IMF representative talks Ukraine economy, Russia sanctions, global inflation

The Russian invasion of Ukraine has wreaked havoc on both the countries’ economies, causing a ripple effect across Europe and the rest of the world.

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In a televised interview with Al Arabiya on Tuesday, Deputy Director of the International Monetary Fund’s (IMF) research department Petya Koeva Brooks talked about the impact the war has had on Russia and Ukraine’s economies, the international organization’s projections for the upcoming years and its concerns about persistent inflation.

Ukraine economic forecast, uncertain future ahead

Ukraine’s economy is expected to contract by 35 percent this year, according to Brooks who also anticipated that reconstruction of the war-torn country will be a “multi-year project.”

“We have a forecast of this year for the Ukrainian economy to contract by 35 percent. But this is subject to enormous uncertainty. And of course, we all hope that there will be a peaceful resolution to the war,” said Brooks, which would then be followed by discussions about the reconstruction of Ukraine.

Russia invaded Ukraine on February 24 in which it calls a “special operation,” leading to the displacement of millions and the killing of thousands, as the war enters its eighth consecutive week.

“The loss of life that we have seen has been mounting, and just the overall devastation, including of critical infrastructure and physical capital, has just been unimaginable,” she added.

Local residents walk along a street next to a building damaged during Ukraine-Russia conflict in the southern port city of Mariupol, Ukraine April 3, 2022. The sign on the vehicle reads: Children. (Reuters)

Brooks said that at this stage in the war, it is still very difficult to make any future economic projections.

“[Rebuilding Ukraine] is going to be a multi-year project,” she said.

Russia’s future uncertain amid sanctions

The IMF’s baseline projections for the war-weary country did not take into account the escalation of sanctions on Russia.

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“It [the forecast] just assumes that sanctions stay broadly at the level they are [at now] and even with that assumption, we have significant downgrades of growth forecast in Europe,” Brooks said.

“In that sort of setting, the growth numbers that we’ve put forward… would be significantly worse than what we’ve put forward so far. And of course, the impact of that on the Russian economy is going to be even larger,” she added.

Sanctions imposed by countries that are against the war in Ukraine have crippled Russia’s economy. The West has imposed sanctions on an array of sectors including military goods, aviation, luxury goods, financial institutions, and most importantly, the energy sector.

The energy sector has long been one of Russia’s most prominent industries, contributing to around 40 percent of the country’s federal budget reserves and up to 60 percent of its exports in 2019, according to a BBC report released in November last year.

Brooks said that further energy sanctions would have a “substantial impact” on the Russian economy, especially when coupled with “much reduced export earnings.”

Without these further escalations, the IMF projects a decline in real growth in Russia, but Brooks noted that further sanctions on the country’s energy sector would be “much, much worse.”

“In the adverse scenario that we consider the escalation of sanctions do include the energy market, together with further effects through higher commodity prices as well as higher inflation, the cumulative loss in terms of Russian GDP by the end of 2027 is in the order of 15 percent,” said Brooks, adding that it could also contribute to around 3 percent loss in the European Union member states’ overall GDP in 2023.

Inflation, global supply shocks

With the global supply shock brought on by the Ukraine war and sanctions imposed on Russia, inflation has become a serious cause for global concern. The rise in food and gas prices worldwide has contributed a great deal to the problem at hand especially since inflation has been consistently on the rise before the war due to the COVID-19 pandemic which already had a substantial and damaging impact on the global economy.

Smoke rises from burning vehicles outside a residential building that has been damaged by an airstrike, as Russia's attack on Ukraine continues, in Kyiv, Ukraine, in this handout picture released on March 20, 2022. (File photo: Reuters)

“With the supply shock of the high commodity prices that we have seen, we have seen even further upward pressure, especially when it comes to food and energy prices. So, in that context, I think the main job of central banks is to tackle that inflation problem, and to make sure that there is no kind of spiral between higher prices and then higher wages and high inflation expectations that then feed back into higher prices [again],” said Brooks.

“Ultimately severing that link and making sure that it does not become an even bigger problem is what is going to protect real incomes and make sure that growth proceeds going forward.”

The IMF’s upcoming report has taken the persistent inflation issue into consideration.

“This is going to be really challenging, especially in an environment of higher commodity prices,” she said. “Our forecasts, which are based on market pricing are for average oil prices to be around 1.6 this year, which is a significant increase relative to last year when that number was $69 per barrel.”

She added that ensuring these higher headline inflation numbers “do not spill over into inflation expectations” and that the “silver lining so far is that medium-term inflation expectations have remained reasonably well-anchored in most countries.”

Brooks also said, “we are now projecting global growth this year at 3.6 percent, which is a significant downgrade,” especially since the forecasted growth rate of the global economy just a few months earlier stood at 4.4 percent.

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