QUESTION: With reference to the article in question, critically assess the impact and potential impact of the ongoing Russia-Ukraine conflict on the economies of developing countries like Jamaica.

COFACE ECONOMIC MARCH 2022 PUBLICATIONS FOCUS By the Coface Economic Research team Economic consequences of the Russia- Ukraine conflict: Stagflation ahead EXECUTIVE SUMMARY The escalation of the conflict in Ukraine and the invasion of the latter by the Russian military on 24 February has triggered turmoil in the financial markets, and drastically increased uncertainty about the recovery of the global economy two years after the onset of the COVID-19 pandemic. With Russia being the world's third-largest oil producer, the second-largest natural gas producer and among the top five global producers of steel, nickel and aluminium, any significant reduction in energy supplies and metal shipments is highly likely to lead to soaring global prices for these commodities. For this reason, on the day the invasion began, financial markets around the world fell sharply, and the prices of oil, natural gas, metals and food commodities (especially grains) surged. While high commodity prices were one of the risks we had already identified as potentially disruptive to the recovery, the escalation of the conflict between Russia and Ukraine increases the likelihood that commodity prices will remain higher for much longer. In turn, it intensifies the threat of long-lasting high inflation, not only for basic needs, thereby increasing the risk of social unrest in both advanced and emerging economies. Industries such as automotive, transport, chemicals, and more generally all sectors using the abovementioned raw materials as inputs appear as particularly vulnerable. Furthermore, considering the scale of the sanctions announced by the Western countries and their allies, the Russian economy will be in great difficulty and will again fall into (deep) recession in 2022, leading us to downgrade the country's risk assessment from B to D. Because of its dependence on Russian oil and, above all, natural gas, Europe appears to be the region most exposed to the consequences of this conflict. While replacing all Russian natural gas supply to Europe (~40 % of total European consumption) is virtually impossible in the short to medium run, current price levels, if maintained until the end of the year, will already have a significant effect on inflation. We estimate at least 15 percentage point of additional inflation in 2022 compared to our previous forecast in the Eurozone, which will, in turn, erode household consumption and lower GDP growth. While some countries, such as Germany and Italy, are more dependent on Russian natural gas, the trade interdependence of Eurozone countries suggests a general slowdown (1 percentage point after taking into account impacts on external trade and business investment). A complete cut of Russian natural gas supply would raise the cost to 4 percentage points at least - bringing annual GDP growth to zero in 2022. In the rest of the world, while the economic consequences will be felt mainly through the rise in commodity prices, which will fuel already existing inflationary pressures in most parts of the globe before the conflict, the drop in demand from Europe will hamper global trade. As always when commodity prices soar, net importers of energy and food products will be particularly affected, and even more so in an uncertain and volatile prices environment, with the spectre of major supply disruptions in the event of an even greater escalation of the conflict, and the further sanctions and retaliations that each country might take. In short, the world has shifted, so have the risks. ALL OTHER GROUP ECONOMIC PUBLICATIONS ARE AVAILABLE ON: coface http://www.coface.com/Economic-Studies FOR TRADECOFACE ECONOMIC PUBLICATIONS ECONOMIC CONSEQUENCES OF THE RUSSIA- OZ FOCUS UKRAINE CONFLICT: STAGFLATION AHEAD stun livestock before slaughtering, as well as for some Chart 4: Russia's share of selected metals in global production in 2019 beverages. High gas prices will thus exacerbate pressures on global food prices through several channels. IT Impact of the conflict on the metals industry Gold Russia is a major producer of palladium, aluminium, nickel and copper (Chart 4). As for energy and agricultural commodities, metals prices were also on the rise over the last months due to significant imbalances, which will worsen (Chart 5). While some segments have benefited from high prices, they Copper 4 have had a strong negative impact on smelters and alloy makers, whose profitability was also affected by high energy prices, notably in Europe. However, Sources: JP Morgan, Coface the end users of key base and precious metals are expected to endure most of the increase in prices, in chart 5: Selected metal prices (100 = Jan 2015) particular the automotive and the aircraft industries, as well as the construction sector. For instance. alladium palladium is key for catalytic converters for internal combustion engines (ICE). Palladium is also used in semiconductors production, as is neon, a gas critical or the lithography processes for chip production, of which Ukraine produces an estimated 70% of world 230 exports. Russian and Ukrainian supply of palladium 190 and neon gas, notably critical for the U.5. industry. is thus likely to add to global semiconductor supply 180 disruptions. Furthermore, nickel is crucial for lithium- ion battery for electric vehicles (EV). Since Indonesia, which holds the world's largest nickel reserve, banned the ore exports to capture more 100 100 added value, this makes the Russian position more important as many companies rush to secure supply TO SO in an already volatile market. Aluminium (car bodies, airplanes, windows, appliances) and copper (wires and rods, electronics, construction, and many other industrial settings) have widespread uses. The current EV transition depends heavily on access to affordable Sources Refinitiv, LME, Caface and large supply of aluminium, copper, nickel, lithium and platinum products. Competition for mineral raw inputs means that Europe Impact of the conflict could fall short in metal access if China increases its on the automotive industry imports. These metals are key for the manufacturing and construction sectors, and manysectors could simply The current situation is strongly impacting