The undeclared war between Ukraine and Russia scares the world’s leading economists. Christine Lagarde, managing director of the International Monetary Fund, in her April 2 speech in Washington, D.C., mentioned the discomfort that the ongoing standoff between the two neighbors brings to the global economy.
Geopolitical tensions, risks of
ultra-low inflation in advanced economies and volatility in emerging markets
could cloud the world’s economic outlook, said Lagarde.
Global growth is projected to be at
around 3.7 percent in 2014, according to IMF figures. The fund is scheduled to publish new global
forecasts in the week starting on April 7.
“The situation in Ukraine is one which,
if not well managed, could have broader spillover implications,” she emphasized.
Resolving the tension “requires not only good policies, but good politics. Both
are essential to enable the global economy to move into a higher gear.”
John Lipsky, former first deputy
managing director of the IMF, in his March 28 interview with Bloomberg said
that the unstable situation in Ukraine may cost problems in terms of Russian
gas supplies to the European Union. All this would likely have important
implications on financial flows.
Ukraine expects the IMF to approve a bailout
package whose size could reach $18 billion and unlock $27 billion in overall support
from Western countries. Austerity measures and budget spending optimization are
key requirements for receiving this package.
Financial analysts have been following events in
Ukraine very closely for the past four months as the country’s national
currency rate and debt securities yields have been going through significant
perturbations due to political uncertainty.
Investors whose economic interests lie in the emerging
markets have had to make some tough decisions as the Ukrainian EuroMaidan
revolution led to a stalemate with Russia. Western democracies clearly oppose
Russian policies towards Ukraine, threatening it with economic sanctions which
may have a heavy impact on the country’s financial position.
The Russian economy may face $100 billion in capital flight this year, according to Andrey Belousov, Russian President Vladimir Putin’s aide. Holders of shares of Russian companies
are expected to sell them en-masse. The World Bank is more pessimistic, forecasting $150 billion outflowing in 2014.
The nationalization of Ukrainian assets
by the renegade Crimean government brings even more
insecurity for investors seeking parking places for their capital in emerging
markets. The situation in Thailand is not too much similar to Ukraine’s, but the
country is also facing the risk of disintegration. Protests there over an
alleged corrupt government have become bloody in recent days. Therefore, as
investors see how multilateral agreements are being violated in Crimea, they
have all the reasons to assume same will happen in Thailand. Then if Thailand
faces capital flight – one may not say Ukrainian crisis has no relations to it.
Morgan Stanley’s emerging market index
MSCI has been near a two-year low lately. Geopolitical tensions push investors
to take capital from these markets and place them in advanced economies, earning less
return but having reliable guarantees.
Kyiv Post associate business editor Ivan Verstyuk can
be reached at [email protected].
