Raphael Stevens

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CREDIT IS THE financial system’s oxygen supply. When it flows freely, it does so unnoticed. When it stops, soon enough everything else does as well. The hypoxic episode that felled the American investment bank Lehman Brothers in 2008 unleashed chaos, turning a subprime-mortgage crunch into a global financial crisis. Ever since, central banks and market pundits have fixed a hawk-like gaze on credit conditions, wary of a repeat.Today’s scramble for safe assets was prompted not by a financial crash but by Vladimir Putin’s invasion of Ukraine. Nevertheless, there are similarities. Once again, the dollar is ascendant as investors flee riskier currencies. Hedging costs, particularly for the war-adjacent euro, are spiking as volatility rises and traders bet that a protracted conflict will continue to favour the greenback. A rush into American government debt—the safest asset of all—has pushed Treasury yields down even as inflation expectations have risen. Prizing security over returns, lenders have driven corporate-bond spreads up.This flight to safety causes plenty of problems on its own. A stronger dollar, for instance, increases the debt burden on countries that borrow in it and dents profits for American companies that earn a lot of their revenues abroad. But the greatest threat to financial stability comes from the pressure it exerts on the money market, where firms borrow to meet their short-term funding needs. This market seizing up is the financial equivalent of a pulmonary embolism, quickly forcing otherwise healthy firms up against the wall. A dash for dollars is fine if it merely pushes exchange rates up. The real trouble comes when it also creates a shortage of them.That happened in 2008, as banks became unwilling to lend to each other and the cost of borrowing for a few months jumped whole percentage points above the overnight rate. Events were repeated in a much milder fashion in March 2020 as the world went into covid-induced lockdown. On every measure of money-market stress, from short-term commercial borrowing costs to the demand for dollars relative to other currencies, the impact of Mr Putin’s war has been milder still (see chart).There are two main reasons for this. The first is that it follows a flood of liquidity from central banks. Since March 2020 the Federal Reserve, the European Central Bank, the Bank of Japan and the Bank of England have issued $9.1trn (11% of global GDP) in new reserves. After that deluge, notes Jonas Goltermann of Capital Economics, a consultancy, it is almost surprising that there are strains on funding at all.The deeper reason is that money markets are now fitted with a comprehensive ventilation system. Permanent swap lines between the Fed and five other big central banks allow them to exchange their own currency for dollars that can be distributed to domestic firms in times of stress. A second facility allows a bigger group to simply borrow dollars from the Fed.Meanwhile, banks no longer rely on unsecured loans from each other to plug day-to-day cash shortfalls. For funding in dollars the replacement is the repo market, where financial institutions and large companies borrow some $2.5trn from each other every day using Treasuries as security. The high-quality collateral makes this market less susceptible to runs, making banks (and their clients) less vulnerable to crises. And it is backstopped by the Fed, which has acted as lender of last resort since a series of liquidity wobbles in 2019.Longer-term credit conditions are also weathering the storm remarkably well. Spreads on risky high-yield (“junk”) bonds have been rising since the beginning of the year but, having started at near-historic lows, are nowhere near the levels they reached in March 2020.For Lotfi Karoui of Goldman Sachs, a bank, that is unsurprising. Around a fifth of the $1.6trn American high-yield bond market is issued by oil, metals and mining firms that are benefiting from, rather than being hurt by, ballooning commodity prices. More generally, issuers tend to be sitting on high levels of cash and are using spare revenues to pay down debt, keeping their bondholders happy. Europe’s smaller €450bn ($496bn) high-yield market, being geographically closer to the war, has been hit correspondingly harder. But even there, investors are yet to take serious losses.A fortnight into a conflict that could end up being measured in years, any claim that credit conditions will remain benign indefinitely would be foolish. Mr Karoui points out that central bankers were bound to guard against a money-market shock, as that was what led to disaster during the crisis of 2007-09. More dangerous are the risks monetary guardians have less experience with: who can tell, for instance, if a prolonged war will lead to another, much broader gumming-up of global supply chains? Yet for now at least, the West’s financial system is proving vastly more resilient than that of Fortress Russia. ■For more expert analysis of the biggest stories in economics, business and markets, sign up to Money Talks, our weekly newsletter.This article appeared in the Finance & economics section of the print edition under the headline “War bonds” More

