Russia’s military operation in Ukraine and the subsequent Western sanctions on Moscow might push the global economy into geopolitical fragmentation, the IMF warned in a report published on July 26.
“A serious risk to the medium-term outlook is that the war in Ukraine will contribute to fragmentation of the world economy into geopolitical blocs with distinct technology standards, cross-border payment systems, and reserve currencies,” the report states.
According to the IMF, such a split would prevent the global community from jointly addressing global problems.
“Fragmentation may also diminish the effectiveness of multilateral cooperation to address climate change, with the further risk that the current food crisis could become the norm,” the authors of the report warn.
The report notes that traditional economic and financial risks have been exacerbated by the conflict in Ukraine and its repercussions. Such risks currently include the effect of tighter monetary policy, slowing economic growth in China and rising energy prices.
However, according to the report, there is “limited evidence of reshoring,” or trade deglobalization, at the moment, and overall, global trade “has been more resilient than expected since the start of the [Covid-19] pandemic,” which can be taken as a positive sign.
Still, the IMF predicts that increasingly tight sanctions on Russia will eventually result in a drop in Russia’s oil exports to the global market and a “decline to zero” of Russian gas exports to Europe, which in turn would make “inflation expectations more persistently elevated” across the globe and tighten financial conditions as governments attempt to deal with rising prices.
“In this scenario, the shock would have a widespread impact, as higher global commodity prices and tighter monetary and financial conditions would affect almost all countries, albeit to different extents. Europe would be particularly affected in this scenario, with 2023… near-zero regional growth,” the IMF states.
Still, according to analysts, “taming inflation should be the first priority for policymakers” despite the costs of tighter monetary policy, as “delay will only exacerbate [the costs].”