The world continues to assimilate the hostilities between the governments of Vladimir Putin and Volodymyr Zelensky. In response to the invasion of Ukraine, both the US and NATO countries have implemented unprecedented economic sanctions and other measures against the government, oligarchs and businesses in Russia.

The purpose of these sanctions is to limit Putin’s room for maneuver and thereby force him to desist from the conflict. In this sense, the Institute of International Finance estimates that the Russian economy could fall by about 15% this year. However, the West is also aware of the possible adverse effects of this very complex situation, with possible ramifications of said sanctions on the rest of the region and the global economy, which have already begun to be observed on several fronts.

One of them has been the effect on the energy market, taking into account that Russia is a major oil producer (10.5 million barrels per day, equivalent to 11% of global production), as well as a very relevant supplier of natural gas. for Europe (close to a third of what the region consumes). An example of the effects of these measures has been a contraction of close to 3 million barrels per day in the supply of world crude oil, which has taken the prices of the main references to their highest levels since 2008. We must also remember the importance that both Russia and Ukraine have in the production of grains (eg wheat) and fertilizers for the whole world. In general, this could contribute both to the persistence of inflationary pressures and to disruptions in supply chains.

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In addition to the negative effects on international trade and inflation, the world has also faced increased risk aversion and volatility in financial markets. There is a significant exposure of the Netherlands, Ireland, Switzerland, Austria and various European and Asian countries and the US itself to the risk that Russia represents, both in investment portfolios and in foreign direct investment. This situation has put investors on edge, but it has also complicated the conduct of public policies in the world, as in the case of monetary policy. Especially in a context in which the US will start its monetary tightening cycle this week (March 16).

Given this situation, some relevant questions for global decision-makers are: how much longer will Putin be able to withstand these pressures from a large fraction of the international community, especially with economic sanctions that could weaken him inside Russia? How far will he be able to carry out his idée fixe of expansionism and at what cost? The duration and scope of the conflict and, therefore, the effect on the rest of the world will depend on it.

For Mexico –as I have already analyzed in other articles– the main contagion channels of the tensions in Ukraine will come from the performance of the prices of raw materials (especially energy and grains) and their impact on the difficult dynamics of inflation and the volatility in the financial markets. Given the limited weight of international trade that we have with Russia and Ukraine, the direct effects will be limited, although some indirect ones could be felt. Similarly, the implications for GDP and public finances so far seem contained. But again, all of this will depend on the outcome of this global geopolitical risk.

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*The author is Deputy General Director of Economic and Financial Analysis of Grupo Financiero Banorte.

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