The World Economy Trembles: Cooperation Must Be Used To Minimize the Effects

America is imposing strong financial and commercial sanctions on Russia, which has invaded Ukraine.

It has also announced its intention to exclude certain Russian banks from the international payment system SWIFT. It is believed this will be an extremely potent measure because it will complicate payment for Russian goods and sending money to Russia.

Presumably, America decided there was no choice but to implement strict measures to halt the violent actions of a Russia that has turned its back on international law; however, the pain of these sanctions will almost certainly extend to those imposing them.

The world economy is already unstable primarily because of the price of crude oil. It is feared that sanctions will cut off supply from Russia, which produces 10% of the world’s oil. The price of natural gas, which Europe depends on Russia to supply, is also increasing.

Rising energy prices will spur inflation across the world. The world economy, still reeling from the coronavirus pandemic, will probably fall into a slump, bringing about an even more serious state of affairs.

An effort must be made to minimize damage to the world economy. The Group of Seven countries, including Japan, must cooperate to overcome this chaos.

As countries consider further sanctions on Russia, there has been discussion of implementing measures to limit the Russian Central Bank’s ability to do business.* Such measures would impede buying assets to prevent a fall in the ruble’s value, potentially causing that currency to collapse, raising prices for the average Russian.

Financial experts in America, Europe and Japan must examine how the chaotic state of the Russian economy will affect the world’s economy. Following Russia’s invasion, world markets have contracted across the board. If sanctions impede the flow of money, there will be further negative pressure on assets such as stocks.

We must avoid a decline in capital investment and consumer spending.

The Federal Reserve’s actions will determine the future of the world’s economy. The Fed has already declared its intention to begin monetary tightening to control inflation, with plans to raise interest rates in the middle of next month. However, the Fed made this decision before Russia invaded Ukraine.

People fear that economic conditions will only continue to worsen. An abrupt shift toward monetary tightening could adversely affect the world economy. The Fed should not cling to its preexisting plans, but instead respond on an ad hoc basis to current economic conditions as appropriate.

The economies of developing countries, still under pressure from the effects of the coronavirus pandemic, are most likely to suffer damage in the aftermath of Russia’s invasion and the ensuing economic sanctions. The effect on the lives of everyday Ukrainians is also a matter of concern.

The G-7, World Bank, and other international institutions should not neglect to evaluate the effects of the current situation, and should take sufficient measures to support the world economy.

*Editor’s Note: On Feb. 28, the U.S., Japan and the European Union barred Russia’s central bank from accessing reserves in foreign banks.