Aurelia Butler

More than half of Ukraine’s economy has shut down and infrastructure assets worth $100bn have been destroyed since Russia launched its invasion of the country, according to the chief economic adviser to President Volodymyr Zelensky.As economists revealed dire predictions for the hit on Ukraine’s economy, Oleg Ustenko said the humanitarian situation was “much worse than anyone can imagine” and urged western nations to tighten sanctions on Russia, including an immediate and complete ban on energy imports. Speaking from Kyiv to the Peterson Institute for International Economics on Thursday, Ustenko said Ukraine’s economy was “very depressed”, adding: “Currently around 50 per cent of businesses are not operating and the rest are not operating at full capacity.” Ustenko also described EU gas imports from Russia as providing “blood money” to its president Vladimir Putin. “I understand that Europeans do not want to be cold . . . it is cold in Berlin and Paris, but much colder [for people] underground in Ukraine with no heating.” Ustenko’s words followed announcements of measures to support Ukraine’s economy. The IMF agreed $1.4bn of “rapid financing” on Wednesday, with the fund acknowledging “additional large support is likely to be needed to support reconstruction efforts” once the war ends. The US Congress agreed $13.6bn in military and humanitarian assistance to support US troop deployment in eastern Europe, support for refugees and emergency food and health support for Ukraine. The aid would not stop a devastating hit to Ukraine’s economy this year as Russia destroys infrastructure, prevents businesses ranging from steelmakers to wheat producers operating as normal and forces citizens to take shelter or flee the country. In a briefing with reporters on Thursday, Kristalina Georgieva, the fund’s managing director, acknowledged the “horrific toll” of the war on Ukraine and pledged to work with the country on “crisis management measures” to ensure the functioning of its economy — something she said was the fund’s “most critical task”.“Even if hostilities were to end right now, the recovery and reconstruction costs are already massive,” she said. While Georgieva noted it was too early to give an exact estimate of those costs, she said “the order of magnitude is going to be quite large”.“We are talking about a large country — 44mn people population — with massive destruction in the key cities . . . as well as massive destruction of transport infrastructure,” she added.An initial survey of forecasts undertaken by FocusEconomics suggested the consensus estimate was for Ukraine’s gross domestic product to contract by 8 per cent in 2022. Its previous survey published in January forecast growth of almost 4 per cent for the year. Many of the economists surveyed expected drops in GDP of between 40 and 60 per cent, FocusEconomics said. The key question, economists said, was how long the fighting would continue.Evghenia Sleptsova, a senior economist at Oxford Economics, said heavy fighting is disrupting activity in 10 of the country’s 24 oblasts (its provinces). Those areas are typically responsible for 60 per cent of Ukraine’s GDP and 59 per cent of its exports, the group said. Exports, she added, have come almost to a halt. Ports on the Black Sea and the Sea of Azov, which previously handled 77 per cent of Ukraine’s exports, have shut down, either because they have been overwhelmed by the fighting or for fear of mines and piracy by Russia’s Black Sea Fleet, according to GMK Center, a Ukrainian industry research and consultancy firm. Most road routes out of the country are swamped with refugees.But some activity continues, especially in western and central regions where there has been little fighting so far, analysts said. “Agricultural producers are saying they will go into the fields and start sowing where possible,” Sleptsova said. The extent of the damage to this year’s grain harvest, and to grains in silos awaiting export, will be critical in determining the damage to Ukraine’s economy and to food supplies globally. Ukraine supplies 12 per cent of the world’s wheat exports, 16 per cent of maize and 40 per cent of sunflower oil, according to the US agriculture department.

The harbour of Mariupol: Black Sea ports are major hubs for wheat and corn, but traffic in and out has ground to a halt © Sergei Grits/AP

If Ukraine were to permanently lose seaports such as Odesa and Kherson, it would have to undergo a far-reaching restructuring of its economy such as opening new trade routes through Poland, said Liam Peach, Capital Economics’ emerging Europe economist.“We don’t know what to put into GDP,” he said. “There may not even be a country any more.” Oxford Economics would also not make any estimate of the hit to Ukraine’s economy until there is some indication of the war’s outcome.Any changes to Ukraine’s territory after the war would determine the size and shape of its economy, said Timothy Ash of BlueBay Asset Management. He envisaged a scenario of a Free Ukraine holding western and central Ukraine, with or without Kyiv, and a Soviet-style Democratic Republic of Ukraine under Moscow’s yoke.As well as the real assets to be carved up between them, he said, a decision would have to be taken, most likely by the IMF, about Ukraine’s financial assets, including its foreign exchange reserves, and its liabilities, including sovereign debt.“There is a huge challenge coming up for the IMF on this,” he said. “How can Free Ukraine service its debts out of only a third or so of its former GDP?” More

