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The economic consequences of the Russian attack on Ukraine

1 Marzo - 2022

Stocks have been tinted with red numbers. Prices of raw materials have risen with the Russian attack on Ukraine. Russia is the world's second largest oil producer and natural gas supplier in Europe. Investors have seen that the economic sanctions that are about to come will thwart these supplies. Petrol and gas have risen in price and this will eventually have an impact on the price of electricity. In fact, the Brent already exceeds 100 dollars and the gas is a 30% higher.

In addition, Russia also has part of the cereal market, such as wheat and maize, which has increased its price as well as key metals such as aluminium, nickel or palladium, which will be noticed in the pockets of consumers. Catalonia imported in 2021 EUR 372.2 million from Ukraine.

"The Russian attack on Ukraine raises the price of raw materials and energy, which will result in an increase in inflation"

The director of the Master in Finance and Bank of the UPF Barcelona School of Management, Xavier Brun, explains that "to make the home aluminium window will cost more because of this situation in Ukraine; or whoever wants to buy a car made of steel and aluminium will have to pay more; filling the tank or using the heating will be much more expensive," adds Professor Brun.

All these increases in raw materials are also translated into the electric bill, which if it was already in historic highs, now we can still see how it is rising again.

All these price rises "based on expectations, sanctions and the impossibility of buying in the Russian market make other sources of supplies searched and prices increased".

And, of course, if oil is also increased, this is transmitted to the cost of transporting many products, starting with food: "Taking products from one point to the next will be more expensive and this raises prices on the shopping basket and therefore all these ingredients together gives us an increase in inflation." Inflation caused by a lack of supply, not by the smooth running of the economy.

In this regard, and on sanctions against Russia, the professor explains that the markets have considered them to be light: "Unparalleled arrangements were those of Venezuela, where no compromise could be made with that country, but with Russia that is not the case." The reason? "Inflation, which is already high enough in Western countries, and if you want to stop it by raising rates, you can also drown the economy," said Brun.

"The markets have detected that sanctions on Russia are soft and the reason for this slightness is the fear of an increase in inflation, which in European economies is already high"

The United States, the European Union and the United Kingdom will attempt to cut off the supply of semiconductors to Russia to cut its competitiveness and the ability to produce many products. In addition, a major issue on the table would be to withdraw SWIFT banking technology: "This would be the most important sanction, SWIFT is the software that allows money to be transmitted electronically, allows simple, fast and digital banking transactions," Brun states. 80% of the world's transactions are done digitally: "If you cut this, you cut off the veins running through Russia, turning it into an island. And maybe they'll do this with the banks closest to Putin, all for fear of a bouncing effect," says the professor.

The war will have an impact on everything else around it: "Finally, if inflation rises, the only way to control it is to raise interest rates. So it'll affect us directly, for example, in mortgages."

"All that looks far away is closer than we think", reblans Brun.

ODS Xavier Brun CAT

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