Global economic tremors complicate Western leaders’ Russia sanctions

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BONN, Germany — Growing fears of a global economic slowdown are complicating Western allies’ economic campaign against Russia, as world leaders struggle to craft new punishments for Moscow without compounding inflation and other domestic financial challenges.

When Russia invaded Ukraine in late February, American and European economic leaders believed their countries were on track for a successful rebound from the coronavirus pandemic and hopeful that inflation might abate. But three months later, the global finance ministers gathering in western Germany this week face a more worrying international economic outlook amid fears that central bank interest hikes could help push parts of the global economy into recession. These head winds are putting additional pressure on the United States and Europe to ensure their sanctions on Russia do not further tip the world into a new economic crisis.

Nations move to tackle inflation, increasing risk to global economy

Already, experts say, the economic consequences of the war have sent the cost of food skyward, which risks sparking a hunger crisis in parts of the developing world. Energy prices have also soared both in Europe and the United States — despite President Biden’s move to release an enormous amount of the nation’s oil reserves — in an added strain on consumers facing the highest rates of inflation in four decades. Some Western leaders want to go much further to choke Russia off from the global economy by depriving it of its substantial quantities of international oil and gas sales. But there may be limits to how much economic pain voters are willing to tolerate.

The European Union on Monday slashed its economic forecast because of the war in Ukraine and warned that the fallout from the fighting could make things significantly worse. “An escalation of the war, a sudden stop of energy deliveries, or a further deceleration of economic activity in the U.S. and China, could result in a much grimmer outlook,” the European Commission warned.

“The global economic situation, particularly high inflation, makes it even harder for Western countries to impose full sanctions — especially on Russian energy,” said Gerard DiPippo, a senior fellow in the economics program at the Center for Strategic and International Studies, a D.C.-based think tank. To date, DiPippo said, the sanctions imposed on Russia “are the most comprehensive sanctions put on a major economy since the Second World War. But they’re ultimately a political act that requires the consent of the country imposing it and enduring the cost from any blowback or effects on their own economy.”

Tunisia among countries seeing major economic consequences from war in Ukraine

The extent of the existing U.S. and European sanctions on Russia over the war remain extraordinary, with the Western powers targeting the Kremlin’s central bank reserves, financial elites tied to Russian President Vladimir Putin, and key sectors of the country’s economy, including its defense base and banking industry, among other measures few predicted at the war’s outset. The Institute of International Finance has estimated that Russia’s economy could shrink by as much as 15 percent this year alone.

But even as the E.U. has worked with the United States and other allies to target Moscow, it has continued to buy Russian fossil fuels, keeping money flowing to Moscow. Some, including Baltic nations and some other Eastern European countries, have pushed hard for a full and immediate embargo. Others have resisted, worried about the economic consequences.

In April, the bloc agreed to phase out coal, but it remains stuck on oil and gas. On May 4, after weeks of deliberation, the European Commission proposed a plan to phase out imports of oil from Russia. It included extensions for two countries — Hungary and Slovakia — that remain heavily dependent on imports, according to E.U. diplomats. But in the two weeks since, E.U. countries have not approved the deal, as other countries pressed for extensions and Hungary pushed for more money to upgrade its oil infrastructure.

E.U. officials and diplomats are expected to discuss the issue again Wednesday in Brussels, though the focus will be on “REPowerEU,” the bloc’s longer-term plan to make Europe independent from Russian fossil fuels “well before 2030.” Diplomats will be watching to see if the plan includes funding that could help convince Hungary to fall in line on the oil phaseout.

U.S. and E.U. officials said there is still some optimism that there will be a deal — eventually. Other experts point out that the Americans and Europeans have moved swiftly to punish Russia even at risk to their own economies, in addition to mobilizing tens of billions in international economic assistance for Ukraine.

“I believe that Europe will on the whole stand firm with the Biden administration in developing and applying sanctions against Russia for its barbaric war on Ukraine,” said Mark Sobel, who previously served as deputy assistant secretary for international monetary and financial policy at the Treasury Department.

Josep Borrell, the E.U.’s foreign policy chief, acknowledged to reporters on Tuesday that the war could lead to commodity price increases in many countries, but he said Europe would have to adapt to new circumstances.

“All our partners consider and feel the direct impact Russia’s war is causing around the world. I said before — on energy prices, on food shortages and inflation,” Borrell said. “Unhappily, all these things together will bring the world to the edge of another recession whatever they do. We will have to adapt our financial support in line with these new needs.”

The oil proposal now on the table for E.U. nations does not include any measures on Russian gas, where there is even greater disagreement among member states.

In recent days, the bloc also appeared to soften its tone on whether E.U. countries can continue to buy Russian gas without violating sanctions, paving the way for European countries to keep buying despite the bloc’s bellicose rhetoric about the war.

Finding a way for companies to keep gas flowing could help avoid a confrontation with Russia as the next round of bills come due. In April, Russia’s state-controlled gas company, Gazprom, shut off the supply of natural gas to Poland and Bulgaria when they refused a Kremlin demand to pay in rubles — and threatened more cutoffs to come.

A push to try to cap the cost of Russian energy has also fizzled, though global financial leaders were expected to discuss the idea at the conference in Germany of the Group of Seven countries. Treasury officials recently raised with the Europeans ideas for imposing price mechanisms that could be paired with their commitment to ban Russian energy after an initial period, according to one person familiar with the matter, who spoke on the condition of anonymity to describe private conversations. But that plan has been discussed for weeks and has to up to this point gained little traction. Treasury Secretary Janet L. Yellen told reporters Tuesday that the United States and the Europeans have discussed a wide range of options, but noted: “We’re not trying to tell them what’s in their best interest.”

Rauhala reported from Brussels.

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