Russian Invasion of Ukraine (2022)

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    Red Sea Shipping Halt Is Latest Risk to Global Economy

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    Next year could see increasing volatility as persistent military conflicts and economic uncertainty influence voting in national elections across the globe.The attacks on crucial shipping traffic in the Red Sea straits by a determined band of militants in Yemen — a spillover from the Israeli-Hamas war in Gaza — is injecting a new dose of instability into a world economy already struggling with mounting geopolitical tensions.The risk of escalating conflict in the Middle East is the latest in a string of unpredictable crises, including the Covid-19 pandemic and the war in Ukraine, that have landed like swipes of a bear claw on the global economy, smacking it off course and leaving scars.As if that weren’t enough, more volatility lies ahead in the form of a wave of national elections whose repercussions could be deep and long. More than two billion people in roughly 50 countries, including India, Indonesia, Mexico, South Africa, the United States and the 27 nations of the European Parliament, will head to the polls. Altogether, participants in 2024’s elections olympiad account for 60 percent of the world’s economic output.In robust democracies, elections are taking place as mistrust in government is rising, electorates are bitterly divided and there is a profound and abiding anxiety over economic prospects.A ship crossing the Suez Canal toward the Red Sea. Attacks on the Red Sea have pushed up freight and insurance rates.Mohamed Hossam/EPA, via ShutterstockA billboard promoting presidential elections in Russia, which will take place in March.Dmitri Lovetsky/Associated PressEven in countries where elections are neither free nor fair, leaders are sensitive to the economy’s health. President Vladimir V. Putin’s decision this fall to require exporters to convert foreign currency into rubles was probably done with an eye on propping up the ruble and tamping down prices in the run-up to Russia’s presidential elections in March.The winners will determine crucial policy decisions affecting factory subsidies, tax breaks, technology transfers, the development of artificial intelligence, regulatory controls, trade barriers, investments, debt relief and the energy transition.A rash of electoral victories that carry angry populists into power could push governments toward tighter control of trade, foreign investment and immigration. Such policies, said Diane Coyle, a professor of public policy at the University of Cambridge, could tip the global economy into “a very different world than the one that we have been used to.”In many places, skepticism about globalization has been fueled by stagnant incomes, declining standards of living and growing inequality. Nonetheless, Ms. Coyle said, “a world of shrinking trade is a world of shrinking income.”And that raises the possibility of a “vicious cycle,” because the election of right-wing nationalists is likely to further weaken global growth and bruise economic fortunes, she warned.A campaign rally for former President Donald J. Trump in New Hampshire in December.Doug Mills/The New York TimesA line of migrants on their way to a Border Patrol processing center at the U.S.-Mexico border. Immigration will be a hot topic in upcoming elections.Rebecca Noble for The New York TimesMany economists have compared recent economic events to those of the 1970s, but the decade that Ms. Coyle said came to mind was the 1930s, when political upheavals and financial imbalances “played out into populism and declining trade and then extreme politics.”The biggest election next year is in India. Currently the world’s fastest-growing economy, it is jockeying to compete with China as the world’s manufacturing hub. Taiwan’s presidential election in January has the potential to ratchet up tensions between the United States and China. In Mexico, the vote will affect the government’s approach to energy and foreign investment. And a new president in Indonesia could shift policies on critical minerals like nickel.The U.S. presidential election, of course, will be the most significant by far for the world economy. The approaching contest is already affecting decision-making. Last week, Washington and Brussels agreed to suspend tariffs on European steel and aluminum and on American whiskey and motorcycles until after the election.The deal enables President Biden to appear to take a tough stance on trade deals as he battles for votes. Former President Donald J. Trump, the likely Republican candidate, has championed protectionist trade policies and proposed slapping a 10 percent tariff on all goods coming into the United States — a combative move that would inevitably lead other countries to retaliate.Mr. Trump, who has echoed authoritarian leaders, has also indicated that he would step back from America’s partnership with Europe, withdraw support for Ukraine and pursue a more confrontational stance toward China.Workers on a car assembly line in Hefei, China. Beijing has provided enormous incentives for electric vehicles.Qilai Shen for The New York TimesA shipyard in India, which is jockeying to compete with China as the world’s largest manufacturing hub.Atul Loke for The New York Times“The outcome of the elections could lead to far-reaching shifts in domestic and foreign policy issues, including on climate change, regulations and global alliances,” the consulting firm EY-Parthenon concluded in a recent report.Next year’s global economic outlook so far is mixed. Growth in most corners of the world remains slow, and dozens of developing countries are in danger of defaulting on their sovereign debts. On the positive side of the ledger, the rapid fall in inflation is nudging central bankers to reduce interest rates or at least halt their rise. Reduced borrowing costs are generally a spur to investment and home buying.As the world continues to fracture into uneasy alliances and rival blocs, security concerns are likely to loom even larger in economic decisions than they have so far.China, India and Turkey stepped up to buy Russian oil, gas and coal after Europe sharply reduced its purchases in the wake of Moscow’s invasion of Ukraine. At the same time, tensions between China and the United States spurred Washington to respond to years of strong-handed industrial support from Beijing by providing enormous incentives for electric vehicles, semiconductors and other items deemed essential for national security.A protest in Yemen on Friday against the operation to safeguard trade and protect ships in the Red Sea.Osamah Yahya/EPA, via ShutterstockThe drone and missile attacks in the Red Sea by Iranian-backed Houthi militia are a further sign of increasing fragmentation.In the last couple of months, there has been a rise in smaller players like Yemen, Hamas, Azerbaijan and Venezuela that are seeking to change the status quo, said Courtney Rickert McCaffrey, a geopolitical analyst at EY-Parthenon and an author of the recent report.“Even if these conflicts are smaller, they can still affect global supply chains in unexpected ways,” she said. “Geopolitical power is becoming more dispersed,” and that increases volatility.The Houthi assaults on vessels from around the world in the Bab-el-Mandeb strait — the aptly named Gate of Grief — on the southern end of the Red Sea have pushed up freight and insurance rates and oil prices while diverting marine traffic to a much longer and costlier route around Africa.Last week, the United States said it would expand a military coalition to ensure the safety of ships passing through this commercial pathway, through which 12 percent of global trade passes. It is the biggest rerouting of worldwide trade since Russia’s invasion of Ukraine in February 2022.Claus Vistesen, chief eurozone economist at Pantheon Macroeconomics, said the impact of the attacks had so far been limited. “From an economic perspective, we’re not seeing huge increase in oil and gas prices,” Mr. Vistesen said, although he acknowledged that the Red Sea assaults were the “most obvious near-term flashpoint.”Uncertainty does have a dampening effect on the economy, though. Businesses tend to adopt a wait-and-see attitude when it comes to investment, expansions and hiring.“Continuing volatility in geopolitical and geoeconomic relations between major economies is the biggest concern for chief risk officers in both the public and private sectors,” a midyear survey by the World Economic Forum found.With persistent military conflicts, increasing bouts of extreme weather and a slew of major elections ahead, it’s likely that 2024 will bring more of the same. More