IN OCTOBER 1914 the Ottoman Empire, having just joined the first world war, blockaded the Dardanelles Strait, the only route for Russian wheat to travel to Britain and France. The world had entered the conflict with wheat stocks 12% above the five-year average, but losing over 20% of the global traded supply of the crop overnight set food markets ablaze. Having risen by a fifth since June 1914, wheat prices in Chicago, the international benchmark, leapt by another 45% over the following quarter.Today Russia and Ukraine, respectively the largest and fifth-largest wheat exporters, together account for 29% of international annual sales. And after several poor harvests, frantic buying during the pandemic and supply-chain issues since, global stocks are 31% below the five-year average. But this time it is the threat of embargoes from the West that has lit a bonfire—and the flames are higher than even during the Great War. Wheat prices, which were already 49% above their 2017-21 average in mid-February, have risen by another 30% since the invasion of Ukraine started on February 24th. Uncertainty is sky-high: indicators of price volatility compiled by IFPRI, a think-tank, are flashing bright red.Rabobank, a Dutch lender, reckons wheat prices could climb by another third. But the damage to global food supply will extend far beyond the grain—and last longer than the war itself. Together Russia and Ukraine export 12% of the calories traded worldwide. They rank among the top five exporters of many oilseeds and cereals, from barley and corn to sunflowers, consumed by humans and animals. Russia alone is the biggest supplier of key ingredients in the making of fertilisers, without which crops falter or lose nutrients.In February, even before the war started, a food-price index compiled by the UN Food and Agriculture Organisation had reached an all-time high; the number of people deemed food-insecure, at 800m, was at its highest for a decade. Many more could soon join them. Higher food prices will also stoke inflation, adding to the price pressures generated by dearer energy.The fallout from the war will be felt in three ways: disruption to current grain shipments, low or inaccessible future harvests in Ukraine and Russia, and withered production in other parts of the world. Start with shipments. In normal times wheat and barley crops are harvested in the summer and exported in the autumn; by February most ships are gone. But these are not normal times: with global stocks low, big importers of Black Sea wheat, chiefly in the Middle East and North Africa, are anxious to secure more supplies. They are not getting them. Ukrainian ports are shut. Some have been bombed. Inland routes, via the north of Ukraine and onwards through Poland, are too great a diversion to be practical. Vessels trying to pick up grain from Russia have been hit by missiles in the Black Sea. Most cannot get insurance.Alternative sources are unaffordable. Last week Egypt cancelled its second wheat tender in a row after receiving only three offers—at a stomach-churning price—down from 20 a fortnight before. More concerning still, exports of corn, of which Ukraine accounts for nearly 13% of global exports, usually take place through the spring until the early summer. Much of it is normally shipped from the port of Odessa, which is bracing for a Russian assault.Future crops are an even bigger worry. In Ukraine the war may result in lower yields and area planted. Winter crops such as wheat and barley, which are sown in October, could be smaller because of a lack of fertiliser and pesticides. Spring crops such as corn and sunflowers, the planting of which would normally start imminently, may not get sown at all. Leonid Tsentilo, whose farm in central Ukraine grows 7,000 tonnes of wheat a year, says local prices for diesel and plant-protection products have risen by 50% in two weeks. Some of his workers have been shipped off to war.In Russia the risk is not curtailed production but blockaded exports. Although food sales are not yet subject to sanctions, Western banks are reluctant to lend to traders. Fear of being fined by governments in the West or shamed by its press is keeping merchants at bay. While Ukraine is “unreachable”, Russia is “untouchable”, says Michael Magdovitz of Rabobank.Most alarming will be the conflict’s impact on agriculture worldwide. The region is a big supplier of critical fertiliser components, including natural gas and potash. Fertiliser prices had already doubled or tripled, depending on the type, even before the war, owing to rising energy and transport costs and sanctions imposed in 2021 on Belarus, which produces 18% of the world’s potash, as it cracked down on dissidents. As Russia, which accounts for 20% of global output, finds it harder to export its own potash, prices are sure to