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The Dark Economic Storm of 2022

By Gino Demeneghi - Mexico Pavilion at the World Expo Dubai 2020
Business Center Director

STORY INLINE POST

Gino Demeneghi By Gino Demeneghi | CEO - Fri, 01/13/2023 - 09:00

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Just as the economy was recovering from the pandemic that shook the world, we had to face a new challenge that would once again affect world indicators. The first quarter of 2022 looked encouraging for the world’s economies. Tourism had returned to popular destinations, and congresses and sporting events around the world were back in person when war knocked on the door: on Feb. 24, 2022, Russia invaded Ukraine. This generated a new economic scenario worldwide.

A short time later, on Feb. 28, 2022, the Russian Central Bank's access to more than $400 billion in foreign currency reserves was blocked and the US, which also imposed sanctions on Russian businessmen and politicians. With these actions, the Russian stock market collapsed and the Russian currency, the ruble, fell to historic lows. Russia then demanded that the gas it sells be paid in rubles, which bolstered the currency’s value, although this did not resolve the economic crisis it continued to face, with a shrinking economy and rising inflation rates.

This war affected not only the region but the entire world as together, Russia and Ukraine export 29 percent of the world supply of wheat and 75 percent of world exports of sunflower oil. The conflict also caused increases in the prices of energy and fertilizers. Including  the impact of the COVID-19 pandemic and climate change that has affected crops around the world, the Food and Agriculture Organization of the United Nations (FAO) refers to the sum of these events as the 2022 World Food Crisis.

Some reactions to Russia's actions were seen on the part of the private sector, among them the action by credit companies Visa and MasterCard, which blocked all transactions linked to Russian institutions on March 1. 

Another highly publicized case was that of the American multinational McDonald's, which after 32 years of operation closed its 850 restaurants in Russia in March 2022 in response to the military campaign against Ukraine. In May, Siberian businessman Alexánder Góvorse bought the chain and reopened it under a different name and its best-known hamburger, although it continues to say "eat me," will bear another name.

, The year also saw the collapse of cryptocurrencies, in what has become popularly known as “crypto winter.” Bitcoin has been in a tailspin since the end of last year as a result of the tightening of global financial conditions. On Jan. 2, bitcoin had a value of US$47,200. As I write this article, the current value is US$17,125, thus losing almost 60 percent of its value.

There are several factors that led to the "crypto winter." One is the rise in interest rates decreed by the US Federal Reserve (Fed).There is an increasingly clear trend among bitcoin and other cryptocurrencies to behave like traditional risky assets. Cryptocurrency prices have plummeted because higher interest rates tend to have a harder hit on investments that seem more expensive or riskier. Gold even fell sometime this year, as higher-yielding bonds make non-interest-paying investments look less appealing. On the other hand, the US dollar strengthened a lot against other currencies.

In June, the International Monetary Fund would publish a "dismal" report on the outlook for the world economy, titled "A gloomy and more uncertain outlook." It mentioned that the world’s Gross Domestic Product had contracted due to the slowdown in China and Russia, while US household spending missed expectations and shocks have rocked a global economy already weakened by the pandemic, bringing higher-than-expected inflation around the world.

In Europe, economies  reflect  the repercussions of the war in Ukraine and the tightening of monetary policy; in Asia, it is the slowdown in China, a consequence of the outbreaks of COVID-19 and the new lockdowns; and worldwide inflation continues to  rise due to food and energy prices and persistent imbalances between supply and demand.

The accumulated effect generated by the crises that are attacking the global economy has been to fuel fears of recession, job losses, hunger and a fall in stock markets. Rising prices are a global phenomenon, amplified by war and combined with the great supply chain crisis.

Today, more than ever, economic authorities must work hard to control inflation. This must be their top priority to protect the impact on the most vulnerable people and create policies that provide the greatest possible stability to the economy.

Photo by:   Gino Demeneghi

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