February 24 marks a year since Russian tanks rolled into Ukraine, marking the beginning of Moscow’s full-blown invasion of its neighbor. Though Ukraine has remarkably survived as a sovereign state, it continues to suffer from round-the-clock artillery shelling.
But alongside thousands of civilian deaths, millions of refugees and extensive infrastructure damage in Ukraine, countries far beyond its borders are feeling the negative effects of the war.
As a second-order consequence of the Russian invasion, the currencies of dozens of countries collapsed against the US dollar in 2022, driving up import costs.
Luc Verfaille, owner of a home appliance company in Cape Town, South Africa, told Al Jazeera “to compensate for the Rand’s higher spending [South Africa’s currency] Depreciation, we had to cut our overheads, including staff.”
Given the complex interplay between geopolitics, commodity prices and financial markets, Russia’s invasion has sent shockwaves through the global economy, including developing countries. Admittedly, the impact varied both within and between developing countries. However, there were some common challenges, including higher commodity prices.
Even before the war, the global recovery from COVID-19 had the commodities market in turmoil. The need to catch up due to national lockdowns and colossal economic stimulus packages fueled rapid price gains. These tendencies were reinforced by the war.
For example, the energy component of the S&P Goldman Sachs Commodity Index ended 2022 10 percent higher than when it started. Between January and June, it increased by 68 percent. Given Russia’s status as a key energy market in 2021 – accounting for 14 percent and 18 percent of global oil and gas production respectively – the war sparked uncertainty about constrained supplies.
But Russia’s hydrocarbon production has remained largely unaffected by the military conflict, and the tightening of sanctions has so far had only a muted impact on Russia’s “resilient” energy supply, according to the International Energy Agency. Moscow has largely managed to divert European pipeline exports to emerging markets like India, China and Turkey – albeit at discounts to market prices.
Across the European Union, gas flows from Russia fell by 80 percent between May and October. Shortages in the pipelines threatened large swaths of energy-intensive industries, and European countries turned to liquefied natural gas (LNG) to keep factories from closing.
Energy and food importers have dealt a blow
Europe’s struggle for new LNG supplies triggered price hikes in the immediate supply (or spot) market. The benchmark spot price for Asian LNG hit a record high last year, exposing many developing countries in the region to power shortages.
Energy importers Pakistan and Bangladesh “are stuck but cannot afford to pay as much for local freight as wealthy European nations,” said Marcello Estevao, global director for macroeconomics, trade and investment at the World Bank.
Although estimates vary, Pakistan’s international reserve position could be enough to cover energy imports as little as three weeks at current prices.
“On the one hand, energy-importing countries have been caught. Some will likely be forced into austerity,” Estevao added. “On the other hand, hydrocarbon exporters in the Middle East and Africa got a boost from higher energy prices…particularly those with spare capacity to ramp up production.”
Many developing countries have cut fuel imports as the war in Ukraine has pushed up oil prices [File: Eranga Jayawardena/` Photo]For some energy exporters such as Nigeria and Angola, higher oil prices have been partially offset by the increased cost of maintaining expensive fuel subsidies. Clearly, oil importers with existing fuel subsidies such as Kenya and Ethiopia fared even worse.
Similar strains have emerged in countries with large food subsidy programs. Before the war, Russia and Ukraine were among the world’s leading suppliers of barley, corn and sunflower. The supply of these and other staple foods was badly affected by the Russian invasion.
The two countries accounted for nearly 30 percent of global wheat exports in 2021. Due to the Russian blockade of Ukraine’s Black Sea ports, a key grain shipping route, wheat prices rose 35 percent year-on-year in 2022, hitting a record high in March.
Countries like Tunisia, Morocco and Egypt – one of the world’s largest wheat importers – have been hit hard. About two-thirds of Egypt’s population can get five loaves of bread, known as eish baladi, every day for just US$0.5 a month, well below market costs. The difference is covered by a bread subsidy program that cost the government $2.8 billion last year.
Last June, Egypt’s finance minister noted that increased wheat prices would add $1.5 billion to the cost of the country’s bread subsidy program in 2022-23. Groaning under the weight of expensive food programs, the government was recently forced to accept a $3 billion loan from the International Monetary Fund (IMF).
As with other IMF programs, lending was conditional on “fiscal consolidation”. Provided that the Egyptian government sticks to a program to cut government spending, it will receive regular loan installments over the next four years. Although austerity measures typically accompany IMF programs, they have been criticized for exacerbating social unrest.
“World hunger remains serious”
“In countries with outsized wheat subsidies, price hikes have had humanitarian and fiscal costs. In general, however, world hunger remains severe,” said Maximo Torero, chief economist at the Food and Agriculture Organization of the United Nations (FAO).
In 2022, the FAO’s annual food price index, which measures changes in international food prices, rose 14.3 percent year-on-year and 46 percent higher than in 2020. As a result, 222 million people worldwide suffered from acute food insecurity last year.
“The international community needs to adopt a portfolio approach to improve food resilience in developing countries,” Torero said, referring to international trade organizations, multilateral development banks and even private companies. “First, agricultural and disaster insurance systems can be improved. Second, food import sources should be diversified and export restrictions should be removed. And third, we can rehabilitate better by investing more in the developing country’s agricultural system.”
The war in Ukraine has disrupted the supply of staple foods such as wheat [File: ` Photo]
IMF loans are becoming more expensive
Meanwhile, war-related inflation prompted the US Federal Reserve and other major central banks to raise interest rates. In the past 11 months, the Fed has raised interest rates by around 4.5 percentage points to slow inflation.
Attracted by higher yields in the US, investors pulled their money out of developing world financial assets. The financial exodus led to widespread currency devaluations of developing countries against the US dollar. In addition to higher import prices, a country’s currency depreciation also makes it more expensive to service its foreign debt.
To cover the deficit, mature emerging markets such as Brazil and India issued bonds in their own currency. To stop the devaluations, they have also drained large holdings of international currency reserves. But for most developing countries, these measures were not an option.
As borrowing from international private lenders was scarce, official bodies such as the IMF stepped in to fill the gap. An analysis of IMF lending by Boston University showed that by the end of 2022, the volume of loans disbursed by the IMF in 27 separate programs totaled $95 billion. This was larger than loan outstandings at the end of 2021, already a historic high for the year.
“One problem for developing countries,” as former Argentina finance minister Martin Guzman noted, “is that IMF borrowing has also become more expensive.” He was referring to the IMF’s international reserve currency, known as the Special Drawing Rights (SDR).
The SDR rate is a weighted average of the cost of borrowing from the five countries that make up the IMF’s reserve currency. “In 2022, IMF lending rates rose in tandem with monetary tightening conditions in four of these five countries,” he said, referring to the US, UK, Japan, China and the eurozone.
Guzman added that “IMF lending to poor countries should avoid fueling inflationary cycles” of the advanced economies that make up the SDR basket and instead focus on balance of payments challenges in borrower countries.
“In order to deal with a significant number of sovereign defaults in the coming years,” there should be an independent debt authority, as opposed to a lending institution like the IMF, which could direct restructurings “timely and effectively,” Guzman said.
Based on standardized legal principles, a global insolvency court could improve creditor-debtor coordination compared to the current market-based approach.
Although the idea has the support of the United Nations, it is unlikely that the US and UK – under whose laws most government bonds are issued – would cede the sovereignty of their courts to a supranational body. But as Guzman pointed out, “The system we have now leaves the debtor countries too little and too late.”
Along with an uneven recovery from COVID-19, soaring food and energy prices, and widespread currency devaluations, the war in Ukraine has only added to an already hostile environment for indebted developing countries.
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