an already stop production in Europe if they are not supplied. strained automotive sector due to various shortages and Moreover, with higher energy prices, many European high raw material prices semiconductors, cobalt, lithium, smelters suspended a part of their production that magnesium, etc. was considered unprofitable. The metals supply Ukrainian automotive factories supply major carmakers chain is complex The tightness of several markets in Western Europe, in particular the wiring hamesses could exacerbate the shortages and push prices to that hold the electronic cables within a car. For instance, unsustainable levels. VW and Renault announced last Friday the stoppage at some of their factories in Europe (Zwickau and Dresden, Togliatti and Moscow) due to the ongoing fights between the belligerents. A few days later Porsche and BMW also announced plant closures. Several plants around the Chart 3: Sunflower oil and selected grain prices (100 = Jan 2019) world are already planning outages due to chip shortages, and the current situation will add to the woes of the 340 -Com - What automotive sector. We should also acknowledge the fact that consumers in Europe are already affected by rapid 300 price increases in EV, which have been promoted over the last years at the expense of ICE cars that are in dire need of 280 access to palladium for their catalytic converters. 290 Impact of the conflict on chemicals 180 Many chemical products were already evolving in a 140 turbulent/highlyvolatile environment (fortheir customers), as prices were reaching levels not witnessed since several 100 years. As Russia is also a producer of oil & gas derivative products, we can expect feedstock for petrochemicals to be more expensive. Higher naphtha and ethane prices 2020 - highly correlated with natural gas and crude price Sources Refinitiv, Coface benchmarks- will dent margins of some petrochemicals firms MARCH 202204 COFACE ECONOMIC PUBLICATIONS ECONOMIC CONSEQUENCES OF THE RUSSIA- FOCUS UKRAINE CONFLICT: STAGFLATION AHEAD As mentioned in the section on the agri-food industry, of the impact of the pandemic on international travels. Rail prices of fertilizers are also on the rise (chart 6) The three freight will also be impacted by the conflict, as European primary nutrients in commercial fertilizers - nitrogen, companies are now forbidden to do business with potash and phosphorus - are indeed expected to be Russian Railways. This will likely disrupt freight activity impacted by current developments. Nitrogen prices between Asia and Europe, transiting though Russia. Rail jumped sharply after Russia invaded Ukraine. Russia freight between the two continents is usually a good is a key exporter of nitrogen with 7 million tons of urea compromise between air [faster but more expensive) exported annually in a 55 million tons market. The conflict and sea (cheaper but slower). In addition, during the will add to supply concerns most notably linked to pandemic, rates for air and sea freight strongly increased, China's export ban on fertilizers until June 2022 to secure benefitting rail transport between Asia and Europe, of domestic food supply. The significant increase in prices which the share in total freight between the two regions and the ongoing turmoil will not encourage the Chinese strongly increased over the last two years. authorities to lift the export ban. Last but not least, with production losses such as in Western Europe, it is worth noting that inventories are running low, notably in India, Impact of the conflict a key importer. on the wood industry chart 6: Fertilizer prices (USD/ton] Russia is a major exporter of lumber (16%% of global exports - Nitrogen -Phosphate -Ammonia in 2019), particularly softwood, and more generally of forest products. The European Union and Chinese wood processing industries most notably rely on exports from Russia. Before the conflict, export restrictions placed by 1000 Russia on wood exports [higher export duties, reduction in the number of crossing points) were already a source of concern for importers. Trade sanctions on Russia will further exacerbate tensions in this sector, potentially cutting global supply of lumber, and exerting upward pressure on prices, which are already high 600 Deep recession ahead 400 for the Russian economy Due to the escalation of the conflict with Ukraine and 200 the resulting harsh sanctions adopted by Western countries, the Russian economy will turn again into recession {updated Coface GDP forecast for 2022: -75%) after the recovery experienced last year. As 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 a consequence, Coface is downgrading Russia's Sources Refinitiv, Caface Country Risk Assessment from B [fairly high) to D (very high). Sanctions notably target major Russian Furthermore, Russia and Belarus, which is also targeted banks, removing seven of them from the international by sanctions, are large exporters of potash: BPC (Belarus) communication tool SWIFT (Box 1 - See next page). and Uralkali (Russia) represent around one third of In addition, several sanctions were slapped on the whole potash market The market is made of long- the Russian central bank's [CBR) foreign currency term contracts between countries and is already tight reserves [mostly held in Western accounts), while as highlighted by the upward trend in New Orleans, the U.S. banned engagement on any transaction Louisiana (NOLA] prices since 2020. Russia is also a major involving the CBR. Furthermore trade on Russian player in phosphorus markets, accounting for 10% of sovereign debt was prohibited by Western countries, the diammonium phosphate market and 20% of the and access to foreign capital was restricted. Selected monoammonium phosphate one, supplying mainly Russian public officials and oligarchs are targeted Europe. Like potash, phosphate is a market characterized by assets freeze and travel restrictions Sanctions by long-term contracts/arrangements. The market is on Russia's defence sectors, export control of high- already tight, and U.S. duties on Moroccan, Chinese and tech components to Russia, and the closure of the Russian rocks have exacerbated the imbalances. EU, Canada, and U.S. airspace to Russian aircrafts have also been implemented. These measures put Impact of the conflict considerable downward pressure on the Russian ruble (chart 7). which has already plummeted. on the