By Anthony Marcus, for Eurasia Business News – May 23, 2022

At the opening of the World Economic Forum in Davos, the International Monetary Fund (IMF) warned of the risks of “geo-economic fragmentation”, which would threaten many countries with additional costs. To prevent disintegration, the IMF calls for reducing trade barriers and the debt burden, as well as developing an international public digital platform that could replace the current system of cross-border payments – too expensive for remittances.

As politicians and business leaders head to Davos, the global economy is facing perhaps the most serious test since World War II,” said IMF Managing Director Kristalina Georgieva, her first deputy, the influent economist Gita Gopinat, and the fund’s director of strategy, policy and analysis, Ceyla Pazarbashioglu, in an article released on Monday. Their speech is timed to coincide with the opening of the World Economic Forum in Davos, which will last until May 26. The theme of the forum, held in person for the first time since 2020, is designated as “History at a Turning Point: Strategies for Governments and Business“.

IMF leaders note that the conflict in Ukraine has exacerbated the negative consequences of the coronavirus pandemic, which would have lead to a decrease in economic growth and an increase in inflation worldwide.

The euro area annual inflation rate stood at 7.4% in April 2022, stable compared to March, when it hit record high 7.5%. In February, inflation hit 5.4%. A year earlier, registered annual inflation was only 1.6% in the euro zone. The annual inflation rate in the European Union stood at 8.1% in April 2022, compared to 7.8% in March. A year earlier, it was 2.0%.

On the other side of the Atlantic, the U.S. annual inflation hit 8.3% in April, slowing down from previous figure, when inflation reached record 8.5% in March on annual terms, after 7.9% in February. This remains a high level of inflation never seen in the United States since April 1981 and the dynamic has been here for months. U.S. inflation already reached 7.5% in January after hitting 7% in December 2021, 6.8% in November and 6.2% in October.

At the same time, high energy and food prices negatively affect households around the world, and rising rates complicate debt servicing.

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Tensions over trade, technology standards, and security have been growing for many years, undermining growth—and trust in the current global economic system. Uncertainty around trade policies alone reduced global gross domestic product in 2019 by nearly 1 percent, according to IMF research. And since the war in Ukraine started, our monitoring indicates that around 30 countries have restricted trade in food, energy, and other key commodities.

The costs of further disintegration will be extremely significant, and for all categories of the population, regardless of income level, warned the IMF. The fund assessed that technological fragmentation can lead to a loss of up to 5% of GDP of individual countries.

The IMF calls for restoring confidence in the global system, adhering to four principles. The first principle is to reduce trade barriers to combat shortages and to reduce the prices of food and other goods. The second is the reduction of the debt burden, including in developing countries. The third principel is the modernization of the system of cross-border payments. This role is now performed primarily by SWIFT – the average cost of an international transfer is 6.3% of the amount, and the cost of intermediaries reaches $ 45 billion per year, according to the IMF. Instead, the IMF proposes to develop a public digital platform – a new element of the payment infrastructure with clear rules, minimal costs for transfers, maximum speed and security of operations. The same platform could unite the digital currencies of different countries. The fourth principle of the IMF is to strengthen the climate agenda and the “green transition”.

The OECD data that came on Monday indirectly confirm the fears of the IMF.

The GDP of the developed countries in the first quarter of 2022 increased by only 0.1% (quarter-on-quarter) after growing by 1.2% in October-December 2021. In annual terms, the growth was 4.2% (in the fourth quarter of last year – 4.9%).

In the G7, quarter-on-quarter GDP growth turned negative in Q1 2022, falling by 0.1% compared with an increase of 1.2% in Q4 2021. The G7 result in the first quarter of 2022 reflects negative GDP growth in the United States (minus 0.4%), Italy (minus 0.2%) and Japan (minus 0.2%), as well as zero growth in France and weaker positive growth in the United Kingdom (0.8%) and Canada (1.4%) than in the previous quarter. Germany was the only G7 country where the pace of growth increased, with GDP growth of 0.2% in the first quarter of 2022 compared with a contraction of 0.3% in the previous quarter.

A key factor in the slowdown in economic growth was supply shocks. At the same time, if the UK has already reached a GDP level higher than it had before the coronavirus pandemic (in the U.S., France and Canada this happened last year), then in Germany, Italy and Japan the indicator is still below this threshold.

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The global economy has been shaken since February 24, when Russia launched a military operation, with the official goal to “demilitarize Ukraine”, remove the Ukrainian government headed by the President Volodymyr Zelensky and protect the rights of Russians living in Donbass, Eastern Ukraine, a region hit by the war since 2014. In a televised address to Russian citizens, President Vladimir Putin stated that circumstances “require decisive and immediate action from us, the people’s republics of Donbass  have asked for help.” 

The Kremlin continues voicing that Moscow’s plans do not include the occupation of Ukrainian territories. The Russian goals would be “demilitarization and denazification” of the country. Moscow also wants Ukraine to return to its neutral status, which was enshrined in the Ukrainian Constitution until 2014 and to offer guarantee of not holding on its territory nuclear weapons.

Read also : How will Russia respond to Western sanctions ?

Ukraine and its Western partners sees the Russian military operation as an invasion and imposed strong strong sanctions against Russian state officials, banks, companies and oligarchs, to put pressure on the Russian government and lead it to a ceasefire and a withdrawal from Ukraine.

Every week since February 24 the United States and its Allies have jointly taken restrictive measures against Russian banks and companies, individuals, the central bank of Russia and banned the import of several Russian goods and services. On March 8, U.S. President Joe Biden signed an Executive Order (E.O.) to ban the import of Russian oil, liquefied natural gas, and coal to the United States.

Since April 1, the Russian government has forced Europeans to pay for their gas purchases in rubles. To do this, European states and energy operators created double accounts, in euros and rubles. In total, “54 companies” from abroad are linked by contract to the Russian energy giant, Gazprom, according to the Russian Deputy Prime Minister Alexander Novak. On this, “about half have already opened special accounts in our bank (…) to allow the transfer in foreign currency, their conversion into rubles and the payment of gas supplied in rubles,” he added, Thursday, May 19, quoted by the national news agency RIA Novosti. The “final list” is expected “in the coming days”.

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