We Can’t Fix Inflation Without Saving Ukraine
ItIf President Biden wanted to leave his political morass, he may consider saving Ukraine.
His approval ratings—31%—are worse even than former President Trump’s. Americans are upset about the worsening inflation rate in 40 years. At over 9%, inflation is U.S. voters’ top concern, and political analysts expect a Democratic rout in the midterms as these frustrations are voiced.
Biden is not the only one who feels this way, neither are the U.S. Europe’s situation is getting worse. The E.U. has a total inflation rate of 9.6%. The overall inflation rate in the E.U. is 9.6%. Energy prices have risen by more than 42%, and food has risen by more than 9%. While Russia is holding the continent hostage for its energy supplies, it’s likely that this will rise even more. Yet, this could prove to be a good sign that inflation isn’t the only problem. For if we have Russia and its crippling of Ukraine to thank for inflation, we have it plus our bungled response to the invasion to thank for the global recession that is now feared—indeed, expected—throughout the world.
Monetary authorities have been increasing interest rates to try and fix inflation. This will cause recession in many economies. To cool down the economy and reduce consumption, it is important to lower prices. This is the sentiment of everyday citizens. The world’s governments are beginning to face accountability as citizens voice dissatisfaction with those they believe have been responsible for their economic mismanagement. Among the notable leaders who have been rebuked following the Russian invasion in Ukraine on February 24, 2017, are French President Emmanuel Macron, U.K. Prime Min Boris Johnson and Mahinda Rajapaksa, Sri Lankan Prime Minister. Each played an important role in reducing inflation. Anti-inflation demonstrations were also seen in Argentina, Panama and Kenya. In the U.S., Biden’s dismal approval ratings suggest such protests have already arrived here.
And yet, a keen electoral defeat may be within Biden’s powers to avoid. When French President Emmanuel Macron lost his parliamentary majority in June, he acknowledged that the Russo-Ukrainian war is having “a profound impact on many things,” and that “it wasn’t sufficiently taken into account in France’s public debate.” The same is true in the U.S. Normaly, the president’s administration does not have many traditional macroeconomic tools or monetary tools that can stop inflation. The president simply does not have much power over the economy for the short to medium-term. However, the current state of affairs is not one that was expected. Although some of today’s inflation is fully attributable to supply chain crunches and demand spikes as the world awoke from COVID-19 lockdowns and malaise, a very significant portion of it is a consequence of the Russian invasion of Ukraine. That can be fixed by the President.
Over the last five years, the critical role of Ukraine has become glaringly apparent in the global economic landscape. Up until February 24, Ukraine was undoubtedly the country most people couldn’t find on a map. It is now, without question, the most crucial country that the rest of the world has not saved, and it puts us in mortal peril. The rest of the world will not solve our economic problems and deal with the political consequences until Ukraine is saved.
Ukraine was, before Russia’s February 24 invasion, an economic powerhouse with a vastly underappreciated role in global supply chains. Its grain exports were at least 10% of the world’s; 12.8% for maize, 10.5% for wheat. Ukraine produced more than 45% of the world’s sunflower oil. Ukraine was also an important mining and industrial country. It is the 4th largest exporter of iron ore, and the 13th largest exporter steel. The country also exported large amounts of nickel and uranium as well as manufactured and exported heavy machinery, chemicals and engines. These are some examples.
Ukraine is an important energy transit nation, even though it was not an energy exporter. Before 2020, more than half—about 70 billion cubic meters (bcm)—of the E.U.’s yearly average 170 bcm of natural gas imports from Russia transited Ukraine. Notwithstanding some recent Russian shenanigans that left Canada bypassing international sanctions to give Russia’s Gazprom pipeline equipment in exchange for Russian promises of higher gas flows, the Nord Stream 1 pipeline to Germany was shut down entirely for most of July for so-called “maintenance”. Russia had already taken a retaliatory action in June by cutting supplies to Poland, Bulgaria and most importantly to Germany, France and Italy. On July 14, Gazprom claimed force majeure, arguing that an “Act of God” (read: on order of President Putin) prevented it from supplying Europe with natural gas. Experts see clear Russian manipulation despite gas flows falling to 40% since July 21. Even though it has yet to happen, Europe now wants to stop Russia from supplying gas. It will increase energy costs and turbocharge inflation. Putin may become richer from inflated energy costs, and people could die because they lack heat.