rise further. Since four-fifths of the world’s potash is traded internationally, the impact of price spikes will be felt in every agricultural region in the world, warns Humphrey Knight of CRU, a consultancy.As a result of all this, a much greater share of incomes will soon be spent on food (see chart). This will be felt most acutely in the Middle East, Africa and parts of Asia, where some 800m people depend heavily on Black Sea wheat. That includes Turkey, which supplies much of the southern Mediterranean with flour. Egypt usually buys 70% of its wheat from Russia and Ukraine. The latter alone accounts for half of Lebanon’s wheat imports. Many others can hardly do without Ukraine’s corn, soyabeans and vegetable oil.Meanwhile higher fertiliser and energy costs will crimp farmers’ margins everywhere. Brazil, a huge producer of meat and agricultural products, imports 46% of its potash from either Russia or Belarus, says Cristiano Veloso of Verde AgriTech, a Brazilian startup. Eventually some of the costs will be passed on to the consumer.Protectionism may pour more fuel on the fire. National restrictions on fertiliser exports increased last year and could accelerate. Limits on food exports, or panic-buying by importers, could trigger a price spike of the kind that sparked riots in dozens of countries in 2007-08. On March 8th and 9th, respectively, Russia and Ukraine banned wheat exports. Argentina, Hungary, Indonesia and Turkey have announced food-export restrictions in recent days.There is no easy fix. Some of the 160m tonnes of wheat used as animal feed every year could be diverted for human consumption, but substitution may export inflation to other staples. Increasing production in Europe and America and drawing on India’s vast strategic stockpile may yield 10-15m tonnes—a substantial quantity, but less than a third of Ukraine’s and Russia’s combined annual exports. Some could come from farther afield but there are bottlenecks: efforts to export more of Australia’s bumper winter-wheat crop have clogged the supply chains between its farms and ports. With corn, governments may resort to appropriating some of the 148m tonnes used as bioethanol feed to help plug this year’s likely shortfall of 35m tonnes. Fertiliser shortages are even harder to cover: new potash mines take 5-10 years to build.The war in Ukraine is already a tragedy. As it ravages the world’s breadbasket, a calamity looms. ■For more expert analysis of the biggest stories in economics, business and markets, sign up to Money Talks, our weekly newsletter.This article appeared in the Finance & economics section of the print edition under the headline “Grainstorm” More

IN 1866 NIKOLAI NEKRASOV, a Russian author, started publishing “Who is happy in Russia”, a four-part poem describing how the abolition of serfdom, enacted a few years before, had failed to enrich most peasants. “The chain has been broken,” its first chapter concludes, and the recoiling ends have hit both sides at once.A century and a half later his verses are a parable for the ostracism of Russia—and its likely fallout. Crushing the world’s 11th-largest economy, comparable in size to Australia, should not necessarily cause global mayhem. But since Nekrasov’s time, and further still since the Soviet Union collapsed, the chain of dependence linking Russia to the world economy has strengthened and grown more complex. Russia ranks number one, two and three, respectively, among the world’s exporters of natural gas, oil and coal. Europe gets the bulk of its energy from its eastern neighbour. Russia also accounts for half of America’s uranium imports. It supplies a tenth of the world’s aluminium and copper, and a fifth of battery-grade nickel. Its dominance in precious metals such as palladium, key in the automotive and electronics industries, is even greater. It is also a crucial source of wheat and fertilisers.So far its exports of raw materials have been spared the kind of comprehensive bans the West has imposed on other sectors. America announced an embargo on Russian oil on March 8th, but it buys little of the stuff; Britain will phase out purchases this year. However, growing signs the West could go further have shocked commodities markets. After America’s secretary of state, Antony Blinken, said on March 6th that it was speaking to allies about a common ban, Brent crude soared to $139 a barrel, double the price of December 1st—though by March 10th it had fallen back to $113. Price swings were violent in gas too: on March 8th contracts linked to the European wholesale gas price surged by a third to €285 ($316) per MWh, 18 times their level a year ago, as Russia threatened to retaliate. On the same day, the London Metal Exchange (LME) suspended nickel trading for only the second time in its 145-year history after the metal hit double its previous record price. This week other metals hit or neared all-time highs.A shock of such depth and breadth is without precedent. A core-commodity index compiled by Thomson Reuters has risen by more than in any period