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    U.S. and Europe Eye Russian Assets to Aid Ukraine as Funding Dries Up

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    Despite legal reservations, policymakers are weighing the consequences of using $300 billion in Russian assets to help Kyiv’s war effort.The Biden administration is quietly signaling new support for seizing more than $300 billion in Russian central bank assets stashed in Western nations, and has begun urgent discussions with allies about using the funds to aid Ukraine’s war effort at a moment when financial support is waning, according to senior American and European officials.Until recently, Treasury Secretary Janet L. Yellen had argued that without action by Congress, seizing the funds was “not something that is legally permissible in the United States.” There has also been concern among some top American officials that nations around the world would hesitate to keep their funds at the New York Federal Reserve, or in dollars, if the United States established a precedent for seizing the money.But the administration, in coordination with the Group of 7 industrial nations, has begun taking another look at whether it can use its existing authorities or if it should seek congressional action to use the funds. Support for such legislation has been building in Congress, giving the Biden administration optimism that it could be granted the necessary authority.The talks among finance ministers, central bankers, diplomats and lawyers have intensified in recent weeks, officials said, with the Biden administration pressing Britain, France, Germany, Italy, Canada and Japan to come up with a strategy by Feb. 24, the second anniversary of the invasion.The more than $300 billion of Russian assets under discussion have already been out of Moscow’s control for more than a year. After the invasion of Ukraine, the United States, along with Europe and Japan, used sanctions to freeze the assets, denying Russia access to its international reserves.But seizing the assets would take matters a significant step further and require careful legal consideration.President Biden has not yet signed off on the strategy, and many of the details remain under heated discussion. Policymakers must determine if the money will be channeled directly to Ukraine or used to its benefit in other ways.They are also discussing what kinds of guardrails might be associated with the funds, such as whether the money could be used only for reconstruction and budgetary purposes to support Ukraine’s economy, or whether — like the funds Congress is debating — it could be spent directly on the military effort.The discussions have taken on greater urgency since Congress failed to reach a deal to provide military aid before the end of the year. On Tuesday, lawmakers abandoned a last-ditch effort amid a stalemate over Republican demands that any aid be tied to a crackdown on migration across the U.S. border with Mexico.The Financial Times reported earlier that the Biden administration had come around to the view that seizing Russia’s assets was viable under international law.A senior administration official said this week that even if Congress ultimately reached a deal to pay for more arms for Ukraine and aid to its government, eroding support for the war effort among Republicans and Ukraine’s increasingly precarious military position made it clear that an alternative source of funding was desperately needed.American officials have said that current funding for the Ukrainians is nearly exhausted, and they are scrambling to find ways to provide artillery rounds and air defenses for the country. With Europe’s own promise of fresh funds also stuck, a variety of new ideas are being debated about how to use the Russian assets, either dipping into them directly, using them to guarantee loans or using the interest income they earn to help Ukraine.“This amount of money that we’re talking about here is simply game-changing,” said Philip Zelikow, a State Department official in both Bush administrations and a senior fellow at Stanford University’s Hoover Institution. “The fight over this money which is occurring is actually in some ways the essential campaign of the war.”Seizing such a large sum of money from another sovereign nation would be without precedent, and such an action could have unpredictable legal ramifications and economic consequences. It would almost certainly lead to lawsuits and retaliation from Russia.Ukraine’s president, Volodymyr Zelensky, referred to the discussions in a video address to his country last week, saying that “the issue of frozen assets was one of the very important decisions addressed” during his recent talks in Washington. He seemed to suggest that the funds should be directed to arms purchases, adding, “The assets of the terrorist state and its affiliates should be used to support Ukraine, to protect lives and people from Russian terror.”In a sign that some European countries are ready to move forward with confiscating Russian assets, German prosecutors this week seized about $790 million from the Frankfurt bank account of a Russian financial firm that was under E.U. sanctions.The Biden administration has said little in public about the negotiations. At the State Department on Tuesday, Matthew Miller, a spokesman, said: “It’s something that we have looked at. There remains sort of operational questions about that, and legal questions.” He said he did not have more information.Very little of the Russian assets, perhaps $5 billion or so by some estimates, are in the hands of U.S. institutions. But a significant chunk of Russia’s foreign reserves are held in U.S. dollars, both in the United States and in Europe. The United States has the power to police transactions involving its currency and use its sanctions to immobilize dollar-denominated assets.President Volodymyr Zelensky of Ukraine at the Capitol this month. A Biden administration official said that even if Congress ultimately reached a deal to send more aid to Ukraine, an alternative source of funding was still desperately needed.Kent Nishimura for The New York TimesThe bulk of the Russian deposits are believed to be in Europe, including in Switzerland and Belgium, which are not part of the Group of 7. As a result, diplomatic negotiations are underway over how to gain access to those funds, some of which are held in euros and other currencies.American officials were surprised that President Vladimir V. Putin did not repatriate the funds before the Ukraine invasion. But in interviews over the past year, they have speculated that Mr. Putin did not believe the funds would be seized, because they were left untouched after his invasion and annexation of Crimea in 2014. And bringing the funds home to Russia would have been another tipoff that an invasion was imminent, at a time Mr. Putin was vigorously denying American and British charges that he was preparing for military action.One Group of 7 official said the coalition had been considering a variety of options for how to use Russia’s assets, with the goal of putting forward a unified proposal around the second anniversary of the war, when many top officials will be gathering in Germany for the Munich Security Conference. The first debates have focused on what would be permissible under international law and under each nation’s domestic laws, as they consider Russia’s likely legal responses and retaliatory measures.Earlier in the year, American officials said they thought the frozen assets could be used as leverage to help force Russia to the negotiating table for a cease-fire; presumably, in return, Moscow would be given access to some of its assets. But Russia has shown no interest in such negotiations, and now officials argue that beginning to use the funds may push Moscow to move to the negotiating table.Among the options that Western countries have discussed are seizing the assets directly and transferring them to Ukraine, using interest earned and other profits from the assets that are held in European financial institutions to Ukraine’s benefit or using the assets as collateral for loans to Ukraine.Daleep Singh, a former top Biden administration official, suggested in an interview this year that the immobilized reserves should be placed into an escrow account that Ukraine’s Ministry of Finance could have access to and be used as collateral for new bonds that Ukraine would issue.If Ukraine can successfully repay the debt — over a period of 10 to 30 years — then Russia could potentially have its frozen assets back.“If they can’t repay, my hunch is that Russia probably has something to do with that,” said Mr. Singh, who is now the chief global economist at PGIM Fixed Income. “And so in that way, Russia has a stake in Ukraine’s emergence as a sovereign independent economy and country.”Settling on a solid legal rationale has been one of the biggest challenges for policymakers as they decide how to proceed.Proponents of seizing Russia’s assets, such as Mr. Zelikow and former Treasury Secretary Lawrence Summers, have argued that nations that hold Russian assets are entitled to cancel their obligations to Russia and apply those assets to what Russia owes for its breach of international law under the so-called international law of state countermeasures. They note that after Iraq’s invasion of Kuwait in 1990, $50 billion of Iraqi funds were seized and transferred through the United Nations to compensate victims in Iraq and other countries.Robert B. Zoellick, the former World Bank president, has been making the case to Group of 7 finance ministers that as long as they act in unison, seizing Russian assets would not have an impact on their currencies or the status of the dollar. He suggested that other countries were unlikely to rush to put their money into another currency, such as China’s renminbi.“With reserve currencies, it’s always a question of what your alternatives are,” said Mr. Zoellick, who was also a Treasury and State Department official.One of the obstacles in the United States for seizing Russian assets has been the view within the Biden administration that being able to lawfully do so would require an act of Congress. At a news conference in Germany last year, Ms. Yellen highlighted that concern.“While we’re beginning to look at this, it would not be legal now, in the United States, for the government to seize those statutes,” Ms. Yellen said. “It’s not something that is legally permissible in the United States.”Since then, however, Ms. Yellen has become more open to the idea of seizing Russia’s assets to aid Ukraine.Factions of Congress have previously tried to attach provisions to the annual defense bill to allow the Justice Department to seize Russian assets belonging to officials under sanction and funnel the proceeds from the sale of those assets to Ukraine to help pay for weapons. But the efforts have faltered amid concerns that the proposals were not thoroughly vetted.With Ukraine running low on funds and ammunition, the debate about how to provide more aid could shift from a legal question to a moral question.“One can understand the precedential point made by those who do not believe the assets should be seized,” said Mark Sobel, a former longtime Treasury Department official who is now the U.S. chairman of the Official Monetary and Financial Institutions Forum. “Given skirmishes and wars in many spots, one could easily argue such a precedent could get out of hand.”However, Mr. Sobel argued that the barbarity of Russia’s actions justified using its assets to compensate Ukraine.“In my mind, humanity dictates that those factors outweigh the argument that seizing the assets would be unprecedented simply because Russia’s heinous and unfathomable behavior must be strongly punished,” he said.Eric Schmitt More

