Impact of Russia-Ukraine War on the Global Economy
By Sanyukta Mandal
Russia’s attack on Ukraine threatens to inflict severe economic damage on some countries and industries- damage indicating hardships for a huge population.
Russia is the world’s 3rd largest producer of petroleum and a major exporter of natural gas. Ukraine’s farms feed millions around the world.
Russia’s attack could slow Europe’s economic recovery by increasing already elevated energy prices. Russia contributes to 40% of Europe’s natural gas. A cutoff of that energy source could undercut the continent’s economy, where gas prices are already crushing households, especially low income ones.
Being the world’s 5th largest wheat producer, Ukraine’s eastern farms and exports through Black Sea ports are threatened which could result in reduced wheat supplies amongst already skyrocketing food prices.
Financial markets could grow even more chaotic if the US proceeds with what some call the “nuclear option”, cutting Russia out of the SWIFT payment network (a messaging service that links thousands of banks and allows them to transfer payments around the world). Such a move would isolate Russia and bar the transfer of profits from energy production, which account for more than 40% of the country’s revenue.
It also had an impact on Indian financial markets. The BSE Sensex is down to its lowest level to 52843 from a peak of 61766. The NSE- Nifty is down to 15863 from a peak of 18477. Investors have lost millions of wealth due to the market gyrations arising out of brewing conflict.
Russia’s attack on Ukraine and retaliatory sanctions from the West may not portend another global recession. The two countries together account for less than 2% of the world’s gross domestic product. And many regional economies remain in solid shape, having rebounded swiftly from the pandemic recession.
Ukraine’s financial markets are in a precarious spot as central banks prepare to reverse years of easy-money policies and raise interest rates to fight a resurgence of inflation. Those higher rates will likely slow spending and raise the risk of another downturn.
World Bank also pointed to the global impact on services trade as outbound travel was disrupted with airspace closures, travel restrictions, sanctions and increased fuel prices. Russia and Ukraine are among the top 10 countries for total global departures and a key source of revenue for tourism-reliant countries in the Europe, East Asia and the Pacific, Middle East, North Africa and South Asia.
The war is likely to stall the post-pandemic recovery in international tourism, which was already anaemic from ongoing COVID-19 disruptions. A further intensification of geopolitical tensions could trigger a renewed decline in international tourism, which would likely be akin to the sharp fall and subsequent weak recovery from 9/11,it noted.
Energy is the “main spillover channel” for Europe, with Russia being a prominent provider of natural gas. The World Bank noted that the price rise for European natural gas have been particularly sharp because of their limited spare capacity, including that of import and export terminals, and the constraint that natural gas must be transported as liquified natural gas.
The World Bank’s baseline projection assumes Ukraine’s poverty, based on the $5.50 per day threshold rate, will increase from 1.8% in 2021 to 19.8% in 2022. It added that models developed by from the United Nations suggested that a more severe and protracted war could lead to poverty affecting nearly 30% of the population. Quoting estimates from authors of a Centre for Global Development blog, the World Bank said the latest surge in food prices could push an additional 40 million people under the $1.90-per-day poverty line.
Ukraine is the world’s fifth-largest wheat exporter, agricultural analyst Alex Smith wrote last month in the journal Foreign Policy, and many of the countries that rely on its wheat “already face food insecurity from ongoing political instability or outright violence”. Yemen, for instance, imports 22% of its wheat consumption from Ukraine, Libya about 43%, Lebanon roughly half.
Rising energy and food prices will intensify the inflationary pressures that policymakers and central banks are struggling to ease. In the estimation of Capital Economics, a worst-case scenario of an escalating conflict and sanctions could send oil prices up to as much as $140 a barrel — international Brent crude had surged above $100 on Thursday after Russia attacked Ukraine — and force natural gas prices up, too.
With inflation running hot, central banks may have less leeway — or inclination — to ride to the rescue with stimulus if the economy sputters in the face of the military conflict in Ukraine.
