Russia may have tried to build a “fortress economy”, but it is the West that currently looks financially secure
Save time by listening to our audio articles as you multitaskIn part the muted reaction reflects Russia’s low weight in the global economy: about 2% in dollar terms. The country’s relative poverty and smaller population when compared with the rest of Europe mean that its exporters depend on European demand but not vice versa. Goldman Sachs, a bank, estimates that the loss of exports caused by a 10% fall in Russian spending would cost the euro zone only about 0.
Things could get much worse should sanctions expand in scope to cover energy purchases or if Russia retaliates against them by reducing its exports. JPMorgan Chase projects that a sustained shut-off of the Russian oil supply might cause prices to rise to $150 per barrel, a level sufficient to knock 1.6% off globalwhile raising consumer prices by another 2%. The stagflationary shock would carry echoes of the Yom Kippur war of 1973, which sparked the first of the two energy crises of that decade.
At present markets are priced for a fairly conventional policy response. Since February 1st investors’ inflation expectations, as revealed by the price of swaps, have risen sharply at a one-year horizon for Britain, America and the euro zone. Yet expectations for longer-term inflation, as measured by long-dated forward swaps, have not changed much . Projections of the’s policy rate at the end of the year have barely changed.
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