transport sector Rising energy prices, particularly oil, will also reverberate chart 7: USD/RUB exchange rate (1 USD = _ RUB) in the transport industry. Airlines and maritime freight companies will suffer from higher fuel prices Airlines are most at risk, as fuel is estimated to account for about TID a third of their total costs. With European countries, 100 the U.S. and Canada having forbidden the access to 90 their territories to Russian airlines, they will be severely impacted. The Russian retaliation, which has already banned European, and Canadian aircrafts (and in all likelihood American ones) from its airspace also means higher costs since airlines will have to take longer routes to bypass the world's largest country by area. The bans are also expected to dent Russian demand for travel. V The magnitude of the impact will vary according to the geographical position of the airline and will depend on the share of Russia in its demand. Airlines have little room forrising costs, as they continue to face lower revenues because Sources: Refinitiv, Coface MARCH 2022COFACE ECONOMIC PUBLICATIONS ECONOMIC CONSEQUENCES OF THE RUSSIA- 05 FOCUS UKRAINE CONFLICT: STAGFLATION AHEAD and will drive a surge in consumer price inflation. on top of a temporary ban on selling Russian assets The Russian central bank already raised its key interest by foreign investors to reduce the money outflow out rate to 20% (from already a relatively high level of of the country. Additionally, the Russian government 9.5%] on 28 February 2022 in an emergency move. has ordered the finance ministry to spend to 1 trillion and could increase it even further to fight the ruble rubles (USD 103 billion) from the National Wealth depreciation and elevated inflation. Compared to Fund to buy shares in Russian companies. most other mineral-rich emerging countries, Russia The higher level of inflation will erode Russian has built up relatively strong financials a low level consumers' purchasing power, resulting in a decline in of public external debt, a recurrent current account real private consumption, the traditional growth driver surplus, and the accumulation of a fair share of its (50% of GDP). In addition to inflation, higher financing minerals revenues in the National Welfare Fund, as costs and the deteriorated sentiment will limit household well as substantial foreign reserves (around USD 640 spending and business investment Concomitantly, billion). However, the freeze promptly imposed by public investments have not been accelerating in recent western depositary countries on the latter prevents years and they are currently expected to be put on hold. the Russian central bank from deploying them and On the other hand, the Russian economy could benefit reduces the effectiveness of the Russian response from higher prices for commodities, especially for to limit the deterioration, and especially the ruble its flagship energy exports. However, EU countries plunge. Over the last years, Russia has been reducing announced their intention to limit their imports from its dependence on the USD in favour of the EUR As a Russia. The IEA published a 10-point plan on reducing esult, at mid-2021, reserves in USD accounted for 16% European reliance on Russia, estimating Europe could of the total, EUR 32%, GBP 7%, while yuan (CNY) was cut imports by more than a third within a year. If it at 13%. Gold reserves represented 22%. were the case, this would result in weaker demand and In order to offset the impact of sanctions, capital softer prices, especially as European immediate needs control measures have been implemented with a ban will decrease, with the end of winter season approaching. on FX transfers, induding servicing FX loans outside This trend could be reinforced should Russia decrease or the country. Russian exporters are also obliged to sell stop pipeline flows to Europe as a counter sanction. In the 80% of their foreign currency revenues. Moreover, the industrial sector, restricted access to Western - produced Bank of Russia banned coupon payments for foreign semiconductors, computers, telecommunications, investors holding ruble-denominated sovereign debt, automation, and information security equipment will while Russian companies are also barred from paying be harmful, given the importance of these inputs dividends to their overseas shareholders. This comes in the Russian mining and manufacturing sectors. Box 1 IMPACT OF SELECTED RUSSIAN BANKS' EXCLUSION FROM SWIFT Society of Worldwide Interbank Financial Telecommunication (SWIFT) is a global messaging system for banks. SWIFT is an international cooperative of global banks that is akin to a bloodline for all international finance. SWIFT itself does not settle payments, but its standardised system of secure messages is highly trusted, as it allows a bank that receives a message to be sure that it is a valid instruction and to proceed safely. Moreover, it allows banks to process high volumes of transactions very quickly. Swift links 11,000 banks and institutions in over 200 countries. The European Commission announced that seven banks would be cut off from SWIFT: VTB Bank (the second-largest bank), Vnesheconombank (VEB), Rossiya Bank, Sovcombank, Bank Otkritie, Novikombank and Promsvyazbank. To mitigate the fallout from the decision on oil and gas payments, Sberbank (the biggest lender by assets) and Gazprombank (heavily involved in the energy sector) are not included in the list. In this context, three alternative options will be available to Russian banks for transactions: Russian banks could continue to carry out cross-border transactions relying on slower and less secure communication tools, such as faxes, emails, phone calls and letters (as did Iranian banks between 2014 and 2016). These processes would be more costly and more vulnerable to cyberattacks. Transactions could be carried out via Russian banks that have not been excluded from SWIFT, if there is a s correspondent agreement between the two banks. Otherwise, companies will have to open an account in the banks authorised to operate on SWIFT in order to carry out their transactions. To carry outtransactionsvia alternative payment networks: (a) the Systemfor Transfer of Financial Messages (SPFS), developed by the Central Bank of Russia or (b) China's Cross-border Interbank Payment Systems (CIPS). However, these two alternative systems have far fewer