According to experts, the sanctions on Russia may cause the world economy to be divided into geopolitical blocs.
In a report released on July 26, the IMF expressed concern that Russia's military intervention in Ukraine and the ensuing Western sanctions against Moscow could cause geopolitical fragmentation of the world economy.
The paper warns that the possibility of the international economy becoming divided into geopolitical blocs with different technology standards, cross-border payment systems, and reserve currencies poses a severe risk to the medium-term picture.
The IMF claims that such a division would inhibit the international community from working together to address global issues.
The authors researchers caution that fragmentation "may also reduce the efficacy of international collaboration to address climate change, with the additional risk that the current food crisis could become the norm."
According to the research, the conflict in Ukraine and its effects have made conventional economic and financial risks worse. At the moment, these concerns include the impact of tighter monetary policy, sluggish Chinese economic development, and rising energy prices.
Nevertheless, the paper claims that there is currently "little evidence of reshoring," or trade deglobalization and that overall, "global trade has been more resilient than projected since the onset of the [Covid-19] pandemic," which is encouraging.
However, the IMF forecasts that tightening sanctions against Russia will eventually lead to a decline in the country's oil exports to the world market and a "decline to zero" in its gas exports to Europe. This, in turn, would raise global inflation expectations and tighten financial conditions as governments try to contain rising prices.
"Under this scenario, the shock would hit nearly all countries, albeit to varying degrees, due to higher global commodity prices and tighter monetary and financial conditions. With near-zero regional growth in 2023, Europe would be particularly impacted in this scenario, according to the IMF.
Despite the costs of tighter monetary policy, economists claim that "taming inflation should be the main priority for policymakers" because "delay will simply compound [the expenses]."