since 1973, on a three-month basis. In the week ending March 4th it showed its biggest increase since at least 1956. Beyond trading floors, hysteria is not yet visible. The calm is unlikely to last. “Right now prices are prints on a screen. In four weeks they become reality,” says a trader. If tensions rise further, energy and metals may have to be rationed. Private firms and personal lives will have to painfully adjust. The rich world would sputter. Poor countries could go bust. In the end Russia may buckle—but not before the broken chain snaps back at the rest of the world with huge violence.Commodity markets are panicking for two reasons. First, many were tight even before the war, owing to strong demand. A robust post-lockdown economic recovery had fuelled appetite for energy and metals, dragging stocks down to record-low levels. Supply, which is easy to cut but takes longer to ramp up, had not caught up, says Giovanni Serio of Vitol, a big oil-trading firm. Many “midstream” facilities that had shut during covid-19, such as oil refineries, remained offline, creating bottlenecks.The second reason for worry is vanishing supply, which has been the main problem since the invasion of Ukraine. Some Russian oil is still flowing out: millions of barrels are currently crossing the Atlantic. But most of it was bought and paid for a fortnight ago or longer. Fresher supplies of Urals crude, the variety Russia pumps, are no longer moving—despite 25% price discounts. Western firms, loth to find themselves stuck with unsaleable cargo, are pre-empting possible sanctions. Many also fear a public backlash: on March 8th Shell said it would stop buying Russian oil after days of negative press coverage following a purchase of Urals crude.Particularly problematic is the lack of financing. Most foreign banks, even Chinese ones, have stopped issuing letters of credit for Russian trades. After a decade of paying steep fines for breaching sanctions against Iran and other pariahs, banks are taking no chances. Increasingly that also applies to big commodity traders like Glencore, which not that long ago still dealt with autocrats in the name of powering the planet (and pocketing profits). Many fear being cut off from bank funding, their lifeline, if they continue to deal with Russia.Problems with logistics are no less important. Unable to get insurance, foreign ships are avoiding the Black Sea. Last week Maersk and MSC, which together account for a third of container operations in Russia, pulled away from the country. Britain has banned Russian ships from its ports; the EU is mulling similar measures. France has intercepted Russian ships carrying steel and soya bound for other countries.Idle cargo and erratic prices are straining the physical and financial infrastructure of commodity trading. Some European ports are severely congested. Wrong-footed traders are facing hefty margin calls. On March 7th China Construction Bank, a big lender, missed a payment at the LME (it has since made it). Bunker-fuel prices have risen by a third since the invasion, constraining shipping worldwide.A proper oil embargo by the West could make all that look like a pleasant punt on the Cam. In normal years Russia exports 7m-8m barrels per day (bpd), half of which go to the EU. In theory China could buy more from Russia, freeing up some other supply. But Rystad Energy, a consultancy, estimates that Russia’s pipelines could re-route just 500,000 bpd from Europe to Asia, with rail adding another 200,000 bpd. Ferrying Russian oil to Europe takes 5-10 days; shipping it to Asia takes 45. Redirecting flows would get even harder if “secondary” sanctions target non-Western firms. With Western payment systems out of bounds, traders would turn to clunky bartering. Better alternatives, used by China or others, could take years to scale up.This suggests a fair chunk of Russia’s oil supply could exit the market. Other commodities would probably be affected. Russia has pledged to respond to a full-blown oil embargo by curtailing gas exports to the West. Limits on coal sales would also be painful, and would complicate Europe’s effort to shift away from gas. As the quality of its own supply has deteriorated, the share of the bloc’s imports of coal coming from Russia has doubled over the past ten years, to 80%. In the case of both gas and coal, much of Russia’s supply would simply not get to market. Its gas-storage facilities are almost full. It does not have a big enough fleet to ship coal to Asia, where it is most in demand (it sends coal to Europe by rail).Call the cartelThe big question is whether an increase in supply from elsewhere could mitigate such losses. Start with oil. America has already scheduled an increase in oil output of 1m bpd. The West could also press members of the Organisation of the Petroleum Exporting Countries (OPEC) to increase supply, yielding perhaps another 2m bpd. Lifting sanctions on Iran may add another 1m bpd. Tapping emergency stocks would help, too. Last week America and other big oil-consuming