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    Russia’s Central Bank Raises Rates to 15 Percent to Curb Inflation

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    The jump, from 13 percent, would bring a long period of “tight monetary conditions” in order to ease price pressures, the bank said. Russia’s Central Bank on Friday raised its key interest rate by two percentage points to 15 percent, a bigger increase than expected as the bank said it was trying to bring down stubbornly high inflation. The central bank, which said the annual inflation rate would range from 7 to 7.5 percent this year, predicted a long period of “tight monetary conditions” in order to bring the rate down close to its target of 4 percent.Driving the price pressures is “steadily rising domestic demand,” the bank said in its statement, spurred by the Kremlin’s decision to inject more money into the economy as it fights a war in Ukraine. The surge in spending “is increasingly exceeding the capabilities to expand the production of goods and the provision of services,” the bank said.At a news conference Friday, Elvira Nabiullina, the head of the Central Bank, said that increased government spending was one of the reasons for the interest rate increase. Russia’s defense budget has more than tripled since last year’s invasion of Ukraine, and it is scheduled to reach almost a third of the government’s spending next year.Russia was largely successful at weathering the immediate storm produced by sanctions aimed at punishing it for the invasion. The restrictions greatly curtailed its lucrative trade with Western countries and largely isolated it from the global financial system.But as Russia spends vast amounts on its war machine, its industrial production and labor markets are unable to keep up with the increased demand, translating into higher inflation and high levels of borrowing.GUM, a luxury shopping mall in Moscow, in August last year.Nanna Heitmann for The New York TimesYevgeny Nadorshin, the chief economist at the PF Capital consulting company in Moscow, said the central bank’s effort to slow the economy by raising interest rates could “suffocate the country’s growth.” “We are in the moment when growth is transforming into a recession,” Mr. Nadorshin said.He pointed to Russia’s mortgage and consumer borrowing markets, which have experienced rapid expansion. “People are still tense about the economy, but they feel that in the moment, things are much better than expected,” Mr. Nadorshin said in a phone interview. “People feel that this is a short period that they must take advantage of.”But Dmitri Polevoy, an economist in Moscow, said that despite high interest rates, he doesn’t see major risks with the Russian economy.“This story is exclusively about inflation,” Mr. Polevoy said in written comments to questions posed through a messaging service. “Under the current budgetary policy and with the same external conditions,” he said, “the risk of a recession is low.”After experiencing a nosedive following the invasion of Ukraine, the Russian economy has returned to growth. The International Monetary Fund recently estimated economic output would rise 2.2 percent this year, as oil exports have largely evaded Western sanctions and found new customers in India, China and other countries.The country has also been able to import Western goods from some former Soviet republics, as well as Turkey and Gulf States. Russian businesses, including banks, have adapted too, serving needs since the departure of many Western companies. More

