This article first appeared in The Edge Malaysia Weekly on July 4, 2022 - July 10, 2022

President of Russia

The Russian president’s decision to invade Ukraine on Feb 24 has brought about Europe’s largest refugee crisis since World War II and disrupted the latter’s agricultural production, causing food shortages around the world. The conflict has worsened the outlook for already inflated global food prices just as the world economy was recovering from Covid-19.

The UN has warned that the Russia-Ukraine war could soon cause a global food crisis that may last for years. According to the World Bank, Russia and Ukraine account for about 40% of wheat imports in the region and about 75% or more in Central Asia and the South Caucasus.

The halt in Ukrainian exports following the start of the conflict pushed the Food and Agriculture Organization’s food price index, which tracks international prices of the most globally traded food commodities, to its highest in March (159.7 points) since records began in 1990.

While post-pandemic global demand, extreme weather, tightening food supplies, high energy prices, supply chain bottlenecks and export restrictions have strained the food market in the past two years, the convergence of these factors following Russia’s invasion of Ukraine is unprecedented. The war has added to mounting concerns of a sharp global slowdown, surging inflation and debt, and a spike in poverty levels.

Since the war began, major foreign investors such as British energy giant BP and McDonald’s Corp have exited Russia, while several Russian banks have been suspended from the Swift (Society for Worldwide Interbank Financial Telecommunications) international payment system. These measures are expected to lead to a deep recession for the Russian economy.

But Vladimir Putin is unfazed, saying, “Sometimes when you look at those who leave — thank God, perhaps? We will occupy their niches: our business, our production — it has already grown, and it will safely sit on the ground prepared by our partners.”

But the sanctions have also hurt Europe, which depends on Russia for a third of its gas, and forced some countries to roll back their clean energy transition plans.

According to the World Bank’s economic update on April 10, emerging markets and developing countries in Europe and Central Asia are expected to bear the brunt of the war and sanctions on Russia.

The war has redrawn or enhanced global political alliances (with Nato set to admit Sweden and Finland into the intergovernmental military alliance, and Ukraine and Moldova poised to gain EU candidate status), while its economic impact reverberates through capital markets, trade and migration links.

Has Putin painted himself into a corner? What will he do next?

President of the US

All eyes are on the US president, who presides over an increasingly divided America, while his posture on China signals deepening fissures in diplomatic and trade relations between the world’s two largest economies.

On Nov 8, the US will hold its midterm elections — polls halfway through a president’s four-year term — for Americans to elect members of Congress and representatives at the state and local levels. The midterm elections will be key to determining whether Joe Biden will lose or maintain control of Congress.

Critical domestic issues that the Biden administration faces include red-hot inflation, gun control and abortion laws. With inflation standing at a 40-year peak of 8.6%, a recent poll showed that voters were leaning towards the Republicans in Congress to handle the economy better.

Biden has escalated the US-China trade war that his predecessor started in 2018. A Phase One trade deal between the two nations was signed in January 2020, but relations have not improved, with Biden announcing on June 18 that he was weighing possible action on US tariffs on Chinese goods.

Beijing has frequently criticised the Biden administration for maintaining the Trump administration’s tariffs, claiming that they have hurt the interests of US consumers and businesses most. The US-China trade war has upended a decades-long effort to reduce global trade barriers and has diminished trade flows between the two countries.

Adding fuel to the fire has been Biden’s ban on imports from China’s Xinjiang region since last December over concerns about forced labour. Imports are barred unless proven otherwise. China denies abuses in Xinjiang, a major cotton maker that also supplies much of the world’s materials for solar panels.

Biden also raised questions on long-standing US policy on Taiwan, when he said his administration would be willing to use military force to defend the island nation. Although the White House later clarified that there was no change in policy, the president’s remarks caused further tensions between the US and the Chinese government, which believes that Taiwan is a part of its territory and cannot exist as a sovereign nation.

The US also faces tensions with Russia as trade relations between the two countries were suspended following the latter’s attack on Ukraine. While the US has provided about US$12.9 billion in security assistance to Ukraine, Biden has rejected the notion that Russia’s war in Ukraine could grow into a larger proxy conflict between Moscow and Washington and its Nato allies.