countries agreed to release 60m barrels from their stash. Hints have been given that they could release more.All this may increase global supply by 3m-4m bpd—a lot, but perhaps not enough. And the extra supply would take too long to arrive. OPEC members cannot crank up production fast, because they have not invested in new fields for years. Restarting American shale wells takes six months; delivering crude from them another six. In the interim, prices would remain excruciatingly high. And there would be other problems. Retrofitting refineries meant to guzzle Urals crude, which has a high sulphur content, is hard. Lebanon has just run out of diesel not for want of oil but capacity to process non-Urals grades.Finding new gas supplies is Europe’s big problem. As spring comes the continent will need less of it, and post-winter restocking could be delayed until the autumn. Meanwhile, Europe could start importing more liquefied natural gas from America, though that would require Europe to crank up its “regasification” capacity (for converting liquefied gas back into gaseous state). Scheduled summer maintenance on Norwegian rigs could be postponed so they continue to produce. Azerbaijan could pipe more to Europe. Altogether such fixes could replace about 60% of Russian imports, Rystad reckons. A strong effort—but still insufficient.Rebalancing the market thus seems impossible without a forced reduction in demand. The least brutal way to achieve this would be through policies seeking to limit consumption, such as caps on the heating of buildings or the rationing of power for industrial use. More likely the market will adjust to soaring prices the hard way, through what economists call “demand destruction”: self-imposed cuts. Mr Serio of Vitol says a jump in crude prices to $200 a barrel could induce “voluntary” cuts of 2m bpd, with another 2m bpd not consumed as incomes are squeezed. On March 9th Rystad said prices could reach $240 a barrel this summer if more countries join the American embargo.Such energy hell would take a huge toll on firms and people. Demand destruction in metals would add to the pain. Aluminium shortages could hamper the making of anything from cars to cans. A nickel scarcity could halt electric-vehicle production.All this will surely hobble rich economies. JPMorgan Chase, a bank, already expects the world economy to grow by 0.8 percentage points less in 2022 than it did a week before the invasion, with the euro zone taking a hit of 2.1 percentage points.For poorer countries the immediate threat is that of walloping current-account deficits. Analysis by The Economist suggests that, all else being equal, oil at $150 a barrel for a year would cause the current-account balances of 37 oil importers to sink by an average 2.3 percentage points. That would clobber countries already under stress, such as Pakistan and Turkey (see chart 2). China would see a percentage point knocked off its current-account surplus. Even big commodity exporters like Chile could suffer, because metals have not appreciated as much. Oil-exporting countries would gain but still face issues, such as currency appreciation that weighed on non-energy exports.High prices are likely to outlast the lifting of sanctions. Russia, seen as a disreputable and risky trading partner, will remain marginalised, says Tom Price of Liberum, a bank. As its capital markets and export proceeds struggle to recover, investment in commodity production will dwindle. Together with a loss of skills and assets, this will cause capacity to shrink. Beyond 2022 higher interest rates and slower global growth may prompt the market finally to cool—at an exorbitant cost. In 1876 Nekrasov started writing the final and jolliest part of his poem, calling it “The feast for all the world”. The happy ending never came: the chapter remains unfinished. ■For more expert analysis of the biggest stories in economics, business and markets, sign up to Money Talks, our weekly newsletter.This article appeared in the Finance & economics section of the print edition under the headline “Barrelled over” More

ALTHOUGH BILLIONAIRES have been getting a bad rap for years, the sanctions levied at Russian oligarchs have intensified scrutiny on the origins of tycoons’ wealth. On March 1st President Joe Biden announced that his government was setting up a “klepto capture” task force to “go after the crimes of Russian oligarchs”.The murky money sloshing around the favoured plutocratic playgrounds of New York, London and Paris is nothing new. In 2014 The Economist devised a crony-capitalism index to measure whether the world was experiencing a new gilded age, characterised by the modern equivalent of the robber barons in late-19th-century America. In 2016, when we last visited our index, we found that crony-capitalists had thrived during the 2000s but were beginning to feel the heat from trustbusters in the rich world and anti-corruption purges in developing countries. How has crony capitalism performed since?Rent-seeking entrepreneurs tend to use