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    Biden Seeks to Tame Oil Prices if Mideast Conflict Sends Them Soaring

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    The president has previously drawn down the Strategic Petroleum Reserve to ease price pressures, but that could be more difficult nowBiden administration officials, worried that a growing conflict in the Middle East could send global oil prices soaring, are looking for ways to hold down American gasoline prices if such a jump occurs.Those efforts include discussions with large oil-producing nations like Saudi Arabia that are holding back supply and with American oil producers that have the ability to pump more than they already are producing, administration officials say.A senior administration official said in an interview that it was also possible that President Biden could authorize a new round of releases from the nation’s Strategic Petroleum Reserve, an emergency stockpile of crude oil that is stored in underground salt caverns near the Gulf of Mexico. Mr. Biden tapped the reserve aggressively last year after Russia’s invasion of Ukraine sent oil prices skyrocketing, leaving the amount of oil in those reserves at historically low levels.The conflict in the Middle East has not yet sent oil prices surging. A barrel of Brent crude oil was trading for about $88 on global markets on Wednesday. That was up from about $84 earlier this month, shortly before Hamas attacked Israel and rattled markets. But analysts and administration officials fear prices could rise significantly more if the conflict in Israel spreads, restricting the flow of oil out of Iran or other major producers in the region.So far, American drivers have not felt a pinch. The average price of gasoline nationally was $3.54 a gallon on Wednesday, according to AAA. That was down about 30 cents from a month ago and 25 cents from the same day last year.Administration officials are wary of the possibility that prices could again jump above $5 a gallon, a level they briefly touched in the spring of 2022. Mr. Biden took extraordinary efforts then to help bring prices down — but those steps are likely to be far less effective in the event of a new oil shock.“They succeeded last year in the second half, but this year I think they’ve kind of run out of bullets,” said Amrita Sen, director of research at Energy Aspects.In part that’s because the administration did not refill the strategic reserve more aggressively when prices were lower, Ms. Sen said. That could undercut its ability to counteract rising prices now.“They got a little overconfident that prices would stay low,” she said. “In some ways, they’ve missed the boat.”

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    Crude oil in the strategic petroleum reserve
    Note: Levels are as of end of each week.Source: Energy Information AdministrationBy The New York TimesMr. Biden released a record 180 million barrels of oil from the strategic reserve, flooding the market with additional supply. His administration replenished just six million barrels when prices dipped this year, leaving the reserve at its lowest level since the 1980s. The Energy Department announced plans last week to continue refilling in the months ahead, but only if prices drop below $79 a barrel.Administration officials insist that tapping the reserve again remains an option. It still holds more than 350 million barrels of oil. That’s more than enough to counteract a disruption in oil markets if one occurs, energy analysts say.The U.S. economy is also less vulnerable to a price spike than in previous decades because the country has become less dependent on foreign oil. The United States produced more than 400 million barrels of oil in July, a record.

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    Monthly U.S. crude oil production
    Source: Energy Information AdministrationBy The New York Times“There’s still a lot of oil in the U.S. strategic reserve, and the U.S. is not in this alone,” said Richard Newell, president and chief executive of Resources for the Future, an energy-focused think tank. He noted that other countries had their own strategic reserves.Still, with Mr. Biden already taking criticism from Republicans for depleting the stockpile, he may be reluctant to tap it again now. “There’s another arrow in the quiver, but there’s only so many arrows right now,” said Jim Burkhard, head of energy markets research for S&P Global Commodity Insights. “Could they repeat it? Yes, but then you’re left with much, much less oil.”The stakes for Mr. Biden are high. Voters often punish presidents for high gasoline prices, and the challenge is amplified for Mr. Biden because, unlike most presidents, he has leaned into his role — intervening aggressively when prices soared early last year, and then claiming credit when prices fell.Independent experts say Mr. Biden is justified in claiming some credit for the moderation in prices last year, though they say other factors — including weaker-than-expected Chinese oil demand — also played a major role.The initial jump in oil prices was driven not by an actual shortage of oil but by a fear of one: Investors worried that millions of barrels of Russian oil would be blocked from the international market, either as a result of Western sanctions or Russian retaliation.Worried that the growing conflict in the Middle East could send oil prices soaring, Biden officials are looking for ways to hold down gasoline prices.Mark Abramson for The New York TimesMr. Biden’s decision to release oil from the strategic reserve provided additional supply at a crucial moment, helping to calm markets and push prices down.Analysts worried that additional sanctions from Europe, which were set to take effect near the end of 2022, would cause a second surge in prices by knocking more Russian supply offline. The Biden administration worked to prevent that by leading an international effort to impose a price cap on Russia that allowed the country to keep exporting oil — but only at reduced prices.That effort has worked to keep Russian oil flowing to markets and avoid a supply shock. In the first half of this year, it also appeared to be denting Moscow’s oil revenues. Increasingly, Russia has found ways around the price cap, forcing administration officials to take steps this month to crack down on enforcement of the cap in hopes of reducing the price at which Russian oil is sold.There is some risk that those enforcement efforts could at least temporarily knock Russian supply off the market at a tenuous time for global oil supply. But more important for the administration, there is little chance that a similar sort of price cap could help keep supply flowing from a large oil producer that could be involved in a widening war in the Middle East — most notably, Iran.Last October, the White House announced that it would enter into contracts to buy oil for the strategic reserve when prices fell below $72 a barrel. Doing so, the administration argued, would not just replenish the reserve but encourage domestic production by guaranteeing demand for oil at a reasonable price. But the effort has gotten off to a fitful start.Rory Johnston, an oil market analyst, said that the administration had been admirably creative in its energy policy, but that its execution had been flawed. Investors, he said, have been left skeptical about the administration’s ability to execute its strategy on refiling the reserve. They are also wondering if Mr. Biden will ever be willing to risk the political hit from driving up oil prices, by buying supply and pulling it off the market to refill the reserve.“If you want to be cynical, they’re very keen to do the price downside stuff and understandably not as keen to do the things that could seen as lifting prices,” Mr. Johnston said. More

