Russia and Ukraine have entered the fourth month of fighting, and the global economy has been fighting inflationary pressures since. While the conflict already did result in supply chain disruptions and shortages of key commodities across the globe, sanctions by the US and EU have further worsened the inflation-situation.
Markets are now left grappling inflation, central bank policy reversal and lower growth. For the last 3 weeks now, the markets have been seeing petty gains, reversing half the downfall seen after the RBI increased rates. What’s up?
More sanctions
The EU passed their sixth phase of sanctions on Russia last week, which includes an embargo on Russian oil. Oil prices surged touching US$ 120 a barrel after.
Per the sanctions, a ban would be imposed on Russian oil that comes into the EU by sea. This accounts for 90% of EU’s oil imports from Russia.
There is an exemption on oil that is transported through pipelines, a concession made for landlocked countries because of a lack of an alternative.
Get ready for higher oil prices
With the EU ban, oil prices have already shot up. In addition to this, there is one more looming problem - China!
So far, since the conflict began, China had been under a lockdown to implement its no-tolerance policy on COVID. This had slowed down demand significantly as both cities and industrial hubs were shut away.
China is now slowly opening up, and it has also reduced rates to further boost the economy. More oil demand coming in from China, while supply problems get aggravated will only lead to a further increase in the price of oil.
Self sabotage
While the intent is to hurt the Russian economy, imposing a ban on Russian oil when the EU is heavily dependent on it, and in a scenario where demand is only increasing is causing self harm too.
The embargo results in a shooting up of oil prices, and a further spike in inflation. Consequent actions will be led by central banks in order to slow the economy down, and the effect will be seen on global financial markets.
What next?
Inflationary pressures have been driving a lot of the negative movement on the markets. We see this continuing till the time the supply impact of the conflict gets resolved, substituted sustainably, or normalised. Or, till the time enough fiscal and monetary action results in a likely lowering of inflation.