participants than SWIFT, which greatly limits the possibilities for transactions. Russia's System for Transfer of Financial Messages (SPFS) works well for domestic transactions but it has higher transaction costs. Currently, 400 banks have already connected to SPFS. Among them are Russian banks, a few banks from the CIS countries, and banks from Germany, Switzerland, France, Japan, Sweden, Turkey, and Cuba. The number of foreign participants in the SPFS system is constantly growing, and by the end of 2021, there were 40. Nevertheless, its ubiquity is not comparable to SWIFT. As of end January 2022, there were 1,280 participants in China's Cross-border Interbank Payment Systems (CIPS), including 75 direct participants and 1,205 indirect participants, covering 103 countries and regions around the world. Direct participants open an account with CIPS, and can send and receive business directly through CIPS. Indirect participants obtain services provided by CIPS indirectly through direct participants. Indirect CIPS participants may still need to go through SWIFT to complete settlements. Among the direct participants, there are 11 foreign banks (DBS, Citibank, JPMorgan, Standard Chartered, HSBC, Deutsche, BNP Paribas, ANZ, MUFJ, Mizuho, and SMBC). Slightly over a third (27 out of 75) are located abroad, where all are overseas subsidiaries of Chinesecompanies, witheightin Europe, ofwhichone in Russia (Industrial and Commercial Bankof China RMB Clearing Bankin Russia) Among the indirect participants, there are 934 companies in Asia (541 companies in China), 159 companies in Europe, 43 companies in Africa, 29 companies in North America, 23 companies in Oceania, and 17 companies in South America. At least 23 Russian banks are connected to CIPS (as indirect participants), and Russia will have no trouble doing business in yuan through CIPS. Moreover, major Russian private and state-owned institutions have only been accepting yuan payments in recent years. For instance, in September 2021, Gazprom switched from accepting USD payments to yuan payments for aviation fuel. Although it has more participants than SPFS, its ubiquity is also not comparable to SWIFT. MARCH 2022COFACE ECONOMIC PUBLICATIONS ECONOMIC CONSEQUENCES OF THE RUSSIA- 07 FOCUS UKRAINE CONFLICT: STAGFLATION AHEAD In this case, the magnitude of additional inflation would some Asian economies arising from supply disruptions narrowly depend on government measures to reduce in goods. With Ukraine being a major supplier of Neon energy bills for households and businesses, which gas to the semiconductor sector, there are concerns in turn will depend on the fiscal leeway of each country. about fresh disruptions to chip production. However, so Despite not being directly exposed to Russia, as trade far, major semiconductor producers (TSMC, SK Hynix, flows are small and mostly include gold, the United Samsung) indicated limited impact to raw material Kingdom imports most of its palladium and a significant procurement, thanks to higher buffer stockpiles and proportion of its platinum from Russia (65% and 33%% diversified procurement sources. Furthermore, fertilisers respectively). While before the conflict, the Bank of are critical for India to feed its agricultural sector, which England (BoE) had forecast inflation to peak above 7%% employs 60% of the country's workforce and accounts for in April, when a 54% rise in regulated household energy 15% of GDP. About one-third of India's potash imports is bills will take effect, the surge in commodity prices is likely met by Russia and Belarus. A disruption in the supply of to push prices even higher. While the BoE was expected fertilisers would hamper productivity in the agricultural to continue raising its interest rate, with three additional sector. This would also be the case for many countries in hikes forecasted in 2022, the fear of a hit on growth could Southeast Asia (Chart 9). Given that the primary sector slow the policy normalization schedule. accounted for 14% and 15% of GDP in 2020 for Indonesia The Central and Eastern European (CEE) region is heavily and Vietnam respectively, a decline in crops would drag dependent on both oil and natural gasimports from Russia on economic growth. Also related to agriculture, Ukraine In terms of oil, the reliance on Russia is high especially for supplies much of the region's wheat, oats and other Slovakia (100% of oil sourced from Russia]. Lithuania (73%) cereals, accounting for 9.2% in 2020, while Russia provides and Poland (72%], while Russian natural gas imports are nearly 4%. Both countries combined account for the third crucial for North Macedonia (100%), Latvia (100%). Czech largest source of cereal imports (Chart 10). Republic (100%). Hungary (95%]. Slovakia (85%) and Bulgaria Reduced agricultural yields are expected to contribute to (75%%). Poland, which sources around 50%% of its natural gas greater food inflation. With food occupying a significant needs from Russia, announced before the conflict that it share of the basket of consumer goods prices in many would not extend its energy contracts beyond 2022. In the economies across the region, this will push up overall past, CEE countries experienced threats of temporary lower consumer price inflation and hurt consumption (Chart n1 supplyvia Yamal, Druzhba South and Odessa-Brody-Plock - See next page). pipelines. In Poland, despite not being that significant, the As North American trade and financial links with depreciation of the Polish PLN (-4% since the escalation of Russia and Ukraine are fairly limited, the impact of conflict), is likely to increase import costs. The importance the conflict will mainly be felt: ) through the price of the Russian market for CEE countries' exports is much channel, and [2) as a byproduct of slowing European lower than it used to be. In this region, Baltics economies growth. Despite the prospect of slower economic are the most exposed due to their geographical proximity growth and higher inflation, the recent geopolitical to Russia and historical trade links. Still, the CEE region, events are not expected to derail monetary policy in which relies more on Western European economies, will North America at this stage. As expected, on March 2. also be affected by the decline in regional demand, as well the Bank of Canada raised its target for the overnight as further supply constraints, as the