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    Fragile Global Economy Faces New Crisis in Israel-Gaza War

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    A war in the Middle East could complicate efforts to contain inflation at a time when world output is “limping along.”The International Monetary Fund said on Tuesday that the pace of the global economic recovery is slowing, a warning that came as a new war in the Middle East threatened to upend a world economy already reeling from several years of overlapping crises.The eruption of fighting between Israel and Hamas over the weekend, which could sow disruption across the region, reflects how challenging it has become to shield economies from increasingly frequent and unpredictable global shocks. The conflict has cast a cloud over a gathering of top economic policymakers in Morocco for the annual meetings of the I.M.F. and the World Bank.Officials who planned to grapple with the lingering economic effects of the pandemic and Russia’s war in Ukraine now face a new crisis.“Economies are at a delicate state,” Ajay Banga, the World Bank president, said in an interview on the sidelines of the annual meetings. “Having war is really not helpful for central banks who are finally trying to find their way to a soft landing,” he said. Mr. Banga was referring to efforts by policymakers in the West to try and cool rapid inflation without triggering a recession.Mr. Banga said that so far, the impact of the Middle East attacks on the world’s economy is more limited than the war in Ukraine. That conflict initially sent oil and food prices soaring, roiling global markets given Russia’s role as a top energy producer and Ukraine’s status as a major exporter of grain and fertilizer.“But if this were to spread in any way then it becomes dangerous,” Mr. Banga added, saying such a development would result in “a crisis of unimaginable proportion.”Oil markets are already jittery. Lucrezia Reichlin, a professor at the London Business School and a former director general of research at the European Central Bank, said, “the main question is what’s going to happen to energy prices.”Ms. Reichlin is concerned that another spike in oil prices would pressure the Federal Reserve and other central banks to further push up interest rates, which she said have risen too far too fast.As far as energy prices, Ms. Reichlin said, “we have two fronts, Russia and now the Middle East.”Smoke rising from bombings of Gaza City and its northern borders by Israeli planes.Samar Abu Elouf for The New York Times Pierre-Olivier Gourinchas, the I.M.F.’s chief economist, said it’s too early to assess whether the recent jump in oil prices would be sustained. If they were, he said, research shows that a 10 percent increase in oil prices would weigh down the global economy, reducing output by 0.15 percent and increasing inflation by 0.4 percent next year. In its latest World Economic Outlook, the I.M.F. underscored the fragility of the recovery. It maintained its global growth outlook for this year at 3 percent and slightly lowered its forecast for 2024 to 2.9 percent. Although the I.M.F. upgraded its projection for output in the United States for this year, it downgraded the euro area and China while warning that distress in that nation’s real estate sector is worsening.“We see a global economy that is limping along, and it’s not quite sprinting yet,” Mr. Gourinchas said. In the medium term, “the picture is darker,” he added, citing a series of risks including the likelihood of more large natural disasters caused by climate change.Europe’s economy, in particular, is caught in the middle of growing global tensions. Since Russia invaded Ukraine in February 2022, European governments have frantically scrambled to free themselves from an over-dependence on Russian natural gas.They have largely succeeded by turning, in part, to suppliers in the Middle East.Over the weekend, the European Union swiftly expressed solidarity with Israel and condemned the surprise attack from Hamas, which controls Gaza.Some oil suppliers may take a different view. Algeria, for example, which has increased its exports of natural gas to Italy, criticized Israel for responding with airstrikes on Gaza.Even before the weekend’s events, the energy transition had taken a toll on European economies. In the 20 countries that use the euro, the Fund predicts that growth will slow to just 0.7 percent this year from 3.3 percent in 2022. Germany, Europe’s largest economy, is expected to contract by 0.5 percent.High interest rates, persistent inflation and the aftershocks of spiraling energy prices are also expected to slow growth in Britain to 0.5 percent this year from 4.1 percent in 2022.Sub-Saharan Africa is also caught in the slowdown. Growth is projected to shrink this year by 3.3 percent, although next year’s outlook is brighter, when growth is forecast to be 4 percent.Staggering debt looms over many of these nations. The average debt now amounts to 60 percent of the region’s total output — double what it was a decade ago. Higher interest rates have contributed to soaring repayment costs.This next-generation of sovereign debt crises is playing out in a world that is coming to terms with a reappraisal of global supply chains in addition to growing geopolitical rivalries. Added to the complexities are estimates that within the next decade, trillions of dollars in new financing will be needed to mitigate devastating climate change in developing countries.One of the biggest questions facing policymakers is what impact China’s sluggish economy will have on the rest of the world. The I.M.F. has lowered its growth outlook for China twice this year and said on Tuesday that consumer confidence there is “subdued” and that industrial production is weakening. It warned that countries that are part of the Asian industrial supply chain could be exposed to this loss of momentum.In an interview on her flight to the meetings, Treasury Secretary Janet L. Yellen said that she believes China has the tools to address a “complex set of economic challenges” and that she does not expect its slowdown to weigh on the U.S. economy.“I think they face significant challenges that they have to address,” Ms. Yellen said. “I haven’t seen and don’t expect a spillover onto us.” More

