Central bankers are delving into their atlases again.
After global monetary policy was shaped in recent years by debt turmoil in southern Europe and an earthquake in northern Japan, the focus is falling on Ukraine, which accounts for just 0.4 percent of the world economy.
Most officials and economists say for now that the standoff in Crimea bears watching rather than reacting to as they maintain their forecasts for growth and monetary-policy stances. That could change if commodity prices or financial markets start to slide, with Russia already raising interest rates and Poland potentially rethinking its aversion to the euro.
“We should watch this situation with great attention and being aware that it’s not only monetary-policy decision-making that’s at stake, but also a broader issue that may have an impact on the economy,” European Central Bank President Mario Draghi said in Brussels on March 3.
Central bankers are on the alert just weeks after a market selloff in emerging economies raised fresh concerns the international economic expansion could falter. German stocks were among those to whipsaw this week on diplomatic developments as forces squared off in Crimea amid the worst standoff between Russia and the West since the end of the Cold War in the early 1990s.
“It’s something I’m watching really carefully for potential implications for growth,” Federal Reserve Bank of Richmond President Jeffrey Lacker said in New York on March 4. “So far commodity markets seem to absorb the news reasonably well.”
San Francisco Fed President John Williams said yesterday he doesn’t see the crisis in Ukraine posing a risk to the U.S. economy for now.
“Ukraine is a very small economy,” Williams said to reporters after a speech in Seattle. Still, “you’ve got to be thinking, what are the implications if this gets much worse, or if this starts to spill over to other regions,” he said. Williams and Lacker don’t vote on policy this year.
Bank of Japan officials don’t see a need to revise the outlook for their economy at present, though they will re-examine it if tensions mount and begin to have an impact on trade, according to people familiar with the Japanese central bank’s discussions, who asked not to be named as the talks were private.
The Bank of Canada yesterday cited Ukraine in explaining its decision to keep its main interest rate unchanged, saying the tensions “have added to geopolitical uncertainty.”
While Ukraine’s $180 billion economy is too small to wield a direct impact on global growth, potential channels of contagion for policy makers to monitor include trade, banking, exchange rates and shipments of natural gas to the European Union.
Ukraine is set to be the world’s third-largest corn exporter this year, and sixth for wheat shipments, according to the most recent estimates from the International Grains Council.
The most exposed economy in central and eastern Europe is Poland which sells 9 percent of its exports to Ukraine and Russia, followed by Turkey and Hungary at 6 percent each and Romania at 5 percent, according to Royal Bank of Scotland Group Plc. Among larger economies, Russia accounts for 0.7 percent of U.S. exports and 4.6 percent of the euro area’s, including 3 percent of Germany’s.
As for banks, 6 percent of Austria’s foreign claims are tied to Russia and Ukraine compared with 4 percent of Italy’s and 2 percent of France’s, RBS estimates. JPMorgan Chase & Co. calculates that European banks have 56 billion euros ($77 billion) of exposure to Russia and 15 billion euros to Ukraine, where Raiffeisen Bank International AG of Austria and France’s Societe Generale SA have the biggest ties.
Fallout in the energy markets may pose a greater threat. As well as being the EU’s biggest provider of oil and coal, Russia supplies about 30 percent of Europe’s natural gas and five of the 12 pipelines that deliver it pass through Ukraine, JPMorgan says.
Oil prices could climb by as much as 10 percent if sanctions are imposed or supply disrupted, potentially crimping Europe’s economic recovery, according to Jonathan Loynes, chief European economist at Capital Economics Ltd. in London.
Russia’s central bank is already reacting to the crisis, raising interest rates this week the most since 1998 as the ruble slid to a record low. The $2 trillion economy decelerated for a fourth year in 2013.
The Polish central bank yesterday left its benchmark rate at 2.5 percent and Governor Marek Belka said the Ukraine turmoil sped up a decision to say rates should stay unchanged until at least the end of the third quarter.
In a sign the skirmish could still reshape Europe’s economy, Belka said March 3 that Poland may need to reconsider its skepticism toward adopting the euro. The country ditched plans to join the single currency in 2012.
Draghi and fellow ECB officials convene today with inflation still half their target of just below 2 percent. While the Ukraine crisis may add to reasons to ease monetary policy, the risk of higher energy costs could fan inflation concerns, said Nick Beecroft, the London-based chairman and senior market analyst at Saxo Capital Markets U.K. Ltd.
If the crisis endures, it may make it even more likely that emerging-market central banks have to tighten monetary policy to maintain the faith of investors, said Roberto Perli, a partner at Cornerstone Macro LP in Washington. Brazil, India and South Africa have already acted this year amid financial-market selloffs as the one-time drivers of global growth turn to drags.
“The situation, if it worsens, puts even more downward pressure on already weak currencies, which the central banks will feel compelled to defend to prevent more inflation problems and further capital outflows,” said Perli and colleagues in a March 3 report to clients.
For the U.S. Federal Reserve and other developed-nation central banks, the focus will be on ensuring liquidity is available to their financial systems rather than switching policy course, he said.
“The Ukrainian situation has not reached the level where major developed-world central banks will feel compelled to intervene at a macroeconomic level,” said Perli, a former Fed economist.