economies are very interest rate by 25 basis to 050%, the first rate hike integrated in European supply chains. since October 2018. The Federal Reserve (Fed) in the U.S. is also expected to start a rate-hike cycle at No region will be spared by imported inflation and global trade disruptions Chart 9: Russia and Belarus' share in total fertilizer imports (9%) 30 Belarus Russia As in the rest of the world, the impact on Asia-Pacific will be felt almost immediately through higher import prices. particularly in energy prices, with many economies in the 25 region being net energy importers, led by China, Japan, India, South Korea, Taiwan and Thailand. It is worth mentioning that only Malaysia (oil and gas) and Indonesia [gas) are net exporters. Higher inflation may have 15 consequences for ASEAN's monetary policy. For now, only the Singaporean central bank tightened its policy in October 2021 and January 2022. Meanwhile, Bank of 10 Indonesia announced at the beginning of the year that it would start to gradually increase reserve requirement 5 ratios, while an interest rate hike would be asses ed later in the year, probably during the third quarter. In Malaysia, however, the stance remained accommodation to support Philippines Myanmar Malaysia Thailand Vietnam Indonesia economic growth. Despite, inflation exceeding Bank of Thailand's target of 1-3% in January, the central bank Sources: ASEAN statistics, Cofone also remains accommodation as it expressed risks to the economic recovery. While inflationary pressures rise, the conflict will also drive external demand down. Asian central banks will have to prioritize between inflation control - chart 10: Russia and Ukraine's share in total cereal imports (x] amid a rise in risk aversion that could exacerbate imported inflation through currency depreciations - and support to growth. This would also have an impact on public finances For example, Thailand has implemented subsidies on 20 fuel retail prices to limit their impact on inflation since November 2021. It also recently approved diesel tax cuts. Consequently, with less revenue and more expenses on 10 subsidies, the Thai government will need to borrow money. pressuring the public debt, which hit 589% of GDP in 2021, the highest in 21 years This is also the case of Indonesia, as state subsidies Malaysia Philippines Vietnam Myanmar Thailand Indonesia surpassed the budget allocation by 39%% in 2020 and were the highest since 2014. There could also be specific impact Sources: ASEAN statistics, Coface on sectors (e g. agriculture, electronics) that are crucial for MARCH 202208 COFACE ECONOMIC PUBLICATIONS ECONOMIC CONSEQUENCES OF THE RUSSIA- FOCUS UKRAINE CONFLICT: STAGFLATION AHEAD chart TI: Food prices share in CPI basket [%] Conversely to GCC countries, Russia is one of the largest trade partners of Turkey: the country accounts for 2.6% of total Turkish exports and 11% of total imports, with key imports being natural gas, metals and grains. Inflationary tensions, that are already extremely high, will then be exacerbated. Following the latest developments, the Turkish lira weakened by 5% to 14.2 vs USD. The country's 5-year CDS rose by 40 basis points to 583 and the yield on 10-year bonds increased by 150 basis points to 24%. Furthermore, about one-fifth of the USD 426 billion dollar projects portfolio undertaken by the Turkish contracting industry abroad is linked to projects based in Russia. The two countries are also collaborating on South Korea Singapore Indonjon Japan Malayala Philippinin Thailand Cambodia India a nuclear reactor construction project, as Russia is building Turkey's first nuclear power plant on the Sources national sources, CEIC Mediterranean coast. "Including tobacco In Africa, food and energy prices the condusion of its next monetary policy meeting could fuel further social pressure scheduled on 15-16 March. We continue to expect the Fed to raise rates by 25 basis points 4 times and to As in the rest of the world, the distinction between the start reducing the size of its balance sheet this year. winners and losers of the commodity price surge in Africa will be determined by each country's position Middle East, Turkey and Israel as a net importer or exporter of commodities. Then, major agricultural importers - such as North Africa, face risk of food shortages Nigeria, South Africa, Ethiopia, Kenya, Senegal, Ghana, Zimbabwe, Mozambique. Cameroon, Benin, Niger The impact of the Ukraine-Russia crisis on the Middle and Guinea - will be affected by higher prices (charts East would be two sided. Initially, rising energy prices 12 & 13). Many African economies, particularly in North would support growth performances and improve the Africa, are also dependent on Russian and Ukraine for fiscal balances of the Gulf Cooperating Council [GCC) food imports and tourism. Most notably, in 2019, Egypt countries. Despite economic diversification efforts, imported more than 70% of its wheat from Russia and most of the GCC economies are still dependent on Ukraine. On the other hand, some other countries oil revenues (hydrocarbons account approximately are likely to benefit from increased interest in their for 35% of GDP in Saudi Arabia, 45% in Kuwait, 40% hydrocarbon and mineral reserves, and therefore from in Qatar and 30% in the United Arab Emirates). These accelerated or new investments: Mauritania, Senegal, countries would also benefit from higher prices in Ghana, Ivory Coast, Mozambique. Uganda, etc. metals as they are among the major exported goods In times of crisis, such as the current one, with from the region. For instance, Bahrain is one of the COVID-19 related restrictions loosening, there is often world's largest aluminium producers, which accounts a tendency for popular discontent to grow. Recently for around 20% of its total exports. Nonetheless, as popular protests against high food, energy and GCC countries import around 85% of their food, these agricultural input prices have taken place in Kenya, countries are vulnerable to food shortages. Another Morocco and Malawi. In addition to the impact of country that could be vulnerable to food shortages global prices, disrupted logistics, currency depreciation is Israel, as Ukraine has been its main cereal supplier [potentially increased by monetary tightening in the over the last few years, as well as a key supplier of U.S. and elsewhere], and sometimes the imposition