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    Yellen May Face Questions in Morocco Over U.S. Dysfunction

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    Treasury Secretary Janet Yellen calls on Congress to authorize more economic support for Ukraine.As Treasury Secretary Janet L. Yellen arrives in Morocco this week to meet with her international counterparts, she will be representing a nation that has led the world’s post-pandemic economic recovery but is now struggling with potentially destabilizing political dysfunction.America came perilously close to defaulting on its debt over the summer and tiptoed toward a government shutdown last month as Republicans fought over the proper levels of federal spending and whether to bankroll more aid to Ukraine. Those events culminated in last week’s ouster of Representative Kevin McCarthy as House speaker, a development that is raising questions about whether the United States can actually govern itself, let alone lead the world.The political dynamic is expected to strain the credibility of the United States at the annual meetings of the International Monetary Fund and the World Bank, which begin on Monday in Marrakesh. Ms. Yellen is expected to press European governments to provide more funding for Ukraine and push creditors like China to relieve the debts of poor countries, including many African nations.The meetings are taking place amid heightened global uncertainty because of the weekend attacks that Hamas waged upon Israel, which threaten to spiral into a regional conflict. The possibility of a wider war could pose new economic challenges for policymakers by pushing oil prices higher, disrupting trade flows and inflaming tensions between other nations. As she traveled to Morocco, Ms. Yellen affirmed America’s support for Israel.“The United States stands with the people of Israel and condemns yesterday’s horrific attack against Israel by Hamas terrorists from Gaza,” Ms. Yellen said in a post on X, formerly Twitter, on Sunday. “Terrorism can never be justified and we support Israel’s right to defend itself and protect its citizens.”In an interview on Sunday during her flight to Marrakesh, Ms. Yellen acknowledged that other nations feel concerned and anxious about the political gridlock that has gripped the United States. However, she pointed out that other democracies face similar obstacles and that she believed America’s allies would continue to be supportive of the Biden administration’s efforts on issues such as protecting Ukraine and addressing climate change.“I think they have been delighted over the last two years to see the United States resume a very strong global leadership role and they want to work with us and they want us to be successful,” Ms. Yellen said.Yet America’s role as an economic bulwark against Russia’s war in Ukraine has been undercut by its own domestic politics, including Republican opposition to providing more economic support to Ukraine. The United States’s huge debt load and its inability to find a more sustainable fiscal path has also hurt its economic credibility.“The rest of the world can only look aghast with trepidation at our dysfunction — lurching from threats of default, to shutdowns, the adjournment of the House because there is no speaker,” said Mark Sobel, a former longtime Treasury Department official who is now the U.S. chairman of the Official Monetary and Financial Institutions Forum, a think tank. “While foreign governments have always expected a degree of hurly-burly U.S. behavior, the current level of dysfunction will surely erode trust in U.S. leadership, stability and reliance on the dollar’s global role.”Eswar Prasad, the former head of the I.M.F.’s China division, added that instability in the U.S. economy could be problematic for some of the world’s most vulnerable economies that rely on America to be a source of stability.“For countries that are already struggling to prop up their economies and financial markets, the added uncertainty from the political drama in Washington is most unwelcome,” Mr. Prasad said.The gathering comes at a delicate moment for the global economy. While the world appears poised to avoid a recession and achieve a so-called soft landing, the fight against inflation remains a challenge and output remains tepid. Economic weakness in China and Russia’s ongoing war in Ukraine continue to be headwinds.The higher borrowing costs that central banks have deployed to tame inflation have also made it more difficult for countries to manage their debt loads.That is a problem across the globe, including in the United States, where the gross national debt stands just above $33 trillion. Foreign appetite for government bonds has been weak in recent months and concerns about the sustainability of America’s debt have become more prevalent. That is making it somewhat more challenging for the United States to counsel other nations on how they should manage their finances.The most challenging task for Ms. Yellen will be persuading other nations to continue to provide robust economic aid to Ukraine as its war with Russia drags on. European nations are coping with economic stagnation, and with Congress in disarray, it is unclear how the U.S. will continue to help Ukraine prop up its economy.Ms. Yellen said she would tell her counterparts that supporting Ukraine remains a top priority. Explaining that the Biden administration lacks good options for providing assistance on its own, she called on Congress to authorize additional funding.“Fundamentally we have to get Congress to approve this,” Ms. Yellen said. “There’s no gigantic set of resources that we don’t need Congress for.”Dismissing concerns that the U.S. cannot afford to support Ukraine, Ms. Yellen argued that the cost of letting the country fall to Russia would ultimately be higher.“If you think about what the national security implications are for us if we allow a democratic country in Europe to be overrun by Russia and what that’s going to mean in the future for our own national defense needs and those of our neighbors, we can’t not afford it,” Ms. Yellen said. More

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    Russia’s Economy Is Increasingly Structured Around Its War in Ukraine

