February 24 will mark one year since Russian tanks rolled into Ukraine, kicking off Moscow’s all-out invasion of its neighbor. Although Ukraine, remarkably, has survived as a sovereign state, it continues to suffer from round-the-clock artillery bombardment.
But in addition to the thousands of civilian deaths, millions of refugees and extensive damage to infrastructure in Ukraine, countries far beyond its borders are feeling the war’s damaging effects.
As a second-order consequence of Russia’s incursion, the currencies of dozens of countries were mixed against the US dollar in 2022, raising the cost of imports.
Luc Werfeil, who owns a home appliance company in Cape Town, South Africa, told Al Jazeera to “absorb the cost of more than the rand. [South Africa’s currency] depreciation, we had to reduce our overall costs, including staffing.”
Given the complex interplay between geopolitics, commodity prices, and financial markets, Russia’s incursion sent shockwaves through the global economy, including developing countries. Of course, the consequences have varied both within and between developing countries. However, there have been some common challenges, including high commodity prices.
Even before the war, the global recovery from COVID-19 boosted commodity markets. Demand pent up by national lockdowns and massive economic stimulus programs fueled a rapid rise in prices. These tendencies were intensified by the war.
The energy component of the S&P Goldman Sachs commodity index, for example, ended 2022 10 percent higher than it was at the start of the year. It increased by 68 percent in January-June. Given Russia’s major energy market status in 2021, accounting for 14 percent and 18 percent of global oil and gas production respectively, the war has created uncertainty over limited supplies.
But Russia’s hydrocarbon output has been largely unaffected by the military conflict, and the tightening of sanctions has so far had little impact on Russia’s “resilient” energy sources, according to the International Energy Agency. Mainly, Moscow has succeeded in shifting European pipeline exports to emerging market countries such as India, China and Turkey, albeit at discounts to market prices.
Meanwhile, throughout the European Union, gas flows from Russia decreased by 80 percent between May and October. Pipeline constraints threatened a number of energy-intensive industries, and European countries turned to liquefied natural gas (LNG) to avoid plant shutdowns.
Energy and food importers took a hit
Europe’s scramble for new LNG supplies has driven prices up in the immediate delivery (or spot) market. The benchmark Asian LNG spot price hit a record high last year as many developing countries in the region grappled with power shortages.
Energy importers Pakistan and Bangladesh “are dependent but cannot afford to pay as much locally as rich European countries,” said Marcelo Estevao, the World Bank’s global director of macroeconomics, trade and investment.
Although estimates vary, Pakistan’s international reserve position may be sufficient to cover just three weeks of energy imports at current prices.
“On the one hand, countries that import energy carriers have been caught. Some will probably be forced to austerity,” Estevao added. “On the other hand, hydrocarbon exporters in the Middle East and Africa have received a boost from higher energy prices…
For some energy exporters, such as Nigeria and Angola, higher oil prices were partially offset by increased costs of maintaining expensive gasoline subsidies. Obviously, oil importers with gasoline subsidies, such as Kenya and Ethiopia, are worse off.
Similar strains have appeared in countries with large food subsidy programs. Before the war, Russia and Ukraine were among the world’s leading suppliers of barley, corn, and sunflowers. The supply of these and other essential commodities was critically affected by the Russian invasion.
The two countries accounted for nearly 30 percent of global wheat exports in 2021. But due to Russia’s blockade of Ukraine’s Black Sea ports, a key grain shipping route, wheat prices in 2022 rose 35 percent from a year earlier to a record high. in March
Countries such as Tunisia, Morocco and Egypt, some of the world’s biggest wheat importers, have been hit hard. Roughly two-thirds of Egypt’s population receives five loaves of bread, known as eish baladi, each day for just $0.50 a month, well below market costs. The difference is covered by a bread subsidy program that cost the government $2.8 billion last year.
Last June, Egypt’s finance minister indicated that high wheat prices would increase the cost of the country’s bread subsidy program by $1.5 billion in 2022-23. Groaning under the weight of expensive food programs, the government was recently forced to accept a $3 billion loan from the International Monetary Fund (IMF).
As with other IMF programs, lending was conditional on “fiscal consolidation.” Provided that the Egyptian government adheres to a plan to cut public spending, it will receive regular loan repayments over the next four years. While austerity measures usually accompany IMF programs, they have been criticized for fueling social unrest.
“World hunger remains severe”
“In countries with excessive wheat subsidies, price increases have had humanitarian and fiscal costs. However, more generally, world hunger remains severe,” said Maximo Torero, Chief Economist at the UN’s Food and Agriculture Organization (FAO).
In 2022, FAO’s annual food price index, which measures changes in international food prices, rose 14.3 percent from the previous year and 46 percent from 2020. As a result, 222 million people worldwide experienced acute food insecurity last year.
“The international community needs to adopt a portfolio approach to improving food resilience in developing countries,” Torero said, referring to international trade bodies, multilateral development banks and even private corporations. “First, the agricultural and disaster insurance schemes can be improved. Second, food import sources should be diversified and export restrictions removed. And third, we can build better by investing more in a developing country’s agricultural system.”
IMF loans are getting more expensive
At the same time, war-induced inflation prompted the United States Federal Reserve System, as well as other leading central banks, to raise interest rates. Over the past eleven months, the Fed has raised its benchmark interest rate by roughly 4.5 percentage points in an effort to slow rising prices.
Investors attracted to higher yields in the US pulled their funds out of financial assets in developing countries. Financial outflows to developing countries led to widespread currency depreciation against the US dollar. Along with higher import prices, the country’s depreciating currency also makes it more expensive to service foreign debt.
To cover the deficit, mature emerging economies such as Brazil and India issued bonds in their own currencies. They also withdrew large reserves of international reserves to stop devaluations. But for much of the developing world, these measures were not an option.
With little recourse to borrowing from international private lenders, official bodies like the IMF stepped in to fill the gap. An analysis of IMF lending by Boston University showed that by the end of 2022, the volume of loans provided by the IMF in 27 separate programs amounted to $95 billion. This was greater than the outstanding loan at the end of 2021, which was already a historical annual high.
“The problem for developing countries”, as mentioned by the former Minister of Finance of Argentina, Martin Guzman, “is that IMF lending has also become more expensive”. He was referring to the IMF’s international reserve currency known as Special Drawing Rights (SDRs).
The SDR rate is the weighted average of the borrowing costs of the five countries that make up the IMF’s reserve currency. “In 2022, the IMF’s lending rates have been raised along with monetary tightening conditions in four of those five countries,” he said, referring to the US, UK, Japan, China and the eurozone.
Guzmán added that “IMF lending to poor countries should avoid the inflationary cycles of advanced economies that make up the SDR basket, and instead focus on balance of payments challenges in borrowing countries.”
“To deal with the significant number of sovereign defaults in the coming years” there needs to be an independent debt authority, unlike a lending institution like the IMF, that can manage restructurings “in a timely and efficient manner,” Guzman said.
Based on a standardized set of legal principles, a global bankruptcy court can provide enhanced creditor-debtor coordination compared to the current market approach.
Although the idea has received support from the United Nations, it is unlikely that the United States and the United Kingdom, under whose laws most government bonds are issued, will cede the sovereignty of their courts to a supranational body. However, as Guzman noted, “the system we currently have leaves debtor countries too little and too late.”
Along with an uneven recovery from COVID-19, rising food and energy prices, and widespread currency devaluation, the war in Ukraine has only added to an already hostile environment for debt-ridden developing countries.