President of China

China’s President Xi Jinping’s zero-Covid policy, which forced routine months-long nationwide lockdowns, has wrought deep economic distress on the country as it disrupted manufacturing, supply chains and consumer spending. Numerous companies were forced to shut down their factories, which has global consequences since most manufacturing hubs for international brands are located in China. The stringent lockdowns, which have had leaders around the world calling them out as unreasonable, prompted corporations to reconsider their dependence on China given the risks.

In its China Economic Update in June, the World Bank projects China’s real GDP growth to slow sharply to 4.3% in 2022 — 0.8 percentage points lower than projected in December.

The damage wrought by China’s zero-Covid policy has been extended beyond the nation itself. Zero-Covid is now routinely identified as one of the factors fuelling worldwide inflation while slower growth in the world’s second largest economy cripples growth in countries dependent on China.

US Treasury Secretary Janet Yellen has said China’s Covid-19 lockdowns appear to be impeding the flow of goods and hampering the global supply chain. She warned that the slowdown in the Chinese economy could affect other countries. The World Health Organization (WHO) has repeatedly described zero-Covid as being “unsustainable”.

Although last Tuesday, China slashed its quarantine period for travellers by half to one week, Xi has repeatedly emphasised that the country should stick to its “dynamic zero-Covid” policy and warned that economic consequences would follow if it doesn’t, according to state media.

“Our country has a large population. Such strategies as ‘herd immunity’ and ‘lying flat’ [Chinese slang for doing the bare minimum] would lead to consequences that are unimaginable,” he said.

Observers opine that Xi’s overriding objective appears to be ensuring a smooth pathway to the 20th Party Congress in the second half of 2022, when he will obtain a third five-year term. To give up zero-Covid would be tantamount to admitting failure of his leadership.

Chairman of the US Federal Reserve

Presiding as the US Federal Reserve chair over a period of high inflation — caused by fiscal and monetary policies to counter the economic impact of Covid-19, supply shocks and pent-up demand — Jerome Powell is in an unenviable position as he balances measures to bring down prices while ensuring a soft landing for the US economy.

It is worth noting that Powell has served under four presidents and is the first non-economist to lead the Fed in 40 years. He was elevated to Fed chair by Donald Trump and reappointed by Joe Biden for a second term last November.

In a bid to cool prices as inflation hit a four-decade high of 8.6% in May, the Fed on June 15 raised interest rates by 75 basis points (bps), the largest jump since 1994, and signalled more rate hikes ahead.

Powell told lawmakers the following week that the central bank was determined to bring down inflation and had the “tools” to make that happen while noting that an economic slowdown is possible given the war in Ukraine and lingering supply chain problems. “It’s certainly a possibility. It’s not our intended outcome at all, but it’s certainly a possibility,” he said.

At the congressional hearing, Powell faced angry lawmakers who fear continued rate hikes could “tip this economy into recession” without stopping inflation.

The Fed is seen as playing a frantic game of catch-up by hiking rates quickly and precipitating a market correction. Powell faces criticism that the Fed had been too slow to react given its position that rising inflation last year was “transitory”, as some say a pullback of monetary policy support should have been undertaken after September.

Powell’s predicament has been compared to that of former Fed chair Paul Volcker, who boldly raised interest rates as high as 20% in June 1981, sending the economy into a double-dip recession. However, the hikes succeeded in bringing down the runway inflation of the 1970s and was followed by about two decades of moderate economic growth and inflation, and a low rate of unemployment. Critics have pointed out, however, that the impact was particularly brutal on small towns in the US’ industrial heartlands, which “never recovered”.

The Fed’s move raises borrowing costs not just for Americans but others around the world, as other central banks are pressured to follow suit. Higher interest rates will also strengthen the US dollar, making it more expensive for countries that have borrowed heavily in the US currency to service and repay debts.

Following the sharp increase in June, all eyes are peeled for a further 75bps rise in July and a 50bps rise in September. Looking further ahead, will Powell stay the course of monetary tightening and steer the US economy towards a soft landing?

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