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    The nation’s finances have proven resilient, despite punishing sanctions, giving it leeway to pump money into its military machine.“Everything needed for the front,” Russia’s finance minister declared, echoing a Soviet slogan from World War II as he talked about the government’s latest spending plans.The government still calls its invasion of Ukraine a “special military operation,” but the new budget figures make clear that the economy is increasingly being restructured around war.Nearly a third of the country’s spending next year — roughly $109 billion — will be devoted to “national defense,” the government announced late last month, redirecting money that might otherwise have flowed to health care, education, roads and other sectors. More tellingly, 6 percent of the nation’s total output is being funneled toward Russia’s war machine, more than double what it was before the invasion.Since Russia sent soldiers across the border in February 2022, its economy has had to adapt to dramatic changes with astonishing speed. The European Union, its biggest trading partner, quickly broke economic relations, upending well-established supply chains and reliable sources of income from abroad. The United States used its financial might to freeze hundreds of billions of dollars in Russian assets and cut the country off from the global financial system.Nineteen months later, the economic picture is decidedly mixed. The Russian economy has proved to be much more resilient than many Western governments assumed after imposing a punishing string of sanctions.Moscow has found other buyers for its oil. It has pumped money into the economy at a rapid pace to finance its military machine, putting almost every available worker into a job and raising the size of weekly paychecks. Total output, which the Russian Central Bank estimates may rise as much as 2.5 percent this year, could outpace the European Union and possibly even the United States.Yet that is only part of the story. As Laura Solanko, a senior adviser at the Bank of Finland Institute for Economies in Transition, said: “When a country is at war, gross domestic product is a fairly poor measure of welfare.” Producing bullets adds to a country’s growth rate without necessarily improving the quality of life.The insistent demand for foreign currency — to pay for imported goods or provide a safe investment — has also caused the value of the ruble to sink at a precipitous pace. Last week, it fell to a symbolic break point of 100 to the dollar, further fueling inflation and raising anxiety levels among consumers.Shoppers buying meat at the central market in Rostov-on-Don, Russia, in 2021. Inflation in Russia has driven up the price of meat and other products since the start of the war in Ukraine.Sergey Ponomarev for The New York TimesThe spike in government spending and borrowing has seriously stressed an already overheated economy. The central bank rapidly raised interest rates to 13 percent over the summer, as annual inflation continued to climb. Higher rates, which make it more expensive for businesses to expand and consumers to buy on credit, is likely to slow growth.Consumers are also feeling the squeeze for daily purchases. “Dairy products, especially butter, meat and even bread have gone up in price,” said Lidia Adreevna as she shopped and examined prices at an Auchan supermarket in Moscow. She blamed the central bank.“Life changes,” she offered, “nothing stays forever, not love, or happiness.”Other pensioners at the store also spoke about increases in meat and poultry prices, something almost half of Russians have noticed in the past month, according to survey data from the Moscow-based Public Opinion Foundation published Friday. Respondents also noted increases in the price of medicine and construction materials.Moscow imposed a temporary ban on diesel and gasoline exports last month in an effort to ease shortages and slow rising energy prices, but the restrictions further reduced the amount of foreign currency coming into the country.The exodus of funds is so worrying that the government has warned of reinstating controls on money leaving the country.With a presidential election scheduled in March, President Vladimir V. Putin acknowledged last month that accelerating inflation fueled by a weakened ruble was a major cause of concern. Getting a handle on price increases may discourage the government from embarking on its usual pre-election social spending.Lower standards of living can be “uncomfortable even for an authoritarian government,” said Charles Lichfield, deputy director of the Atlantic Council’s Geoeconomics Center.Since Russia imports a wide range of goods — from telephones and washing machines to cars, medicine and coffee — he said a devalued ruble makes “it more difficult for consumers to buy what they’re used to buying.”A Karachi Port Trust security guard keeping watch over the Clyde Noble, a Russian crude oil tanker berthed at the Karachi Port in Pakistan in June. Pakistan received discounted Russian crude oil as part of a new deal between Islamabad and Moscow.Rehan Khan/EPA, via ShutterstockThe United States, the European Union and countries allied with Ukraine have doggedly tried to cripple Russia with sweeping sanctions.The impact was swift and sharp in the spring of 2022. The ruble tumbled, the central bank increased rates to 20 percent to attract investors, and the government imposed strict controls on capital to keep money inside the country.But the ruble has since bounced back and interest rates come down. Russia found eager buyers elsewhere for its oil, which was selling at vastly discounted prices; liquefied natural gas; and other raw materials. More recently, Russia has become adept at evading the $60 per barrel price cap on oil imposed by the Group of 7 nations as global oil prices have once again started to rise.China is among the nations that have stepped up to buy energy and sell goods to Russia that they previously might have exchanged with European nations. Trade with China rose at an annual rate of 32 percent in the first eight months of this year. Trade with India tripled in the first half of the year, and exports from Turkey rose nearly 89 percent over the same period.Meanwhile, the war is gobbling up other parts of Russia’s budget aside from direct military spending. An additional 9.2 percent of the budget is slated for “national security,” which includes law enforcement. There is money for injured soldiers and for families of those killed in battle, and for “integrating new regions,” a reference to occupied territory in Ukraine.Sergei Guriev, a Russian economist who fled the country in 2013 and is now provost at Sciences Po in Paris, said accurately assessing the Russian economy is difficult. The existing economic models were designed before the war and based on different assumptions, and the published budget figures are incomplete.What that means for Russian households on a daily basis is harder to discern.“Overall, it’s very hard to compare quality of life before and after the war,” Mr. Guriev said. “It’s hard to know what Russians think. People are afraid.”Valerie Hopkins More

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    Europe Rushes to Build Defenses But With Little Consensus on How