or some dairy products (butter, milk). raising of taxes, are also involved. Chart 12: Wheat: most vulnerable countries chart 13: Other grains (Sorghum, corn, rice..): most vulnerable countries Sources USDA, Coface calculation sources: USDA, Coface calculation " vulnerability is defined as [import - export)/consumption Barbados, Benin, Burkina Faso, Cameroon, Colombia, Congo (Brazzaville), Congo kinshasal, Costa Rica, Cote d'ivoire, Cube, Dominican Republic, Ecuador, Fiji Gabon, Ghana Quaternala, Guinea, Haiti, Honduras Hong Kong, Jamaica, South Korea, Liberia, Madagascar, Malawi, Moli Mauritania, Mauritius, Mozambique, Namibia, Nicaragua, Niger, Nigeria, Papua New Guinea, Philippi en, Philippines, Senegal, Sierra Leone, Singapore, Somalia, Tanzania, Thailand, Trinidad and Tobago, Uganda and Venezuela. MARCH 202208 COFACE ECONOMIC PUBLICATIONS ECONOMIC CONSEQUENCES OF THE RUSSIA- FOCUS UKRAINE CONFLICT: STAGFLATION AHEAD chart TI: Food prices share in CPI basket [%] Conversely to GCC countries, Russia is one of the largest trade partners of Turkey: the country accounts for 2.6% of total Turkish exports and 11% of total imports, with key imports being natural gas, metals and grains. Inflationary tensions, that are already extremely high, will then be exacerbated. Following the latest developments, the Turkish lira weakened by 5% to 14.2 vs USD. The country's 5-year CDS rose by 40 basis points to 583 and the yield on 10-year bonds increased by 150 basis points to 24%. Furthermore, about one-fifth of the USD 426 billion dollar projects portfolio undertaken by the Turkish contracting industry abroad is linked to projects based in Russia. The two countries are also collaborating on South Korea Singapore Indonjon Japan Malayala Philippinin Thailand Cambodia India a nuclear reactor construction project, as Russia is building Turkey's first nuclear power plant on the Sources national sources, CEIC Mediterranean coast. "Including tobacco In Africa, food and energy prices the condusion of its next monetary policy meeting could fuel further social pressure scheduled on 15-16 March. We continue to expect the Fed to raise rates by 25 basis points 4 times and to As in the rest of the world, the distinction between the start reducing the size of its balance sheet this year. winners and losers of the commodity price surge in Africa will be determined by each country's position Middle East, Turkey and Israel as a net importer or exporter of commodities. Then, major agricultural importers - such as North Africa, face risk of food shortages Nigeria, South Africa, Ethiopia, Kenya, Senegal, Ghana, Zimbabwe, Mozambique. Cameroon, Benin, Niger The impact of the Ukraine-Russia crisis on the Middle and Guinea - will be affected by higher prices (charts East would be two sided. Initially, rising energy prices 12 & 13). Many African economies, particularly in North would support growth performances and improve the Africa, are also dependent on Russian and Ukraine for fiscal balances of the Gulf Cooperating Council [GCC) food imports and tourism. Most notably, in 2019, Egypt countries. Despite economic diversification efforts, imported more than 70% of its wheat from Russia and most of the GCC economies are still dependent on Ukraine. On the other hand, some other countries oil revenues (hydrocarbons account approximately are likely to benefit from increased interest in their for 35% of GDP in Saudi Arabia, 45% in Kuwait, 40% hydrocarbon and mineral reserves, and therefore from in Qatar and 30% in the United Arab Emirates). These accelerated or new investments: Mauritania, Senegal, countries would also benefit from higher prices in Ghana, Ivory Coast, Mozambique. Uganda, etc. metals as they are among the major exported goods In times of crisis, such as the current one, with from the region. For instance, Bahrain is one of the COVID-19 related restrictions loosening, there is often world's largest aluminium producers, which accounts a tendency for popular discontent to grow. Recently for around 20% of its total exports. Nonetheless, as popular protests against high food, energy and GCC countries import around 85% of their food, these agricultural input prices have taken place in Kenya, countries are vulnerable to food shortages. Another Morocco and Malawi. In addition to the impact of country that could be vulnerable to food shortages global prices, disrupted logistics, currency depreciation is Israel, as Ukraine has been its main cereal supplier [potentially increased by monetary tightening in the over the last few years, as well as a key supplier of U.S. and elsewhere], and sometimes the imposition or some dairy products (butter, milk). raising of taxes, are also involved. Chart 12: Wheat: most vulnerable countries chart 13: Other grains (Sorghum, corn, rice..): most vulnerable countries Sources USDA, Coface calculation sources: USDA, Coface calculation " vulnerability is defined as [import - export)/consumption Barbados, Benin, Burkina Faso, Cameroon, Colombia, Congo (Brazzaville), Congo kinshasal, Costa Rica, Cote d'ivoire, Cube, Dominican Republic, Ecuador, Fiji Gabon, Ghana Quaternala, Guinea, Haiti, Honduras Hong Kong, Jamaica, South Korea, Liberia, Madagascar, Malawi, Moli Mauritania, Mauritius, Mozambique, Namibia, Nicaragua, Niger, Nigeria, Papua New Guinea, Philippi en, Philippines, Senegal, Sierra Leone, Singapore, Somalia, Tanzania, Thailand, Trinidad and Tobago, Uganda and Venezuela. MARCH 2022COFACE ECONOMIC PUBLICATIONS ECONOMIC CONSEQUENCES OF THE RUSSIA- 09 FOCUS UKRAINE CONFLICT: STAGFLATION AHEAD DISCLAIMER This document reflects the opinion of Coface's Economic Research Department at the time of writing and based on the information available The information, analyses a herein have been prepared on the basis of multiple sources considered reliable and serious, however, Coface does not guarantee the accuracy, completen or reality of the data contained in this guide. The information, analyses and opinions are provided for information purposes only and are intended to supplement the information otherwise available to the reader. Coface publishes this guide in good faith and on the bas commercially reasonable efforts as regards the accu acy, completeness and reality of the data. 