Ukraine War Will Lower Global Growth Says IMF, Russian Economy Could Contract 15 Percent in 2022

A participant stands near a logo of IMF at the International Monetary Fund/World Bank Annual Meeting in Nusa Dua, Bali, Indonesia on Oct. 12, 2018. (Johannes P. Christo/Reuters)

The International Monetary Fund (IMF) is expected to cut down its global growth forecast for 2022 due to Russia’s invasion of Ukraine, according to the managing director of the agency, placing a damper on the post-pandemic economic recovery that was critical to many nations.

“We think that we would be downgrading our growth projections as a result of the crisis, but we still expect the world to be in positive growth territory,” Kristalina Georgieva told CNBC. “Obviously, how long this war goes is the main uncertainty factor we face.”

Spillovers from the conflict, like rising commodity prices, can inhibit growth, Georgieva said. With inflation at high levels, price pressures from the Russia-Ukraine war can weigh down on real incomes and reduce consumer demand.

Business confidence can also decline. The main worry of the IMF is that the recovery of countries, some of which were comparatively slower than others, would be impacted disproportionally by the ongoing conflict.

Inflation triggered by the Ukraine conflict will result in monetary tightening in several countries, and have particularly serious consequences in the Caribbean, Latin America, several countries in Africa, and some nations in the Middle East, Georgieva said.

The world was projected to grow by 4.4 percent this year, according to a January outlook by the IMF, down 1.5 percent from the 5.9 percent growth seen last year. The organization is scheduled to issue an update for its annual world economic outlook by mid-April.

Though Georgieva expects Russia to “definitely” enter a recession, neighboring nations might be spared of such an economic consequence. Earlier this week, The World Bank’s chief economist, Carmen Reinhart, had warned in an interview with Reuters that Russia and Belarus were in “square default territory.”

Speaking to reporters, Georgieva agreed that a debt default by Russia was no longer “improbable.” At this point, the IMF has no policy relations with Russia. Its office in Moscow is no longer operational.

The negative impact of the war on the Russian economy is supported by other experts. An analysis by the Institute of International Finance (IIF) projected that the economy of Russia would contract by around 15 percent this year due to the severe international sanctions.

“Further escalation of the war may bring more boycotts of Russian energy, which would drastically impair Russia’s ability to import goods and services, deepening the recession,” the IIF said in a note. The war’s inflationary impact on commodities will also add to the overall hike in prices and negatively affect the global economy. Both countries are major food exporters.

The rising price of oil, exacerbated by sanctions against Russian oil, can eat into GDP, says commodities trading major Trafigura’s chief economist Saad Rahim. “A $100 per barrel increase in prices will see a 3.5-4 percent hit on global GDP (gross domestic product) if we stay at that level for the entire year,” Rahim said.