Geography may allow Australia to avoid the direct human costs of the Ukraine conflict but not its fallout. Commodity market disruptions, supply chain breakdowns, sanctions and geopolitical realignments will affect Australians.
Russia is the world’s second largest gas producer (17% of global output) and the third largest oil producer (12%). It is a key supplier of aluminium, copper, nickel, platinum, palladium and titanium. Russia and Ukraine supply up to 80 to 90% of neon gas used in lasers to make semiconductors.
They produce large quantities of cereals, including almost 25% of the world’s wheat, and oilseeds for human and livestock consumption.
Loss of all or part of this supply will affect production and prices. Oil, gas, wheat, palladium and nickel prices have gone parabolic. Without rapid de-escalation, sustained high commodity prices may reduce global growth by 1% and add up to 3% to inflation.
Australian energy producers and farmers may benefit, although supply constraints limit opportunities and higher transport costs will reduce gains. Farmers face shortages and higher prices for fertiliser because Russia is responsible for around 20% of each global potash and ammonia supply.
For consumers, as the Reserve Bank of Australia governor, Philip Lowe, has warned, the conflict could trigger new waves of inflation and higher interest rates. If wage rises do not match price increases, then Australians will see a diminution of purchasing power.
Trade restrictions and sanctions targeting Russia may be ineffective. They assume US and western dominance of global commerce, but Russia and its ally China are important suppliers of energy, raw materials and many manufactured and intermediate goods. China and Russia have technological and financial workarounds which allow them to somewhat mitigate the effect of sanctions. There could be economic blowback from retaliatory measures.
Restricting Russian access to the global banking system may rebound. Foreign investors are owed at least US$150bn (AU$208bn): around US$20bn (AU$28bn) of Russia’s dollar debt, US$41bn (AU$57bn) in rouble-denominated sovereign bonds and US$86bn (AU$119bn) of shares. With Russia unable or unwilling to make payments, much of this could be lost.
Businesses forced to close operations or divest will not recover their investment. For example, BP’s disposal of its stake in Rosneft may result in a write-down of up to US$14bn (AU$19bn). Russia might also seize foreign business assets or not return about 500 aircraft, valued at US$10bn (AU$14bn), leased from western firms. Western automobile, aerospace and technology firms face loss of income from reduced access to the Russian market.
Australian savings, via investment funds, are exposed modestly to Russian shares and debt but more significantly to firms directly or indirectly affected by developments. Volatile share markets are pricing in losses and the broader dislocation.
The larger exposure is through the banking system, which has extended credit to Russia as well as businesses that are affected by sanctions, volatile commodity prices and a slowing economy. Banks, mainly European and American, have already foreshadowed multi-billion dollar write-downs. Problems may cascade through the hyper-connected financial system creating a daisy chain of losses setting off a financial crisis.
The inevitable geopolitical realignment will have significant costs. There is the loss of the “peace dividend” which allowed lower defence spending. Alongside the US and EU, Australia plans to substantially increase defence spending.
While benefiting defence contractors, higher military expenditure will divert resources from more productive uses, such as health, education, social services, infrastructure and strategic investments. It will place additional stress on already fragile public finances in many countries battered by the pandemic.
Since 1989, the dissolution of cold war alliances and improved security allowed increased global trade and capital flows. The trend is now to closed economies, economic nationalism and self-sufficiency. A fragmented global economy and rising barriers to trade and cross-border investment may result in lower incomes and more expensive goods and services.
Sanctions and the seizure of central bank assets can set dangerous precedents. The weaponisation of trade and financial relationships between nations will slow long-term growth and development. It will also produce lasting suspicions and tensions which will prevent cooperation on global issues like the environment and pandemics.
Australia, as an open economy, is especially vulnerable. Closer Sino-Russian ties may decrease Australia’s export opportunities.
“You may not be interested in war, but war is interested in you.” The aphorism attributed to Leon Trotsky captures the far-reaching consequences of conflicts. Trapped by historical alliances, Australia is not immune to a fracturing global economic and political order.
• Satyajit Das is author of Fortune’s Fool: Australia’s Choices (March 2022) and A Banquet of Consequences – Reloaded (March 2021)