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The oil market is however already sanctioning itself, The Russian Federation is the world's second largest with major disruptions of Russian exports and a Russian natural gas producer (679 billion cubic metres in 2019) il price discount above 30%. and third largest crude oil producer (11.2 million barrels per day in 2019). Following the latest developments, Impact of the conflict Brent oil prices breached USD 100 per barrel for the on the agri-food industry first time since 2014, while Europe's TIF gas prices surged at a record EUR 192 on 4 March (chart 1). Pressure on agricultural commodities prices - which Replacing Russian natural gas supplies to Europe (~40 % were already on an upward trend - will be exacerbated of total European consumption) will be impossible by the conflict. Russia is the largest wheat exporter In the short-run, and still very challenging when it in the world [almost 20% of global trade). Moreover, comes to the sole flows transiting through Ukraine In Ukraine is a key producer of corn (6" largest]. wheat 2022, Europe will probably have to compete with Asian (7*j. sunflowers (1"]. as well as being among the top ten countries for LNG carriers available in the spot market, producers for sugar beet, barley, soya and rapeseed. In and a much deeper supply squeeze from Russia would 2019, Russia and Ukraine together accounted for 25%, lead to demand destruction. 21% and 17% of global exports of wheat, barley and corn, Regarding crude oil, options for output increase from respectively (Chart 2). In addition, Russia and Ukraine other sources exist - the Organization of Petroleum also stand for about 75%% of global sunflower seeds and Exporting Countries [OPEC) should continue to unwind safflower oil exports (the two are used as edible oil for its output cuts and non-OPEC output is on the rise in human and animal consumption). several countries [Canada, Brazil, Guyana, etc.) and may Therefore, with Ukrainesuspending commercial shipping accelerate given current prices (U.S. shale). Still, these at its ports, and Russia closing the Azov Sea to commercial alternatives might not be sufficient to offset severe vessels, supply disruptions will be significant. disruptions to the Russian supply. The main upside risk Furthermore, leading grain traders including ADM, for oil supply, which could limit price increases, would Cargill and Bunge suspended their operations in be a possible nuclear deal with Iran, which holds the Ukraine (but none has stopped its business in Russia so world's fifth proven oil reserves and whose production far). Although Russia mainly ships its grains from ports in has been limited by U.S. sanctions. Prospect of progress the Black Sea (still open at the time of writing] and that was notably improved by the trip to Tehran of the Azov Sea ports are much smaller, these disruptions could head of the International Atomic Energy Agency on 5 already affect wheat, com and barley exports to Egypt March. If Iran were to return to the market, more than `and Turkey [the two largest buyers of Russian wheat, and 1 million barrels per day of exports could gradually second and third importers of Ukrainian grain), as well as substitute for disruptions in Russian supply In order to Cyprus. Italy and Lebanon. address concerns over potential disruptions to the 4-5 Higher cereals prices (Chart 3) would translate into higher million barrels exported each day by Russia, countries consumer prices for products such as pasta or flour, as of the International Energy Agency [IEA) - a group well as edible oil (such as sunflower or safflower oil, but of 31 OECD countries accounting for around 45 % of also other edible oils like olive oil. Moreover, this would global oil consumption - agreed on 1 March to release lead to higher meat prices, as com and coarse grains are 60 million barrels of oil from their emergency reserve. used for animal feed. The consequences of the ongoing This represents about 4% of those stockpiles and is La Nina' episode, which is resulting in lower soybean and equivalent to approximately 2 million barrels per day corn production in Latin America, are then likely to be for a month. This is the fourth coordinated drawdown exacerbated of the IEA after 1991, 2005 and 2011. Meanwhile, the Another indirect effect for the agri-food industry would OPEC and its partners (which includes Russia) did not come as a byproduct of higher natural gas, which is signal a faster increase in crude oil output. The OPEC+ a crucial input for fertilizers. Soaring prices will lead has agreed to adjust its overall production upward by to lower fertilizer production and/or higher prices, 400,000 barrels per day from March to August, as it has therefore diminishing agricultural yield. Furthermore, done since August 2021 lower fertilizer output means fewer CO. available to Chart 1: Oil and Natural gas prices Chart 2: Russia and Ukraine's share in global exports of selected grains Natural gas in Europe [EUR MW] - Brentcrude oil just/bb), right ace] 140 120 160 10% 60 40 When Corn Barley 2014 2015 2016 2017 2018 2019 2020 2021 2023 Sources Trademap, Coface Sources Refinitiv Coface MARCH 2022 1- According to the National Oceanic anbd Atmospheric Administration (NOAA), "Lo Nia is defined as a cooler than normal sea surface temperatures in the central and eastern tropical Pacific ocean that impact global weather patterns .06 COFACE ECONOMIC PUBLICATIONS ECONOMIC CONSEQUENCES OF THE RUSSIA- FOCUS UKRAINE CONFLICT: STAGFLATION AHEAD Moreover, even before these implementing official formal While Germany will be the most afflicted of the major restrictions various Western companies have decided to Eurozone economies, Italy is not far behind. Although stop or limit their activity in the Russian Federation. To try Italy has managed storage reserves better than its to limit the impact, Russia will probably want to deepen European peers (39%% capacity vs. an EU average of its trade relations with China (Box 2), already the main 30%). Prime Minister Mario Draghi warned that current market for its exports and imports Box 2 levels are low, not typically being reached until the end of March. On the financial stability front, Unicredit's relatively strong exposure has raised concerns, but with CHINA'S ROLE IN THE RUSSIA-UKRAINE CRISIS its Russian subsidiary accounting for around 3% of the Bilateral trade reached a record USD 145.9 billion in 2021, up from USD 107.8 group's capital and revenues, this is hardly a systemic risk. billion in 