their relationships with the state to maximise profits. Technically speaking, an economic rent is the surplus remaining once capital and labour have been paid a market price. With perfect competition that surplus would not exist. But rents can be artificially elevated if firms win contracts at beneficial prices, form cartels to stitch up consumers or lobby governments for favourable rules. Most rent-seeking businesses are operating perfectly legally.Our index uses 25 years of data from Forbes’s annual stock-take of the world’s billionaires. In 2021 the publication listed 2,755 individuals with total estimated wealth of $13trn. We have classified the main source of each billionaire’s wealth into crony and non-crony sectors. Our crony sectors include a host of industries that are vulnerable to rent-seeking because of their proximity to the state, such as banking, casinos, defence, extractive industries and construction. We have aggregated the data according to billionaires’ country of citizenship expressed as a share of its GDP.Russia’s crony economy sticks out like a blinged-up Muscovite in the Algarve. Some 70% of the 120 Russian billionaires, who together hold 80% of its billionaire wealth, fall within our crony-capitalist definition. Wealth equivalent to 28% of Russia’s GDP in 2021 came from crony sectors, up from 18% in 2016. But many Russian oligarchs will be taking haircuts on their empires as sanctions bite.Globally, crony wealth has declined as a share of the total, reflecting in part the surge in tech-related wealth. Nonetheless it remains entrenched in many places. In Malaysia, a former prime minister was jailed for corruption in 2020 after $4.5bn was stolen from the state, but crony capitalism still dominates there. India’s share of billionaire wealth derived from crony sectors has risen from 29% to 43% in six years. The Philippines has fallen to fourth in our index but crony sectors still account for four-fifths of total billionaire wealth.By contrast, around four-fifths of American billionaires, accounting for 90% of total wealth, operate in non-crony sectors. Led by a boom in tech valuations, wealth in non-crony sectors rose from 11% to 17% of GDP between 2016 and 2021. But in recent years America has opened investigations into the firms of its behemoth-building billionaires. Tech firms do exhibit some of the cosseted characteristics of crony industries: they spend heavily on lobbying to defend their juicy market shares, for instance. Reclassifying technology firms as crony would increase America’s crony wealth from 2% to 7% of GDP.Over the past decade China has minted new billionaires faster than you can say Yves Saint Laurent. In 2010 there were 89. Now there are 714 with a combined wealth of $3trn, around 70% of the amount in America. The crony-sector share of GDP has changed little in six years, though its share of overall billionaire wealth has fallen from 44% to 24%. This exposes one of the shortcomings of our index: to some extent all businesses operate in China with the consent of the state. Falling out of favour can have grave consequences, as Alibaba’s Jack Ma discovered in 2020. Assuming all Chinese billionaires are cronyistic would place China second in our index.Billionaires in autocratic countries remain vulnerable to the whims of their leaders. Mikhail Khodorkovsky was worth $15bn in 2004 but he fell out with Vladimir Putin and his oil firm was expropriated. A purge in Saudi Arabia has meant not a single billionaire from the kingdom has appeared on Forbes’s list since 2017. Billionaires in autocratic countries outside China derive about 70% of their wealth from crony sectors. A good chunk of this $750bn is likely to be stashed in Western countries that do not ask too many questions. ■For more expert analysis of the biggest stories in economics, business and markets, sign up to Money Talks, our weekly newsletter.This article appeared in the Finance & economics section of the print edition under the headline “The makers and the takers” More

THE OMENS are bad for the world economy. When oil prices surge, growth typically moves in the opposite direction. Sometimes the price shock begins with a political earthquake, like the Suez crisis of 1956. Sometimes oil producers deliberately create the shock, as with the OPEC embargo of 1973. And sometimes the culprit is soaring demand, such as when oil prices hit record highs in 2008. The common denominator in all these cases is that America and most other rich countries soon enough faced recessions.So it would hardly be surprising if the current surge in oil prices—a doubling in three months, fuelled by Russia’s invasion of Ukraine—foreshadows a sharp downturn in growth. Pictet, an asset manager, counts six episodes since 1970 in which real oil prices rose by more than 50% from their previous trend; each preceded a recession. As of late February oil prices had already surpassed this 50% threshold, and have only climbed higher since then.Nevertheless, the easily observed relationship between oil and the