WASHINGTON/FRANKFURT (Reuters) – The Russian attack on Ukraine may slow global growth and raise new economic risks, but top central banks are keeping their focus trained on an inflation fight that looks set to intensify.Europe may be the most vulnerable to a broader economic shock from the war, but the European Central Bank made clear Thursday the region could absorb the expected hit to economic growth but couldn’t afford for policymakers to turn their backs on rising prices at a record rate across the euro zone.The ECB, calling the war a “watershed moment,” in a surprise move sped the end of one of its key pandemic bond purchase programs and cleared the way for possible interest rate increases later this year.ECB President Christine Lagarde in a press conference said the economy could weather the shock from war and tighter policy and “still grow robustly in 2022…Supply disruptions show some signs of easing. The impact of the massive energy price shock on people may be partly cushioned by drawing on savings accumulated during the pandemic.””You can slice inflation any way you want and look at any core measure, it’s above target and rising. We have a 2% mandate and we’re failing it,” said one ECB policymaker, who asked not to be named.A similar narrative was emerging in the United States and elsewhere as officials weighed the economic risks suddenly facing the world against the unexpectedly large and persistent rise in inflation seen as major economies reopened from the pandemic.Russia’s Feb. 24 invasion of Ukraine has prompted a sell-off in global equity markets, increased some measures of financial market stress, and most notably pushed up the price of oil. But none of that has pointed to a systemic problem, at least not yet. The Fed and other central bank officials have said they are confident that adequate market backstops are in place; the stress metrics have not increased that much in comparison to prior financial shocks; and the price of oil has moderated, with West Texas Intermediate crude trading Thursday afternoon for about $107 a barrel, down from as much as $130 earlier this week.More central to policymakers is that in major parts of the world economic growth is expected to continue above trend, allowing them to focus on inflation running far faster than their common 2% percent benchmark.The Bank of Canada raised interest rates earlier this month. The Bank of England and the Fed are expected to do so next week. Each is expected to follow with more increases in coming months.Even fiscal policy officials – more sensitive to the politics of economic developments and often cheerleaders of looser central bank policies – are keenly aware of the corrosive power of run-away price increases.Inflation “is of tremendous concern,” Treasury Secretary Janet Yellen said in a Washington Post Live interview Thursday. “It hits Americans hard. It makes them worry about basic pocketbook issues.”New U.S. data released Thursday showed consumer prices rose at a 7.9% annual rate in February, the highest in 40 years. Investors now expect the Fed to raise the target federal funds rate to a level between 1.75% and 2% by year’s end, a quarter point higher than they expected as of last week.The outlier among major central banks is the Bank of Japan. The war is expected to boost inflation pressures there as well. But the recovery from the pandemic is less advanced, and policy tightening not imminent. More

NEW YORK (Reuters) – Fallout from Russia’s invasion of Ukraine may be setting the stage for more gains in the dollar, upending investor expectations for a weaker greenback as geopolitical uncertainty and worries over European growth raise the U.S. currency’s appeal. The U.S. Dollar Currency Index, has surged 3% year-to-date to its highest level in 21 months, buoyed in part by investors seeking shelter from market volatility that has hammered stocks across the globe and fueled wild swings in commodity prices. Russia calls its actions in Ukraine a “special operation.”How much further it runs may depend on the paths taken by the Federal Reserve and European Central Bank in their efforts to normalize monetary policy. While investors are betting the Fed will likely push through several rate increases this year to fight surging inflation, many believe the ECB faces a tougher slog, with soaring raw materials prices posing a greater threat to Europe’s energy-dependent economy. Bets on a widening gap in yields between the U.S. and euro zone have helped drag the euro near its lowest level against the dollar in more than two years. The currency was down 0.8% against the dollar Thursday afternoon despite a surprisingly hawkish shift from the ECB at its monetary policy meeting.”The view at the start of the year that the euro would appreciate after a couple of months of dollar strength has taken a bit of a setback,” said Bipan Rai, North American head of FX strategy at CIBC Capital Markets.The recent price action in the two currencies runs counter to what many investors had expected earlier this year, after a hawkish pivot Fed rhetoric helped the dollar rise 6.3% in 2021. Strategists polled by Reuters at the end of January broadly expected the dollar to tread water, while forecasting that the euro would rise by 1.5% over the next 12 months. “Everything that created that bullish case for the euro earlier this year now creates a very bearish case,” said Eric Leve, chief investment officer at wealth and investment management firm Bailard. While Leve had started the year expecting the euro to strengthen at the dollar’s expense, he has now trimmed exposure to European equities and is looking to hedge euro currency risk.A sustained rise in the dollar could have broad implications for markets and the U.S. economy. Though a strong currency tends to weigh on the profits of domestic exporters, it could also help the Fed tame inflation, which recently logged its largest annual increase in 40 years. Conversely, a weaker euro could exacerbate already high consumer prices in the euro zone. Markets are pricing the fed funds rate to rise by more than 165 basis points in the U.S. this year, starting with a widely anticipated increase at next week’s Fed meeting. ECB rate hike expectations firmed on Thursday, with markets pricing around 43 basis points’ worth of interest rate hikes this year. The ECB on Thursday said it would end asset purchases in the third quarter and ramped up inflation forecasts, but also pared its growth outlook. Analysts at Nuveen said earlier this month that a Brent crude price of $120 per barrel would sap two percentage points from growth off the euro zone, compared to one percentage point from the United States, due in part to the country’s greater domestic energy supply and lower taxes. “There is much more fear on this side of the pond, and I think that’s going to reflect itself in the ECB,” Aashish Vyas, investment director at Resonanz Capital, a Frankfurt-based hedge fund investment advisor. Robin Brooks, chief economist at Institute of International Finance, wrote earlier this week that the euro can fall below $1.00 as markets adjust to “a major adverse shock to the euro zone.” The currency recently traded at $1.0987. Some believe dollar strength will moderate later this year.Steve Englander, head of global G10 FX research at Standard Chartered (OTC:SCBFF), believes the Fed will deliver less rate hikes than expected and the war in Ukraine will ebb, leaving the euro at $1.14 by year-end.But in the near term, there may be a little bit more pain for the euro, said Paresh Upadhyaya, director of fixed income and currency strategy at Amundi US. “Just north of parity is probably the trough in the euro,” said Upadhyaya, who is maintaining a short euro position for now. More