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    At Saab’s sprawling combat production center in Karlskoga, Sweden, the 84-millimeter shells that can take out a battle tank in a single stroke are carefully assembled by hand. One worker stacked tagliatelle-shaped strips of explosive propellant in a tray. Another attached the translucent sheafs around the rotating fins of a guiding system.Outside the squat building, one of hundreds in the guarded industrial park, construction is underway on another factory. Capacity at this plant — a few minutes’ drive from the home of Alfred Nobel, the inventor of dynamite and founder of the peace prize — is scheduled to more than double in the next two years.The enlargement is part of a titanic expansion in military spending that every country in Europe has undertaken since Russia invaded Ukraine 18 months ago. Yet the mad dash by more than 30 allied countries to stockpile arms after years of minimal spending has raised concerns that the massive buildup will be disjointed, resulting in waste, supply shortages, unnecessary delays and duplication.“Europeans have not addressed the deeply fragmented and disorganized manner in which they generate their forces,” a recent report from the Center for Strategic and International Studies said. “Investing more in an uncoordinated manner will only marginally improve a dysfunctional status quo.”The North Atlantic Treaty Organization, which sets overall defense strategy, and the European Union have pushed for greater cooperation and integration, creating several new initiatives, including one to coordinate weapons procurement.Manufacturing shells at a Saab facility in Karlskoga, Sweden.Loulou d’Aki for The New York TimesAnother step in the production at the Karlskoga facility.Loulou d’Aki for The New York TimesCleaning the main charges on the production line.Loulou d’Aki for The New York TimesStill, a growing chorus of weapons manufacturers, political figures and military experts warn the efforts fall far short of what is needed. “There needs to be some clarity since we’re not the United States of Europe,” Micael Johansson, the president and chief executive of Saab, explained from the company’s headquarters in Stockholm. “Every country decides themselves what type of capabilities they need.”Each country has its own strategic culture, procurement practices, specifications, approval processes, training and priorities.Alliance members may sometimes use the same aircraft but with different encryption systems and varying instruments. As Ukrainian soldiers have discovered, 155-millimeter shells produced by one manufacturer do not necessarily fit into a howitzer made by another. Ammunition and parts are not always interchangeable, complicating maintenance and causing more frequent breakdowns.The European Union does not “have a defense planning process,” said Mr. Johansson. This summer, he was appointed vice chairman of the board at the Aerospace and Defense Industries Association of Europe, a trade association representing 3,000 companies. “NATO has to rethink how do we create resilience in the whole system,” including supply chains that produce the munitions soldiers use on the battlefield.Saab’s president and chief executive, Micael Johansson, at the company’s headquarters in Stockholm.Loulou d’Aki for The New York TimesCrucial raw materials like titanium and lithium, as well as sophisticated electronics and semiconductors, are in great demand.And there is a shortage of explosives, particularly powder, which manufacturers across the entire weapons industry depend on. But there has been little detailed discussion about which systems should get priority or how the supply of powder as a whole could be increased.“I suggested it,” Mr. Johansson said, “but it hasn’t happened yet.”The discussions are taking place at a time when the resilience of far-flung supply chains of all kinds are being re-examined. Memories are still fresh of interruptions in the flow of natural gas and grain resulting from the war in Ukraine, not to mention the severe backlogs in the production and delivery of goods and materials caused by the Covid pandemic.The big trend now, said Michael Hoglund, head of business area ground combat at Saab, is to bring supply chains closer to home and to create reliable backups. “We’re no longer buying the cheapest,” he said. “We’re paying a fee to feel safer.”Workers on the production line.Loulou d’Aki for The New York TimesAssembling a weapon.Loulou d’Aki for The New York TimesCoordinating supplies is just one element. Getting a jumble of varying weapons systems, practices and technologies to smoothly perform in concert has always been a challenge. NATO has set standards so that the different systems are compatible — what is known as interoperability.The practice, though, can be less than harmonious.The European Defense Agency’s annual review last year found that only 18 percent of defense investments are done together, half of the targeted amount. “The degree of cooperation among our armies is very low,” Josep Borrell, the European Union’s top diplomat, said at the time.Sweden is on the cusp of joining NATO, but it has partnered with the military alliance before, and Saab, which produces a range of weapons systems including the Gripen fighter jet, sells to scores of countries around the world.Managers there have seen some of the challenges to coordination up close in large and small ways.A Gripen aircraft at the Saab test center in Linkoping.Loulou d’Aki for The New York TimesJakob Hogberg, a Gripen test pilot, discussing the aircraft.Loulou d’Aki for The New York Times“The whole system in each army is built up in a special way,” said Gorgen Johansson, who oversees the Karlskoga operation. (He is not related to the chief executive.) Behind him sat an empty green tube used to launch Saab’s shoulder-fired NLAW anti-tank missile. It was signed by Ukraine’s former minister of defense and returned to its maker as a token of appreciation.Some customers, he said, want two launchers packed in a single box, another wants four, or six, because they have bought vehicles and equipment that can hold different numbers of launchers.Mr. Johansson said that until very recently, it was impossible to get the players to even talk about standardizing where labels were positioned or what color they should be.Bigger problems remain. After the Cold War ended, there was an enormous consolidation of defense companies as military spending shrank. Still, like varying brands of cereal, there is a wide range of each major weapons system. Europe has 27 different types of howitzers, 20 types of fighter jets and 26 types of destroyers and frigates, according to an analysis by McKinsey & Company.In building a unified fighting force, Europe must balance competition, which can result in improvements and innovation, with the need to eliminate waste and streamline operations, by ordering or even designing weapons in concert.Underlying the once-in-a-generation military expansion is that the continent is still primarily dependent on the United States for its safety. President Trump’s complaints in 2018 of insufficient spending in Europe and veiled threats to withdraw from NATO profoundly shook the region.A staff member collecting equipment from a tank used as a target at a test center.Loulou d’Aki for The New York TimesHolding up shrapnel that hit the target after a firing exercise.Loulou d’Aki for The New York TimesBut the view that Europe has to take more financial responsibility for its own defense is now widespread, urgently ratcheting up the pressure to better unify Europe’s defenses.Coordination, though, faces several built-in hurdles. As the center’s report concluded, integrating European defense “will be a slow laborious process and a generational effort.”Governments are already funneling millions or billions of dollars to defense and, naturally, every one wants to support its own industries and workers.And whatever Europe’s overall defense needs may be, each nation’s first priority is protecting their borders. There is limited trust even among alliance members.“We think we are friends,” said Gorgen Johansson in Karlskoga. But he noted that during the pandemic when there was a shortage of ventilators, Germany, which had a surplus, stopped supplying them to Sweden, Italy and other countries in need.“The talks have started,” Mr. Johansson said of efforts to improve coordination. “Do I think it will go quickly? No.”Working on a plane at Saab’s fighter production facility in Linköping.Loulou d’Aki for The New York TimesWorkers assembling an aircraft in Linköping.Loulou d’Aki for The New York Times More