Moscow. November 3. INTERFAX - Events in the Middle East are being discussed in the world not only in connection with their military component, but also, perhaps, economists are following them with no less attention.
Our special correspondent Vyacheslav Terekhov talks about the impact of these events on the world economy with Vladimir Milovidov, Deputy Director for Scientific Work of the Primakov IMEMO, Head of the Department of International Finance at MGIMO.
War and the prospects of the world's economies!
- If you look at the forecasts of various agencies about the impact of these events on the global economy, you can't help but notice that they differ dramatically. For example, the economic growth rate in developed countries will decrease by only 0.7 percent, and in the Middle East and North Africa by as much as three times - up to 6 percent. The Middle East is the center of events, and is it possible that the economies of developed countries are so independent of events in this region of the world?
- All forecasts, of course, are still very preliminary. Here it is necessary to divide the consequences from the particular to the general. Bloomberg published his estimates for three scenarios: a local conflict (only Israel and Hamas are involved, possibly the West Bank, that is, Palestine; a proxy war, when other paramilitary groups that operate in the West Bank, Lebanon, possibly Syria, Yemen, and finally a direct regional war, that is, the Israel-Iran conflict. In all three cases, the consequences for the global economy are different.
The price of oil varies in the range from $ 4 to $64 per barrel. This one, as well as forecasts for all other financial and economic indicators, are very simplified, and either underestimated or overestimated somewhere.
- This is understandable, since military operations are still ongoing and it is unknown how events will develop further.
- It should be borne in mind not just some short-term effect, but what consequences this conflict may lead to. Therefore, I would adhere to a different classification: the prospects of the Israeli economy, the prospects of the regional economy and the prospects of the world economy.
Each level has its own most significant factors.
Damage to the Israeli economy
- Let's start naturally with Israel. Israel's economy has already suffered serious damage. As reported, 350 thousand reservists are called up in Israel, which is about 8% of the active workforce. Another 200 thousand Palestinians work in Israel, they too have dropped out of active economic activity due to military operations, border closures. Consumer demand is falling sharply, domestic trade and the catering sector are declining. Moreover, the Palestinians are mainly employed in these sectors, both in their enclaves and in Israel itself. According to the Palestinian Authority's Bureau of Statistics, 73% of working Palestinians are employed in trade and services. Officially, the forecast for Israel's GDP has already been revised from 3 to 2.3%, there are J.P.Morgan Chase estimates of an 11% drop in GDP.
The Israeli economy in terms of foreign economic relations is very interesting. The country has a negative trade balance (imports exceed exports), but the balance of payments is positive due to the items for which financial resources come to Israel: these are, for example, services, tourism, income from investments abroad. Since 2005, if we take the OECD statistics as a basis, the total outgoing flow of Israeli direct investment has been approaching $ 130 billion. In addition, Israel is strong in the field of computer technology, which allows you to earn income in the form of royalties. Foreign investments are also steadily flowing directly into Israel. Their annual inflow has increased more than 5 times since 2005 and, according to my estimate, by the beginning of the conflict amounted to about $ 250 billion. Naturally, the current war will radically change the situation.
- It is impossible to talk about the Israeli economy in isolation from the influence on it and formally one of the components of Israel – Palestine!
- I agree. Let's not forget that although Palestine (both parts of it) are formally one state with Israel, the Palestinians have their own administration, their own economic institutions, and laws. However, although the two economies are inextricably linked, intertwined, but at the same time they are radically different. Moreover, the Palestinian territories themselves differ. For example, according to the World Bank, unemployment in the West Bank is 13%, and in the Gaza Strip – 45%. The unemployment rate among young people (15-29 years old) is 20% and 61%, respectively, and in Israel unemployment is 3%. With the deterioration of the economic situation, these imbalances will only increase in the future and increase the level of internal conflict.
Therefore, it can be concluded from here that in the regional context, even with a local internal war, the problems of Israel, as one of the most developed countries in the region, will be very sensitive. However, it is probably not worth extrapolating this influence to the whole of North Africa yet, and negative assessments seem to me exaggerated.
Egypt is without gas and is waiting for an influx of refugees from Gaza
- There is another important player in the region - Israel's neighbor – Egypt.
- From a military-political point of view, I do not undertake to comment. On the economic side, Egypt is already suffering, for example, from a disruption in gas supplies for LNG plants and terminals. Some analysts call Iran, Israel and Cyprus a kind of gas hub. Egypt is a major exporter of LNG, so the war in Israel directly affects it. While Egypt is holding back the influx of Palestinian refugees, but as the conflict deepens, the situation may change. And the influx of refugees from the Gaza Strip can negatively affect both the economy and the social sphere of Egypt, and hence the political situation.
A serious decline in the world economy is hardly worth waiting for
- We have considered the impact of military operations on the economy of the region in which they occur. And how do they affect the entire global economy?
- The impact of Israeli problems on the entire world economy is even less pronounced. By the way, the share of Israeli products in the total imports of the rest of the world is 0.3%. Of the developed countries, the share of Israeli products in the purchases of Cyprus is the largest.
The basis of imports from Israel are petroleum products. Israel's largest partners are the United States and China. At the same time, diamonds are the most important export item to the United States, and microchips to China. Israel connects technological exports with Europe. But, as in the USA and China, the share of Israeli products in total import purchases can be said to be negligible, significantly less than 1%.
