The cost of possible war

Oil races to prices not seen since 2014

The markets globally have been volatile, driven by a rapid flow of information from the crisis in Eastern Europe. Stock markets in Asia and then in Europe fell sharply; and then, after a Russian general announced some troops would be withdrawing from the Ukrainian frontier, revived as sharply. The tensions between the Russian Federation and its southern neighbour — once a junior partner in the Union of Soviet Socialist Republics, and still linked to Russia by economic and cultural ties — worsened conditions in stock markets already rattled by the spectre of global inflation. In India, the volatility index rose 20 per cent and stocks fell over 3 per cent at the beginning of the week, as a consequence of the Russia-Ukraine tensions.

Fossil fuel is both part of the cause, and implicated in the fallout, of this crisis. Russia is a major natural gas exporter to the world but especially to Western Europe; the leadership in the Kremlin has never been shy of using its control of the gas supply to push the Europeans into a co-operative posture. The European Union was unable to form an effective and united front — even rhetorically — to defend Ukraine’s sovereignty. The new German chancellor, Olaf Scholz, has visited Ukraine’s capital, Kyiv, where he stressed support but did not go as far as promising weapons sales. The French president, Emmanuel Macron, made a dramatic visit to the Kremlin but, in the press conference that followed five hours of talks with Russian President Vladimir Putin, was unable to demonstrate that any progress had been made. Meanwhile, the United States has not played an entirely constructive role, infuriating the Ukrainian leadership by constantly declaring that war was imminent and evacuating its embassy in Kyiv. Notably, Mr Scholz in Kyiv did not back US President Joseph R Biden’s promise that, if Russia invaded Ukraine, the new Nord Stream 2 pipeline to take Russian gas to Europe would never come online. The original Nord Stream project is headed by Gerhard Schroeder, the last Social Democrat chancellor before Mr Scholz got the office, and he has just been appointed to the board of Russia’s state-controlled energy giant Gazprom.

But world markets recognise that the reaction to any invasion of Ukraine by Russia will certainly target the country’s financial and trading access to the rest of the world. It may be cut off from inter-bank transfers through the SWIFT network, for example. But the real concern is that Russia, which contributes nearly a fifth of the global exports of fossil fuel-based products such as naphtha and fuel oil, might be cut off from the global energy supply chain and further stoke inflationary pressures. Prices raced towards $100 for a barrel of Brent crude, levels not seen since the great oil price collapse of 2014 — before coming back down to around $95 following news of the partial Russian withdrawal. Demand has already outpaced supply, and stockpiles of oil globally have been falling. If oil stays at this level, some modelling indicates global inflation would rise by about half a percentage point — perhaps more in particularly import-dependent emerging economies like India. It should be clear that the costs to the global economy of a Russian invasion are extremely high. Diplomatic efforts to calm the crisis must succeed — and the costs to the Russian leadership of turning away from the path of peace must be demonstrably high.