2020. Chinese exports to Russia rose by 35% from 2020 to USD France is less dependent on Russian gas, on the one 67.6 billion, while imports from Russia rose by 12% to USD 78.4 billion, with hand because it consumes less gas due to its investment energy imports dominating (nearly two-thirds of China's total imports from in nuclear energy, and, on the other, because Russia is only its second largest supplier behind Norway (20% vs. Russia). Russian companies have also indicated a preference towards using 3636). Nevertheless, Russia represents about 10%% of several yuan for trade settlements. Trade settlements using yuan rose from 3.1% of China-Russia trade in 2014 to 17.5% in 2020. On 25 February 2022, Gazprom metals imports aluminium, iron ores, nickel and titanium. Neft, the oil unit of Gazprom, announced that it is shifting entirely to yuan Furthermore, Ukraine is also a key supplier for sunflower oil (65%% of total crude sunflower-seed oil imports). Even settlements for jet fuel. if it is less dependent on Russian gas, which accounts Bilateral local currency swap arrangement for only 9% of its gas imports (behind Algeria, Nigeria or In October 2014, the People's Bank of China (PBOC) and the CBR signed a even Qatar], the Spanish economy is likely to see some bilateral local currency swap agreement with a scale of RMB 150 billion sectors be directly impacted by the dependence on RUB 815 billion, valid for three years. This swap agreement was subsequently Ukrainian imports of corn (30% of total com imports) extended twice in November 2017 and November 2020. There have been and sunflower-seed oil (70%). Moreover, as evidenced multiple bilateral local currency swaps initiated, with funds provided to in recent months, energy inflation is particularly volatile Chinese and Russian commercial banks, according to news reports, but very in Spain due to the large share of contracts with daily minimum details were provided. However, the PBoC branch in Qingdao said price changes. Consequently, consumption, which was in 2018 that it had facilitated a ruble loan using the swap, with Bank of China still 8% below its pre-crisis level at the end of 2021 due to lending rubles to a local firm so it could import Russian goods. reduced disposable income (compared to other major Eurozone economies). could be dragged down further. While inflation seemed temporary, and was expected to fall back in the second half of 2022, higher energy prices European economies are definitely for a prolonged period are likely to fuel inflationary the most at risk pressures. According to our estimate, the surge in commodity prices will lead to 15 percentage point of additional inflation in the Eurozone in 2022. As input Europe is definitely the most vulnerable region, because costs will remain high for longer, this should further of its reliance on Russian oil and gas (chart 8). While affect companies' profitability and their ability to dependence on Russian gas varies greatly from one absorbthese costs, which would thus be passed on to country to another, all economies will be affected by consumers, fuelling second-round and/or pass-through soaring gas prices on the continent. Together with the rise effects on inflation. in the price of other commodities, this will fuel inflationary On 10 March, the European Central Bank (ECB) board will pressures in all countries of the region, lower household publish its latest forecast for inflation, which will probably disposable income, and, in turn, private consumption. In show an upward revision, leading to mounting pressures addition, given the substantial intra-Eurozone trade flows, to tighten its monetary policy earlier and further. all economies are very likely to be significantly affected. Nevertheless, it is worth mentioning that the ECB's tools In the case of Germany, natural gas is the second have no grip on energy prices. Moreover, with financial biggest energy source and 316 million people (37% of markets on a downward slope, the environment has the population) live in a household heated with gas. Gas turned more adverse. The ECB said in a statement that imports from Russia (65% of total gas imports] are not easily it would stand ready to stabilize the financial markets. substitutable as there are no LNG terminals in German As initially planned, it is likely to end the Pandemic ports but we do not expect, at least in the near-term, that emergency purchase programme (PEPP) at the end of Germany will run out of gas (the reserves are sufficient the month, and to keep its communication unchanged to last through the winter). Besides gas, the total direct for now. Any discussion on a deposit rate hike is likely to be merchandise trade with Russia is very small. Nevertheless, postponed until there is a clearer view on the economic there is some connection in the automotive industry. and political outlook for Europe. Both Italian and Greek sovereign 10-year bond yields dropped by 20 bp on Chart 8: Natural gas as a share of total primary energy 1 March following comments by ECB officials hedging consumption in 2019 against the risk of a premature hike in interest rates. Italy In terms of debt sustainability, staying in an ultra-low interest rate environment would more than compensate Nothorlands the stagflationary headwinds Europe is currently facing. United Kingdom At the time of writing, in what we could call a best-case Turkey scenario assuming a gradual easing of tensions and a Germany dedine in commodity prices from their current high peak Belgium -while remaining high - , we estimate an average impact Spain on Eurozone close to one percentage point, with a larger dedine in the more exposed countries, such as Germany. Latvia However, a more adverse scenario cannot be ruled out, in EU 27 which we could see a stronger disruption of energy flows. Portugal For instance a complete cut of Russian natural gas Greece flows to Europe would considerably affect economic activity through a 40% reduction in natural gas supply. Canchia Gas from Russia Assuming energy substitution where possible, Poland Gas from all other sources andgas supply rationing where least damaging to France economic activity (thereby halving the apparent GDP- 0% 5% 10% 15% 20% 25% 30% 35%% 40% to-energy elasticity), the impact on Eurozone GDP could reach 4 percentage points, which would bring Sources Eurostat, Coface annual growth to zero. MARCH 2022