economy is no iron law. There have been times when crude prices soared and yet recessions were averted, including the peak of a global commodities boom in 2011. The type of shock matters, as does the economic backdrop. Moreover, much of the world appears to have become better insulated from oil markets over time. Old dismal patterns may not perfectly repeat themselves.Consider the mechanics by which rising oil prices hurt growth. Energy is an important factor of production, so a sharp decrease in its supply or increase in its price may drag down output. It may also hurt demand: if people spend more of their incomes on oil, less is left over for other things. Add to this the possibility that central banks may tighten monetary policy aggressively when higher oil prices push up inflation, as the Federal Reserve did following the OPEC crisis of 1973 and the Iranian revolution of 1979.Yet no two oil shocks are the same. A critical variable is whether the shock stems from the economy’s supply side or demand side. If there is a sudden shortfall in supply, as during an embargo, that functions as a new tax on production and consumption. If, however, robust demand is the cause, rising oil prices reflect economic vitality. Lutz Kilian, an economist with the Fed’s branch in Dallas, has shown that broad demand strength can, for a time, outweigh the negative effects of higher oil prices. A pure supply shock is, by contrast, more harmful. The period since the pandemic struck has featured a bit of both. The quadrupling in crude prices from the spring of 2020 to the start of 2022 reflected growth roaring back from its pandemic-induced slowdown. Only the most recent surge is unquestionably a supply shock, caused by the Ukraine war and associated sanctions.Three changes in the structure of the global economy may dampen the effects of the price surge. Most obviously oil’s role in growth cycles is not what it used to be. In 1973 the world used nearly one barrel of oil to produce $1,000-worth of GDP (in inflation-adjusted terms). By 2019 that was down to 0.43 barrels, with the energy intensity of growth falling annually “in an almost perfectly linear fashion”, according to a report last year by the Centre on Global Energy Policy at Columbia University. A shift in economic output from industry to services is part of the explanation. The world has also become more efficient in using oil. Cars, for instance, go twice as far per gallon of petrol as in the 1970s.A related change is the way that governments respond to oil shocks. As James Hamilton of the University of California, San Diego, has observed, in the 1970s American officials aggravated economic dislocations with price controls on petrol, which resulted in shortages. Since 1981 they have steered clear of such controls, which has made for more volatile crude prices but smoother market adjustments. Some tweaks in behaviour have got easier thanks to the pandemic: if air fares soar, why fly to that business meeting when you can log on to Zoom instead?Central bankers may also be less tempted to jack up interest rates simply because of soaring energy prices, thereby reducing the risks of a recession. There is a debate over whether the pass-through from oil shocks to core inflation is basically nil, as argued in a paper for the Fed by Todd Clark and Stephen Terry, or small, as argued in another Fed paper by Cristina Conflitti and Matteo Luciani. However, the experts agree that the pass-through has weakened, in part because of the diminished energy intensity of growth. Even before the war in Ukraine, the Fed was set to raise interest rates several times this year in order to rein in inflation. The salient point is that, according to market pricing, investors do not believe that the oil shock will lead to much more aggressive moves by the Fed than previously expected.Shale fellow well metA final difference with past oil shocks is the momentous evolution of America’s status in the global crude industry. In the first decade of the 2000s America imported more than 10m barrels of oil per day in net terms. With the shale revolution, American oil production has soared, such that it now meets most of its energy needs from its domestic production. In 2020 America became a net exporter for the first time since at least 1949.One effect is that oil shocks are now less destabilising for the American economy in aggregate. Consumers may dislike rising crude prices but oil producers enjoy them. A key question in the months ahead will be the extent to which they expand drilling. That would help offset the economic loss from softer consumer spending. And for the rest of the world, a resilient American economy would provide useful ballast amid all the turbulence. The EU must worry not just about oil but also about a much more acute shortage of natural gas. Should it join America and Britain in banning Russian imports, the price of crude could go much higher still. But at oil’s current price, the world economy can, with luck, withstand the shock. ■For more expert analysis of the biggest stories in economics, business and markets, sign up to Money Talks, our weekly newsletter.This article appeared in the Finance & economics section of the print edition under the headline “Shock absorbers” More

