Russo-Ukraine War: Gauging the Impact on Global Economy

By IndraStra Global Editorial Team

Cover Image Attribute: A damaged administrative building after a Russian shelling in downtown Kharkiv on March 1, 2022. | Source: Sergey Kozlov—EPA-EFE/Shutterstock/Flickr

The global economy has suffered a significant setback due to Russia's military intervention in Ukraine. This crisis is unfolding when the world economy is still recovering from the pandemic. Even before the war, inflation rose in many nations due to supply-demand mismatches and official support during the pandemic, forcing monetary policy tightening. The latest Chinese lockdowns may trigger new bottlenecks in global supply networks.

In this scenario, the war will negatively influence economic development and inflation and its immediate and sad humanitarian consequences. As a result, financial risks have increased significantly, and policy tradeoffs have grown increasingly complex.

In 2022 and 2023, we now expect the global economy to expand at a rate of 3.6%, which is a decrease from the International Monetary Funds' January projection. It is a direct result of the war in Ukraine and the sanctions imposed on Russia, with both nations expected to endure sharp economic contractions. In addition, due to the indirect consequences of the conflict, this year's growth estimate for the European Union has been lowered by 1.1 percentage points, making it the second most significant contribution to the total downward revision.

This war is the latest in a series of supply shocks that have afflicted the global economy over the past few years. Its repercussions spread far and wide, much like seismic waves, through commodities markets, international trade, and financial interconnections. For example, Russia is a crucial provider of certain commodities such as oil, gas, metals, wheat and corn, and Ukraine. Reduced availability of these "certain commodities" has resulted in a significant increase in their prices. Currently, commodity markets are getting affected by the war in two ways: first, by the physical impact of blockades and the loss of production capacity, and second, by the impact on trade and output as a result of sanctions. 

Exporters of commodities in Europe, the Caucasus and Central Asia, the Middle East and North Africa, and sub-Saharan Africa are the most adversely affected countries. However, the most significant impact is seen in the European Union (EU) and several Emerging Markets and Developing Economies (EMDEs). Currently, the EU imports a substantial portion of its energy from Russia, including natural gas (35%), crude oil (20%), and coal (40 percent). On the other hand, Russia relies on the EU for its exports, with over 40% of its crude oil and natural gas. Furthermore, several EMDEs rely primarily on food imports from Russia and Ukraine. Therefore, the rise in food and fuel prices will hurt lower-income households worldwide, particularly in the Americas and the rest of Asia.

Several major oil corporations have started terminating business in Russia, and many energy traders are boycotting Russian oil. In addition, following the beginning of the invasion, the price of Urals (the Russian oil price benchmark) plunged to more than $30/bbl below the cost of Brent oil. Long-term, the exit of oil companies from Russia and decreased access to investment and technology are anticipated to impact the nation's energy production severely. As a result, despite a contracting economy and interrupted supply lines, experts predict that Russia's inflation rate, which measures the rate of change in the cost of living, will reach at least 20 percent in 2022.

Besides that, Eastern Europe and Central Asia have substantial direct commercial and remittance ties with Russia and are anticipated to suffer more and beyond. In addition, the internal and external displacement of 10 million Ukrainians within Ukraine and in neighboring nations, particularly Poland, Romania, Moldova, and Hungary, exacerbates regional economic difficulties. 

Right now, we all need to focus on forward-looking uncertainty measures that are available in near real-time. For example, the current levels of uncertainty due to the rise in "demand" and "inflation"; may be driven by the heterogeneous nature of the Russia/Ukraine shock. But, its' implications are still unclear, although the consequences of a "protracted conflict" will likely have adverse effects on multiple economic outcomes. 

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