Russia-Ukraine Conflict Adds Uncertainty to Asian Economy

Reconfiguration of supply chains, fragmentation of payment networks, and changes in reserve currency holdings are some of the effects stemming from the Ukrainian conflict.

The Russia-Ukraine conflict has added uncertainty to the Asian economy, which already has to battle a COVID-19 surge and brace for tighter financial conditions, said Changyong Rhee, the director of the Asia and Pacific Department at the International Monetary Fund (IMF).

“We are now quantifying the impact through various channels… but we don’t have at this moment the exact number partly because there are still a lot of uncertainties,” said Rhee, who was just nominated as a candidate for South Korea’s central bank governor.

Noting that the most important channel to impact the Asian economy is commodity prices, Rhee said how long this conflict will last will have an impact on oil prices, and with the fluctuation of oil prices, the impact on the Asian economy can change “quite a lot.” Indonesia, which exports a lot of commodities, will be less affected by the current crisis, while South Korea, Japan and India, heavily reliant on oil import, will be negatively affected.

Rhee urged Asian governments to reduce fuel subsidies, which tend to benefit people with higher incomes as they consume more energy, and adopt targeted fiscal policies to support the poor households, who also need to cope with higher food prices amid the crisis.

Apart from the Russia-Ukraine conflict, Omicron’s spread in the region and higher interest rates due to U.S. monetary policy normalization are also headwinds for Asia’s growth. U.S. Federal Reserve’s interest rate hikes could prompt capital outflows and drive up financing cost, exacerbating Asia’s debt issue, Rhee said, adding that Asia’s debt now accounts for nearly 40 percent of the global total, compared with 25 percent in 2007.

“So debt has increased quite significantly and high interest rates will definitely affect the borrowing cost and financing cost, could even slow down the economy,” he said.

For China, the direct impact is “relatively small,” Rhee said, adding that the increase in global oil prices will affect China and the slowdown in Europe might have an indirect impact on China’s export. China could boost consumption growth and roll out stimulus plans to help achieve its long-term objective of deleveraging as well as its short-term economic growth target for 2022 set at around 5.5 percent.

Predicting the Russia-Ukraine conflict’s potential impact on globalization, Rhee wrote in a recent IMF blog that it “may fundamentally alter the global economic and geopolitical order should energy trade shift, supply chains reconfigure, payment networks fragment, and countries rethink reserve currency holdings.”

“Increased geopolitical tension further raises risks of economic fragmentation, especially for trade and technology… I really hope that it’s not happening that way, so that Russia and Ukraine have to resolve this issue quickly. I hope that globalization can continue,” Rhee said.

Noting that a setback for globalization would mean higher costs and smaller trade flows, Rhee stressed that trade is a great engine for growth. “The more people exchange, there are more ideas and more technology development. I hope that multilateralism prevails,” he added.