Israel supplies fertilizers to Brazil, petroleum products to Turkey, and fruit and vegetable products to Russia. But all these supplies are not critical. Therefore, it is hardly worth expecting serious drops in GDP in the world, probably based on these data.
There is a lull in oil so far…
- This region is inextricably linked with the problems of oil and gas supplies to the world. If there are any, will OPEC + and Russia support the market?
- Yes, it is oil that is the likely trigger of the global crisis in the event of an escalation of the conflict and its transition to the stage of Israel's war with Iran.
So far, the oil market does not react strongly to the events taking place. If we take the period from the beginning of 2023, then the maximum price for Brent fell in mid–September - about $ 95 per barrel. Now the price is at around $ 86, almost the average annual level, maybe a little more.
In this regard, OPEC+ intervention is unlikely. Another thing is that the largest oil countries in the region will also experience similar effects of the conflict. 50 years ago, the answer was the oil embargo against the United States, which triggered the world economic crisis of 1973-1974. Now the effect of such an embargo, and sometimes they talk about it, will still be significantly lower. At that time, the United States was a net importer of energy and gas and oil. Now the USA is one of the world's largest producers of hydrocarbons. They are ahead of Saudi Arabia in oil production: they have 20 million barrels of oil per day, and the Saudis have 12.
Therefore, there is a lull in oil so far.
...and there are problems with gas supplies!
- There remains natural gas!
- There are problems with natural gas, since Israel has the Tamar, Leviathan and Karish gas fields offshore. Thanks to these fields, Israel supplies gas to Jordan and Egypt, being a major regional player in the gas market. Shevron, as the operator of the Tamar field closest to the Gas sector, stopped production on October 7. This caused a jump in gas prices in the world by more than 40%. But even with this in mind, it is still difficult to talk about the growth of negative processes. The markets are quite competitive, another thing is that after their restructuring in 2022, due to anti-Russian sanctions, any even small volumes of gas supplies can greatly destabilize the market. Let's not forget that it's coming to winter and there are no free resources or there are very few of them.
Given the situation in Europe, where there is actually a recession, the destabilization of the gas market may worsen the situation and prolong stagnation.
The most negative scenario for the world economy depends on Iran!
- After all, all calculations are made, as I understand, based on limited military operations in this region. But Iran threatens to enter the war under certain circumstances. Will this greatly change the picture of the economic situation in the world?
- Perhaps this is the extreme and most negative scenario. In fact, Iran's direct involvement in the confrontation between Israel and the Palestinians can also become a catalyst for a global conflict involving the United States, possibly Europe.
Here the forecasts are the darkest... Iran is now considered the third OPEC member in terms of oil production. Current production is about 3 million barrels per day, despite the fact that all OPEC countries produced, according to the end of September, 28 million barrels per day. If we take all OPEC+ countries, their production during this period amounted to 43 million barrels per day. The total oil supply in the world averages 100 million barrels per day.
This is a significant share, given the actual equality of supply and demand with the probability of outstripping growth of the latter. Moreover, if Iran enters the war, the cross-border conflict will not be limited to them alone, since Israel does not have a common border with Iran. Obviously, Iraq will also be affected, and this is another 4.3 million barrels of oil per day. The whole situation in the Persian Gulf is being destabilized: the strategically important Strait of Hormuz may actually be blocked. That is, the Israel–Iran war, and if it starts, the direct participation of the United States in it should not be excluded, can turn off up to 13% of the volume from the world oil market. So much is produced today together with Iran, Iraq, Kuwait, the UAE. It will be a global cataclysm.
Bloomberg predicted an increase in oil prices by $64 in the Israel-Iran war scenario, that is, to about $ 150 per barrel. I think this is an underestimate.
The war in the Middle East – what is the fate of transport corridors?
- In addition to oil and gas, projects of global transport routes also depend on the region. What will happen to them in the event of a protracted war? Are all these projects, roughly speaking, flying? And these are the projects of the India - Middle East–Europe transport corridors, the Chinese "One Belt, One Region". And what will be the fate of the North-South project with the participation of Russia, Iran and nine other countries?
- In the worst-case scenario, the issue of transport corridors will acquire completely different dimensions. Still, I would not use the word "fly". The current projects have their objective reasons: the growing interconnection of countries, the risk of artificial barriers, such as the United States and Europe are building, imposing sanctions, the risk of military conflicts.
There is such a scientific concept – the center of economic gravity. This is a certain point on the map that reflects the conditional balance of global trade volumes and regional economic development. So for the past 50 years, it has been steadily shifting towards Asia, although in the 50s it was in the Western Hemisphere. Naturally, the interdependence of Asian economies is growing, so the construction of transport infrastructure will inevitably continue.
The issue of control over transport corridors is on the agenda!
- So the life of global transport projects does not depend on the war in the Middle East?
- Now the question will be different. Returning to the potential conflict in the Middle East, this is not a question of stopping the creation and development of transport corridors, but a question of controlling them.
In a big way, the current geopolitical events are built around this. Only when we turn to the logic of spatial development and the linking of Asian regions, there is no longer a question of oil or gas, Iran or Israel. There are other players here, whose role, it seems to me, the Americans do not fully take into account. These are China and Russia. And our countries are extremely interested in strengthening, so to speak, the "connectivity" of Asian countries (the connection of individual parts of the system and their interaction – IF).
It is impossible to underestimate the role of China and Russia in this issue, as life shows.
