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Thursday, June 09, 2022
Geopolitical Turmoil and Pandemic: Twin Causes of the World's Cost Crisis
He Jun

The world, as we speak, is experiencing a global cost crisis.

On June 8, the United Nations Secretary-General's Global Crisis Response Group (GCRG) released its second latest report on food, energy, and financial systems, stating that the COVID-19 pandemic and the climate crisis have "exacerbated a global cost-of-living crisis unseen in at least a generation". Three months into the Russia-Ukraine conflict, the impact of the rising cost to global food, energy, and fertilizer markets is escalating.

Figure 1: U.S. Wheat Futures Prices Since the War in Ukraine (cents/bushel)

Source: Sina Finance

An estimated 1.6 billion people in 94 countries face at least one of these crisis situations, with about 1.2 billion people living in the most vulnerable countries, which are extremely at risk in the three sectors of food, energy, and finance, the UN report said. Secretary-General António Guterres warned that while these groups and countries have been hit hard, no country is immune to the impact of the crisis of rising cost of living. To this end, Guterres called for a political solution in accordance with international law and the UN Charter.

The United Nations believes that immediate action is needed on two fronts before a political solution to the Russia-Ukraine conflict. "We need to bring stability to global food and energy markets to break the vicious cycle of rising prices and bring relief to developing countries", Guterres said. He also announced to coordinate two task-forces to allow for a "safe and secure export of Ukrainian-produced food through the Black Sea" as well as to ensure "unimpeded access to global markets for Russian food and fertilizers".

Figure 2: Brent Crude Oil Futures Prices Since the Ukrainian War (USD/Barrel)

Source: Sina Finance

Rebeca Grynspan, Secretary-General of United Nations Conference on Trade and Development (UNCTAD), said that the current global food, energy, and financial crises are cumulative. She stated that countries have already been deeply affected by the COVID-19 pandemic, coupled with the impact of the long-term climate crisis, and the three-month Russia-Ukraine conflict, the situation only worsens, especially for developing countries. Grynspan called on countries to release energy reserves to address short-term gaps. She noted that while the 63-nation sanctions against Russia did not include food and fertilizers, the export of these has become increasingly difficult. In order to ensure the export of grain and fertilizers from Russia and Ukraine, the UN calls on all parties to take immediate action to prevent the crisis from turning into a catastrophe of global proportions.

It is worth noting that the UN report raises an important issue here, namely the cost crisis. Researchers at ANBOUND opine that the cost crisis can be seen as another expression of economic inflation. The UN, of course, does not only look at the cost crisis from an economic angle. The rise in cost will have a wide-ranging impact on the globe in terms of humanitarian crisis, economic development problems, social stability, and the widening gap between the rich and the poor, especially in poorer countries.

In regard to the cost crisis, economists have offered variegated explanations. For instance, since the global financial crisis in 2008, the central banks of various countries opted for massive quantitative easing, and the loose monetary policy has caused a global excess of capital, which has directly led to rising inflation. More economists believe that the geopolitical conflict resulted by the Russia-Ukraine war directly has stimulated the rise in global energy and food prices, which is an important reason for the rise in costs worldwide.

There is some truth to all these views, but they are not complete. Researchers at ANBOUND believe that there are currently two sources of the cost crisis in the world: the first is Ukraine and the other is China. The first source is caused by Russia's invasion of Ukraine, and the second is because of China's zero-COVID policy. These two sources of the cost crisis will not be resolved for the time being.

The reason behind this seeming pessimistic judgment is not complicated. The war in Ukraine is not merely about territorial and national sovereignty, nor is it solely because of NATO's intervention, nor that it is a proxy war. The war, in point of fact, involves deeper enmity between both countries. The two have been at war for more than 100 days, and the death toll on both sides has reached tens of thousands. This is not an issue that can easily be resolved within a short period of time. Even if there is a temporary truce, the confrontation between Ukraine and Russia will see no end for now. It is entirely possible that at some point, due to some contradictions and frictions, both will be at war again. Consequently, the war in Ukraine as a source of geopolitical turmoil will lead to long-term geopolitical risk in global markets and raise economic costs.

As for the dynamic clearing, or zero-COVID policy in China, this is a long-term issue as well. Viruses have existed on earth for hundreds of millions of years before humans, and they will continue to exist. History taught us that they cannot be completely eradicated. Under the zero-COVID policy, the battle waged on the novel coronavirus will be an endless one. As the world's second-largest economy, one of the largest producers, and a major trading country with global influence, if China is entangled in such a struggle against the virus in the long term, its economy will definitely be seriously affected. The reduction of China's economic efficiency, in turn, will significantly push up the cost internationally.

Final analysis conclusion:

The global industrial layout will be affected by the cost crisis, due to the two long-term factors mentioned above, namely the war in Ukraine and China's zero-COVID policy. This new reality may lead to the re-distribution of industries worldwide. From this perspective, it is inevitable that the world will be forced to readjust and deploy the industries.

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