The world finds itself in a perilous position which has the potential to create recessions in the US and Europe and severely impact China. And China can now see that Russia’s invasion threatens its stability so has offered to mediate. Naturally share markets are falling.
Oil and gas are at the centre of the world’s peril but there are other dangerous forces including US and European inflation, much higher interest rates than currently anticipated, a massive requirement of defence aid to Ukraine and nearby vulnerable countries, the mental stability of a dictator with a nuclear war button and, of course, the serious problems in China.
The likelihood of even higher oil prices escalated last night in Washington when Senior congressional Democrats and Republicans announced they had reached a deal on a bill to ban US imports of Russian oil. It will need to be approved by Congress.
That adds to the pressure on President Biden from his senior advisers, led by secretary of state Antony Blinken, for a similar ban.
Over in Europe, UK Prime Minister Boris Johnson says Europe must begin to wean itself off Russian oil and gas so any US ban will almost certainly be accompanied by European curbs on importing Russian oil and gas. Across the transatlantic, alliance communities want Putin deprived of cash so that Russia is sent into a depression.
But the global economic consequences of current oil prices (let alone further rises) will be severe. US inflation is already at 7.5 per cent so skyrocketing oil prices will take it beyond 10 per cent. That’s serious inflation and requires either substantial falls in government expenditure or much higher interest rates. And if those unpalatable remedies prove too difficult then the US is headed towards to a South American type spiral.
Ordinary Americans, as they have in the past, will understand the dangers and will cut back their expenditures. The US faces the prospect of a recession or something worse.
Europe is very dependent on Russian gas and if the price jumps further European inflation will also rise and it will face the same issues as the US.
But even more serious will be the impact on consumer spending from the fear of an approaching war. A severe recession is almost certain.
Confirming these perilous scenarios, the International Monetary Fund warns that the war in Ukraine could inflict significant damage on the global economy, disrupting markets and trade and adding to inflationary pressures.
Johnson has made it very clear that Putin’s act of aggression in Ukraine “must fail and be seen to fail”. He is advocating all the countries in the transatlantic alliance increase their military aid to Ukraine to enable it to win.
Markets have previously assumed that Putin would win and after the turmoil there would be some stability. Johnson has a different view and is clearly indicating that citizens in those Ukraine cities that fall to the Russians should have the equipment to make life incredibly difficult for the invaders – exactly what happened to the Russians in Afghanistan. The war might continue for years.
Thirdly, when dictators makes a huge mistake they find it very difficult to admit error. The Russian economy is going to be smashed. China cannot save it. There is clearly a danger that Vladimir Putin will start a war with Europe and that war could be nuclear. That is not a forecast, but the world will fear this taking place which will compound the economic dangers that are ahead.
China is set to be hard hit which will impact Australia.
The increase in the prosperity of China’s population and Communist party rule is closely linked to global prosperity. Now that is about to change, and western demand for Chinese goods will be reduced. Global public anger could turn on China and demand harsh purchasing cuts because China clearly knew about the invasion and did not oppose it.
At the same time, China has severe problems in property development and needs prosperity in the west to get through this period.
There is probably nobody who can convince Putin to pull back, but if there is a person in the world it is China’s President Xi Jinping. And Boris Johnson has already thrown out an olive branch saying that Europe is prepared to undertake that Ukraine will not join NATO. It might be a lever that Xi can pull.
No dictator in the world has ever been subjected to the sort of economic and public opinion weapons that have been applied to Putin. Russia is set to be deprived of almost all revenue, its banking systems has been wrecked and about half of Russia’s foreign reserves are frozen. At the same time the western democracies have been bought together to form a trans-Atlantic alliance not seen since the second world war. We are also seeing social media mobilising the world against Putin.
But when everyone is set to suffer led by Russia, China, the US, Europe and India there is a chance of a resolution. China mediation via the United Nations is the best hope.
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