Kiwi businesses have been warned of the worst-case scenario from the invasion of Ukraine, as the physical war and an economic one combine to put pressure on the global economy
Russia’s invasion of Ukraine has sparked almost unprecedented economic volatility, New Zealand officials say, warning the worst may be yet to come as the crisis takes full effect on global markets and price inflation.
Kiwi exporters have also been urged to prepare for a worst-case scenario and ensure their market models can withstand the impact of the conflict.
At a virtual exporter briefing hosted by the Ministry of Foreign Affairs and Trade last Friday, the ministry’s senior economist Geoff King said that while much of what officials had previously raised as a concern had come to bear, the speed and severity of the situation had taken economic commentators by surprise.
“The crisis is in effect two separate wars: there's the physical conflict in Ukraine itself, and that's disrupting the region and its role in the global economy.
“But there is also this economic war so to speak, where the weapons being deployed are economic sanctions, and this is having both short-term and long-term economic implications for the region, and for the global economy.”
King said trade was becoming “highly challenging if not impossible in many instances” for the region, as shipping companies halted bookings and Russia’s ban from the SWIFT payment network made payment extremely difficult for those trading there.
The collapse of the Russian ruble, a sign that international sanctions were having the desired effect, meant New Zealand companies like Fonterra were putting an end to exports.
While sanctions on Russian oil and gas had been limited to date, prices were nonetheless 60 percent higher than at the start of the year.
King said continued volatility would add fuel to domestic inflation for imported goods and put further pressure on business margins. While the longer-term outlook for New Zealand exports was relatively strong, an extended conflict was likely to weigh on global growth.
“Those Ukrainian truck drivers in many cases have parked the truck at the nearest service station and handed the keys to the service station owner and headed back to the Ukraine to fight…there could well be New Zealand goods and products sitting on those trucks that just aren't going to get to their destination." – Simon Hearsey, Trade Commissioner
Berlin-based Trade Commissioner Simon Hearsey said energy prices in Germany had gone up 50 percent “overnight” and continued to bounce around, a sign of the instability at play.
“I don't think we've ever, in a global situation – certainly not in the last 80 years – seen such a volatile period where we've seen drastic, inflationary pressures overnight.”
There had also been a surge in demand for commodities from countries which relied heavily on Ukraine and Russia for supplies like sunflower oil and wheat, which in turn would have a flow-on effect for global markets.
While New Zealand and other countries were already dealing with “extraordinary” price increases in some areas, Hearsey believed the full inflationary effect of the Ukraine conflict was yet to be truly felt.
Supply chains were becoming more difficult to navigate, and while goods were still transiting through Russia for the time being, there were other issues such as the loss of thousands of Ukrainian and Russian truck drivers who usually moved goods around Europe every day.
“Those Ukrainian truck drivers in many cases have parked the truck at the nearest service station and handed the keys to the service station owner and headed back to the Ukraine to fight…
“There could well be New Zealand goods and products sitting on those trucks that just aren't going to get to their destination, so at some point in the near future, these flow-on effects will start to bite.”
Hearsey said another unknown was how the surge in military spending from EU countries and those further afield would affect other budget decisions and the fate of consumer companies in the market.
“If there’s one piece of advice I could give, it’s … really consider your contingency planning process at the moment and prepare for what's going to be a long, potentially worst-case scenario.”
Andrea Smith, the head of MFAT’s newly established Russia sanctions taskforce, said the first tranche of sanctions imposed by the Government was unlikely to have a significant impact on Kiwi businesses, given they were targeted at political and military actors, but further rounds could have more of an effect.
“I am starting from the perspective that … at the moment, nothing is off the table, but don't interpret that as meaning a whole bunch of things are on the table either.
“It's just that as we are working through this process, and working through options and entities and individuals over the next little while, some of that in terms of … where the Government wants to have maximum impact and the decisions it takes will become a little clearer.”
The sanctions lists being produced by international partners were being taken into consideration, but the taskforce had to carry out its own consultations and due diligence to ensure New Zealand’s criteria and thresholds were being met.
Regular advice would be provided to ministers, including the potential ramifications for Kiwi businesses of any specific sanctions, she said.
Smith said it was too early to be definitive about any retaliatory measures from Russia, but the country would likely “play a tactical game” in its response to those sanctioning it.
The Russian government had placed travel bans on some US and Canadian nationals and was able to confiscate aircraft in the country, but had also threatened other measures such as nationalising foreign companies, restricting imports and limiting the outflow of oil and gas.
Asked how New Zealand would respond to the US or others introducing sanctions on China for any supporting role in the war, Smith said officials were considering the implications of other states’ stances but remained primarily focused on sanctions in relation to Russians and Russian entities.
The Government had been “encouraging China to use its access and influence to urge an early diplomatic solution to this particular crisis”, she added.
