The Russian invasion of Ukraine has entered its 79th day and the world has become a more uncertain place than it has ever been in the last 80 and more years.

This invasion will not only have destroyed the Ukrainian economy by the end of it, irrespective of how it ends, but it will also have weakened Russia. The full impact of the sanctions imposed on Russia by the EU and the US will not be felt immediately, but in the months and years to come. Added to this is the increasing rate of inflation. Part of this may have been brought about by the Russian invasion of Ukraine and the disrupted supply chain of staple products such as wheat, or the boycott of Russian gas by EU member states.

However, in the main, this increase in the rate of inflation is due to the money that was pumped by most governments into the economy of their countries to counteract the economic slowdown caused by the coronavirus. The result of this inflation will be an increase in interest rates which will heighten further the uncertainty. Moreover, while EU member states have learnt how to live with the coronavirus and manage it, there are other countries that are still in crisis mode. Even if EU member states have learnt how to manage the coronavirus, the level of indebtedness of governments, businesses and individuals has increased significantly.

The increase in interest rates will bring families and persons all over the world to their knees as real incomes have remained fairly static over the last 10 years. It will spell disaster for businesses that may be facing a great need to generate cash profits to pay back loans while, at the same time, they would be facing a lower demand. Governments will also be cash-strapped as their cost of borrowing could increase significantly and we would be facing once more the risk of a sovereign debt crisis.

The increase in interest rates will bring families and persons all over the world to their knees as real incomes have remained fairly static over the last 10 years

With this dangerous cocktail of increased rate of inflation, increased interest rates and relative increase in the cost of borrowing, increased indebtedness, reduced demand, and impact of the coronavirus and the effects of the Russian invasion of Ukraine, the question is who will buckle first under such economic pressures? And once someone buckles, will there be a domino effect?

Will we end up in a global debt crisis engulfing several governments, businesses and people? Would this lead to a deeper economic crisis than the one we had post the 2007 financial markets crisis? To what extent have the foreign reserves of developing economies been depleted over the past years? If they have been depleted significantly, they may not have the capacity to import food, fuel and other essential supplies, thereby weakening their economy further.

The possible solution could be a bailout by the World Bank. However, very often, that would require economic reforms that would impoverish the population even further. As such, the issue cannot be resolved purely from an economic perspective. It will require statesmanship, which may be lacking nowadays.

What could be the impact on Malta? The Russian invasion of Ukraine may seem to be distant from us. We seem to have handled the coronavirus well. However, indebtedness could be a problem. We have grown accustomed to easy money, thanks to low interest rates, and we have grown accustomed to low unemployment, thanks to strong economic growth. The current international situation and its impact on Malta will be a challenge which may require us to adopt a different mindset.