Sat. May 28th, 2022

Not so long ago, the International Monetary Fund projected global growth rate would slow to 4.4 percent in 2022. But as I have warned, it is overshadowed by the global risk of US stagflation.

After the disastrous failure of international diplomacy over the Ukraine, As the Ukraine is under fire, the crisis will derail global recovery and increase risk of stagflationary recession. Yet, the crisis was avoidable.

Energy risks amplify stagflation threats

For a long while, the geopolitical risk of the Ukraine has been discounted due to seemingly low economic contagion risks. Russia represents less than 2 percent of the global economy and global trade, and the Ukraine’s role is fractional.

Nonetheless, Russia is the world’s second-largest oil exporter. And the oil market is ill-equipped for major supply disruptions after two years of Covid-19, low inventories and diminished spare capacity. Worse, as supply concerns spur oil stockpiling, price increases escalate.

Moreover, Russia is the world’s largest natural gas exporter. In 2021, it exported around $55.5-billion natural gas to other countries worldwide.

The sanctions will suppress supplies and drive-up prices worldwide. And the European Union is the largest importer of natural gas in the world.

Currently, the US is an oil exporter, accounting for almost 6 percent of global oil exports while producing nearly all the natural gas it uses. Hence, Washington’s penchant for severe sanctions rather than bold multilateral diplomacy.

By contrast, Russian gas is vital to the US’ NATO (North Atlantic Treaty Organization) allies Germany (49 percent of gas supply), Italy (46 percent) and France (24 percent). It accounts for much of Europe’s gas imports (42 percent) via pipeline alone.

Overall, energy makes up two-thirds of Europe’s imports from Russia. Perceived supply threats may create painful economic fallout for European countries already grappling with the specter of high inflation.

Supply disruptions compounding commodity risks

Together, Russia and the Ukraine account for a quarter of global wheat exports. The crisis will have an adverse impact, especially in the poorest developing economies. What happens in the Black Sea region will also reverberate across Africa, particularly major importing countries such as Egypt, followed by Sudan, Nigeria, Tanzania, Algeria, Kenya and South Africa.

Since 2020, global grains have been among the key drivers of global food price increases. Now commodities prices will escalate further. Emerging Asia will have to cope with increasing energy and commodity prices and new inflation spikes.

Starting in March or soon thereafter, the US Fed’s impending rate hikes, even if they would prove fewer than initially expected, will compound new macroeconomic vulnerabilities.

The huge economic and geopolitical risks we are witnessing today represent a massive failure of international diplomacy. But why did Russia opt for a path that will hurt it the most in the short term?

ECONOMIC GROWTH AND MILITARY EXPENDITURES IN UKRAINE, 2010-2021

Source: Data from SIPRI, IMF

Russia’s allegations: NATO expansion, far-right paramilitaries

Neither the demonization of President Vladimir Putin nor the vilification of Russia and its people can nullify some allegations, particularly the role of NATO expansion and that of far-right extremists in the Ukrainian paramilitary.

As declassified files evidence, a series of security assurances were given to Soviet leaders against NATO expansion from all major US, European and NATO leaders. In 2017, these declassified assurances were posted online by the National Security Archive, an independent US nongovernment organization.

More recently, the Orwellian denials of the role of far-right and neo-Nazi paramilitaries entered an ominous phase. Before Christmas, Russia’s UN motion against the “glorification of Nazism” was passed by more than three of four UN member countries.

Yet, EU members abstained en masse from the UN resolution. Worse, the Ukraine, Canada and even the US rejected the motion. In Moscow, this was seen as a carte blanche for the Ukrainian far-right against Russia.

READ: United States was one of three countries that voted against the Anti-Nazi Resolution.  https://www.teenvogue.com/story/united-states-was-one-of-three-nations-to-vote-against-anti-nazi-resolution

During World War 2, the Ukraine’s far-right forces collaborated with Nazi Germany and during the Cold War, with Washington. After the 2014 crisis and increased Western military aid, the groups became increasingly active.

Last September, a US watch-group reported a far-right group, Centauria, had made its home in the Ukraine’s major Western military training hub, built ties with the far-right Azov movement and infiltrated the Armed Forces to reshape the Ukraine’s military along white supremacism.

In the past year, repeated warnings by fellow Democrats that these groups sought to radicalize the Ukrainian military were ignored by Biden’s Secretary of State Antony Blinken and National Security Adviser Jake Sullivan. Instead, Western training, financing and arming prevailed for violent regime change in the Ukraine. When Putin gave his TV address, even Facebook decided to allow praise of Ukrainian neo-Nazis as long as they fought Russian invasion.

Three decades of plunging living standards

Despite repeated efforts to capture the parliament, the far-right groups enjoy only fringe democratic support in the Ukraine. Most Ukrainians want peace and development. But that’s not what they’re getting.

From 1991 to 2014, the US provided the Ukraine with $4 billion in military assistance, according to the US Congressional Research Service. Over $2.5 billion has been added after 2014 plus over a billion, provided by the NATO Trust Fund. That’s only part of the total NATO military investments in the Ukraine. But as Iraq and Afghanistan have shown, military and so-called economic aid seldom foster consumer welfare.

In 2014, Ukrainian military spending was about 3 percent of GDP (gross domestic product), increasing to 6 percent in 2022, corresponding to more than $11 billion. So, following the 2014 crisis, Ukrainian military expenditures have doubled. At the same time, economic growth has tanked to negative territory. As a net effect, Ukrainian living standards have collapsed.

After the implosion of the Soviet Union, Ukrainian per capita incomes were still almost at par with Poland and ahead of Latvia. Today, they are more than 60 percent behind them. Ukrainian living standards are barely ahead of Libya, which Western intrusions have turned into a failed state.

Failure of diplomacy; edge of ultimate calamity

In an interview done two months ago, US Army Col. Douglas Macgregor, former US ambassador to Germany and ex-Pentagon adviser, expected Russian forces to invade the Ukraine “toward the end of January, beginning of February in all likelihood.”

The Ukrainian crisis and its timing were well-known in the West. It was allowed for a purpose. Macgregor charges the “US war lobby” for “fueling conflicts from [the] Ukraine to Syria.” As he puts it, “our goals should be that [the] Ukraine remains independent, sovereign, free and that may or may not have anything to do with membership in NATO. But we haven’t been willing to consider that.”

The colossal failure of international multilateral diplomacy has taken us all closer to the abyss. Russia and the US own 90 percent of more than 13,000 nuclear warheads. Since 1947, the atomic scientists’ Doomsday Clock has served as a barometer of the likelihood of a human-made global catastrophe. A few weeks ago, it was set at just 100 seconds to midnight, again. One fatal mistake away from planetary calamity.

If international diplomacy continues to fail, the problems of the Ukraine will pale in comparison to what’s ahead.

War is the realm of uncertainty.

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