problems in Europe, particularly inflation. Sanctions, however, can target specific projects and technologies including those in energy and thereby have a longer term impact on Russia’s oil and gas supplies.

Dr Nakhle adds that we shouldn’t forget the implications on the broader economy. Both Russia and Ukraine are major commodity exporters such as of grains and inputs required for the manufacturing of chips. If these are disrupted, they can cause supply disruptions and further inflationary pressures that would go beyond Europe.

With respect to the inflationary pressures, oil and gas prices have played a significant role, with gas prices increasing at a faster rate than what we saw in crude markets, particularly in Europe. If energy prices continue their upward trend, then we are going to see a greater inflationary pressure which might potentially lead to more aggressive policy reactions from central banks. However, if central banks press the brakes too hard, they risk slowing down economic growth.

We should also not forget the geopolitical premium. Should there be a de-escalation in the Ukrainian crisis, we should expect oil prices to retreat from the levels we have today. 

If the crisis causes a notable disruptions to Russia’s oil supplies, then OPEC has the incentive to compensate for the loss of those barrels. However, if the situation stays as it is, OPEC doesn’t seem to have a solid ground to deviate from its current strategy, especially given that some members are struggling to meet their production commitments. 

Finally, with respect to US President Joe Biden’s climate agenda, Dr Nakhle argues that progress has been disappointing on that front as reducing the impact of higher energy prices on the electorate has taken priority.