Learn more: Ukraine in Worse Than You Think
These and other global supply chain countries are so important that any interest rate rises taken by governments to combat inflation will not be effective. Rate increases can be described as demand-side adjustments. However, the real problem behind inflation is currently supply-side. In other words, strictly speaking, the problem is less that there is too much demand, and more that there isn’t enough supply. Supply chains are being disrupted by the war in Ukraine. Russia’s blockade of Ukraine’s Black Sea ports, through which Ukrainian farmers export agricultural products, has created a global grain and cooking oil shortage, for just two examples. The Turkish-brokered agreement between Russia and Ukraine for a grain export route is almost certain to be a ruse, similar to Russia’s Nord Stream 1 prevarication.
It is hard to precisely calculate how much of the global inflation crisis is due to Russia’s invasion of Ukraine, but the effect is marked. According to the U.N. Development Program, 71 million people have been pushed into poverty by Russia’s aggression and its consequences. That’s not 71 million Ukrainians (there are only 45 million), but rather vulnerable people all over the world suffering from inflation and shortages triggered by the Russian invasion of Ukraine. According to the U.S. Federal Reserve, its impact on global GDP will result in a 1.5% reduction in global GDP in 2022 and 1.3% increase in global inflation 2022. This is due to high commodity prices and scarcity as well tight financial conditions.
Unfortunately, it is reasonable to assume the Fed’s estimates are overly optimistic. Governments, the U.S.’s included, have proved themselves very poorly prepared for all aspects of Russia’s assault on Ukraine and the liberal world order. Even before the invasion, the U.S. government has not been able to accurately predict the rise in inflation. Together, these failures suggest that modest assessments of the impact of a crumbling Ukraine on global supply chains probably grossly underestimate its contribution to the world’s economic problems. Inflation is also a major factor due to geopolitical instability as well as commodity shortages caused in part by the invasion. The war in Ukraine has had a devastating effect on the prices.
This could’ve been avoided. If western governments had committed early in (or even before) the invasion to saving Ukraine instead of proclaiming loudly that they would not directly engage, Russia would not have been able to blockade the Black Sea and sever Ukraine’s export routes for agricultural and industrial commodities. The U.S. could have prepared global energy markets and decision-makers to buy Russian natural gas and oil in 2021, before it announced its determination that Russia would invade Ukraine. Europe might be better equipped to resist Russia’s retaliation. Russia’s GDP would have been less if NATO had begun to take decisive military actions against Russia. Russia could have been stopped. But it wasn’t, and the rest of the world has suffered the consequences. Predictably, voters all over the world are increasingly dissatisfied with their political leadership for the consequences of their inaction—record inflation.
Irrespective of whether voters see the Ukraine war as a threat to their tight pocketbooks, it is irrelevant. Average citizens have shifted their focus from vocal support of saving Ukraine to anger about inflation. Because, some argue that government should first take care of its citizens, there might not be as much support to rescue Ukraine.
Although Ukraine’s importance is obvious, cause and effect can be seen. Global economic prospects will worsen the longer this war continues. Currently, after five months of Russian violence, Ukrainian farmers have reduced their wheat and barley plantings by 30-60% for the winter. A single Ukrainian harvesting or planting season that is interrupted by war can cause an outbreak of global hunger.
Eventually, probably over years, the Fed’s demand-side monetary policies will almost certainly tame inflation, but most likely only by triggering a recession that will cause average citizens additional hardship. In order to get prices to normal without a recession, depression or worsening of the economy, if this conflict continues for several more years or months it would take approximately equal time. It is difficult to imagine how the voters will feel better during this prolonged period.
They’ll have ample time to complain at the ballot box, voting for the same leaders that supported Ukraine but blocked Russia. Putin would be able to win against existential and political enemies from democracies all over the globe. The possibility exists that pro-Russian new governments such as President Marine Le Pen of France, or another term for Donald Trump could be given the opportunity to reverse sanctions. It would effectively reward Putin for his invasion of Ukraine. This reward would allow him to attempt again. country.
It would be better for the west to make the hard decision right now to save Ukraine. This would be a supply-side correction for inflation due to supply-side shortages. Ukrainians would be able to return quickly to their factories, farms, and steelworks. It would be much more efficient than the current long-term rate rise game, and it will also cost us less long-term. Inflation could decrease in the west in order to help those governments which aren’t up for reelection.
The saving of Ukraine could also demonstrate leadership, which might help to win back disillusioned voters in America, Europe and other countries. It might keep the order of liberal democracy intact and maintain control over Russia. By now, the entire world needs to know how crucial Ukraine is. You can save Ukraine by acting now.
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