AS ONE DOOR slams shut, another creaks open. In the past fortnight the global pressure on Russia’s finances has increased dramatically. Meanwhile, in Iran, the grip of sanctions is set to be relaxed again. In 2018 America withdrew from a multilateral nuclear accord with Iran. A year-long negotiation to revive it has moved to the final stages. A deal appears close. It is not unhelpful to its chances that an accord would bring Iranian oil back to the global market.Iran’s experience is instructive. In the past decade it has suffered recessions, devaluations and chronic inflation under the pressure of worldwide sanctions. Its economy has been whacked. But it has not collapsed. That is in large part because Iran’s manufacturers have proved resilient. Tehran’s flourishing stockmarket is testimony to the economy’s hardiness. Many of the firms that have survived and prospered are listed there.American sanctions have been a fact of life in Iran for decades. They began in 1979 when President Jimmy Carter imposed a ban on imports of oil from Iran and froze Iranian assets held in America following the seizure of the American embassy in Tehran. But sanctions on Iran really started to bite when other countries joined in. To press Iran into curbing its nuclear programme, a wave of international sanctions was imposed and steadily tightened between 2010 and 2012. Iran’s oil exports and banks were targeted. The foreign assets of its central bank were frozen. And commercial banks worldwide were proscribed by America from financing any business with Iran in dollars. Since then, a sanctions regime of varying degrees of severity has remained in place.The damage has been extensive. Iran’s oil exports fell from 2.5m barrels per day in 2011 to 1.1m in 2014. Its economy suffered deep recessions in 2012 and 2018. The embargo on Iran’s oil exports left a large hole in government finances. Lacking access to its reserves or reliable dollar revenue from oil exports, the authorities have been unable to support the exchange rate. The result has been chronically high inflation. There has been a lot of hardship. The latest World Bank report on Iran refers to a lost decade of negligible GDP growth. It might have been a lot worse, though.There are three explanations for Iran’s resilience. First, though sanctions have been extensive and assiduously policed, they are subject to leakage. Iran has been able to export several hundred thousand barrels of oil a day. Much of it ends up in China, marked as oil from Malaysia, Oman or the United Arab Emirates (UAE). Sanctions-busting is risky. But some privately owned refiners are willing to take the risk in exchange for a hefty price discount. And dollars are not the only hard currency: there is the yuan, of course, but also the UAE’s dollar-pegged dirham.A second source of resilience is export diversification. Iran has a range of manufacturing industries. Some of the bigger ones, such as mining and metal-bashing, benefit from access to cheap, reliable energy. In addition Iran has land borders with several populous countries, including Pakistan and Turkey. A chunk of Iran’s land-based trade is undocumented and thus hard to police.A third factor is import substitution. The weaker rial has put imported goods beyond the reach of many Iranians. But it has been a boon for manufacturers serving the home market of 83m. Go shopping in Tehran, says a local, and you will find Iranian-made clothing, toys and household goods. “If there were a global self-sufficiency index, Iran would be ranked highly,” he says.Iran’s stockmarket reflects this resilient economy. Some of the larger firms are on the sanctions list, but hundreds of smaller ones are not. Stocks have proved a good hedge against devaluation and inflation. Many locals have noticed this. The market exploded in 2020 as retail investors piled in. That mini-bubble has since burst. Stocks are cheap again, says Maciej Wojtal of Amtelon Capital, a fund that invests in Iran. The median price-to-earnings ratio for the top 100 companies is around five, based on the forecasts of local analysts.Iran’s leaders have boasted of a “resistance economy”. But its hardiness mostly reflects a bottom-up struggle for basic survival, not a top-down strategic choice, argues Esfandyar Batmanghelidj of Bourse & Bazaar, a think-tank, in a recent essay. Economies are made up of ordinary people. They adapt to changed circumstances the best they can. For Iranians, there is now a real prospect of better days ahead. For the Russian people, the painful adjustment is just beginning.For more expert analysis of the biggest stories in economics, business and markets, sign up to Money Talks, our weekly newsletter.This article appeared in the Finance & economics section of the print edition under the headline “Persian lessons” More