The Russo-Ukrainian conflict has been ongoing since 2014, a time when Russia annexed Crimea and backed the separatists in Donbas. On February 24, 2022, the conflict escalated as Vladimir Putin launched a full-scale attack on Ukraine.
Conspiracies about a third World War and an inexplicable sense of anxiety has gripped a world that is just recovering from the turmoil of the pandemic. Putin’s decision to recognise the independence of two pro-Russian breakaway regions in Eastern Ukraine resulted in a “special military operation”. Within minutes, a dozen Ukrainian cities including the capital Kyiv were targeted with missile strikes. The war rages on till today.
The human toll of this political move is immeasurable. No motive can justify the trauma, death and destruction. But, looking past humanitarian concerns, what does it mean for the global economy? Let us take a look.
Considering the globalised world that we live in, the effect of this war will extend far beyond the realms of Europe. With nations imposing sanctions on Russia and boycotting trade, the value of the Russian ruble has fallen to an all-time low of less than a cent of USD. Switzerland, famously neutral in the World Wars in 1914 and 1939 has ditched neutrality to sanction Russia and Putin. Swiss banks have announced that Russian assets will be frozen. Many Russian banks have also been cut off from inter-bank payment systems such as SWIFT.
These sanctions are bound to have its repercussions. Russia is a dominant supplier of gas to many European nations through several vital pipelines. Europe gets nearly 40% of its natural gas and 25% of its oil from Russia. It is likely that Europe will be walloped with spikes in heating and gas bills in the months to come. The sudden disruption in supply has also resulted in what is called ‘commodity shock’ which directly results in soaring prices, globally. The threat of war alone caused prices at the pump to rise in recent months.
Besides gas, Russia and Ukraine are considered the bread-basket of the world. Together, they account for nearly one-third of the world’s wheat market. They also export about 19% of world corn supply, and a whopping 80% of sunflower oil exports. With the war putting these in jeopardy, food supply chain is bound to get hit quite hard.
For instance, for both Egypt and Turkey, nearly 70% of their wheat import comes from this chain. This will cause further stain on Turkey’s economy which is already battling inflation close to 50%. Food shortages in Lebanon or a few African nations which depend on Ukraine for more than half their wheat imports could stoke larger issues of scarcity and social unrest. The burden of war continues to fall on the most vulnerable.
Nearly 70% of India’s crude edible oil demand is met through imports. It is therefore expected that prices of edible oil, especially sunflower oil will be hiked in the weeks to come. With an integral commodity like food being hit, it is natural that prices of other commodities will increase, exacerbating consumer and producer prices.
As the world recovers from the pandemic quite rapidly, raw materials and other components of manufacturing are zooming across the world to meet consumer demands. With war-time, it means overwhelmed ports, freight management and delays, again resulting in increasing prices.
Russia is also the largest exporter of palladium, used in automotive exhaust. With rising fears that Russia might be cut off from global markets, the price of palladium has already begun to soar. This, combined with rising oil prices and shortage of semiconductors and chips (which are being diverted to war machinery), adds to the industry’s woes.
Despite Russia’s gargantuan size, it is a relatively minor player in the global economy, say experts. Harvard economist Jason Furman calls it “a big gas station.” Unlike China which has intricately woven itself into almost all supply chains, war in Russia would only affect the few nations that are heavily dependent on it. The effect unfortunately on these nations might be crippling. It also means increased pressure on the Middle East to balance out the oil shortage. In the long term, it will push Europe to diversify and further globalise its imports and exports. Russia will be forced to rely more on trade and financial links with China. The complete impact of the Ukraine crisis on the global economy is yet to be seen, but it will be a defining moment in reshaping it.
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