The escalation of tensions between Russia and Ukraine has created cause for the global economy to be concerned. These countries are major producers of energy, food grains and other essential commodities, this will further affect the prices, supply and stock markets globally. Although it is unlikely to result in a global recession as the aggregate Gross Domestic Product (GDP) of Russia and Ukraine is below 4%, as per the world economics. However, certain countries like Yemen, Libya, China, Australia, India and other Asian countries may face the repercussions of the war.
European countries import over 40% of natural gas from Russia. If the supply is cut off, the economy will have to deal with increased natural gas costs. “Oil briefly climbed past $100 a barrel for the first time since 2014, while European natural gas jumped as much as 62%,” reported Bloomberg. As natural gas and oil are used in households, people will have to combat the hiked prices soon.
As a result of the high cost of natural gas, industries which use fertilisers and heavy industries have had to control the production. This has added to the tension of the stock markets as the central banks had decided to increase the interest rates and overthrow the cheap money policies to keep a check on inflation. However, this is likely to end up in a recession as shortage in supply of energy, monetary uncertainty, high interests and lesser spending capacity results in depression of the economy.
As expected, “in January, annual inflation in the 19 euro-area countries reached 5.1 percent, the highest level since records began in 1997,” reported by Bloomberg.
There is a possibility that Russia may not stop or reduce the exports to Europe, however, it will still get affected as several gas pipelines go through Ukraine. "They could simply be casualties of a military invasion," reported NPR.
After Russia launched an attack on Ukraine, the western countries have resolved to “punish” them. USA President Joe Biden has decided to target Russian banks by issuing sanctions that will affect their ability to trade in dollars.
“The sanctions include penalties on five banks, including Russia’s biggest lender Sberbank, with $1 trillion in total assets. Export controls will limit Russia’s access to high-tech products, and personal sanctions targeted the country’s elite,” stated Joe Biden, USA President.
Analyses suggest that these sanctions could affect the financial systems for US banks. Therefore, their focus should be on preserving growth. However, a weak economy is suspected in the future due to expected inflation.
It has also been speculated by media reports that the USA may consider using the “nuclear option” to stop Russia which may further impact the global economy.
Another major consequence is cyber attacks by Russia in retaliation to these sanctions. Federal agencies and the Department of Homeland Securities have anticipated Russia’s possible cyber attacks after they had undertaken a similar strategy against Ukraine in 2015-2016, stated by NPR.
In a research report written by Soumya Kanti Ghosh, Chief Economic Adviser, State Bank of India, it has been stated that the consequences of the Russia and Ukraine conflict will have an impact on the essential necessities and assets in India.
Ukraine is the major exporter of food and in case the Black sea route is disturbed the price of corn and wheat will be impacted. While the oil prices have been increased to $100 per barrel.
It has been predicted that the involvement of India is limited to economic interest; the repercussions will also be economy-related only. “Rise of commodity prices will impact CAD and domestic inflation. The export outlook of services towards Europe will be impacted negatively. Sanctions on Russia may impact regular trade (e.g. tea) between India and Russia,” stated in the report. It has been analysed that the inflation will soon increase by 52-62 basis points as a 33.5% rise in the average price of Indian basket of crude oil has been registered since April 2021.
"Although ongoing geopolitical tensions between Russia-Ukraine can hurt Asia through multiple channels, such as tighter global financial conditions, elevated uncertainty and the risk of weaker global demand, higher commodity prices are the most important transmission channel," said Sonal verma, Chief Economist - India and Asia ex-Japan, at Nomura.
About 70% of the total wheat imports by Egypt and Turkey comes from Russia. They are greatly dependent on Russia for their supply of grains. Owing to this, these countries are also suffering from an economic depression as the prices of food, fuel and energy have increased exponentially, ie, about 50%.
Along with this, Lebanon is said to be also getting impacted as Ukraine exports 50% of wheat to the country. Therefore, Lebanon has become another economy undergoing a crisis.
Russia exports’s nickel account for 49 per cent, palladium 42 per cent, aluminium 26 per cent, platinum 13 per cent, steel 7 per cent and copper 4 per cent, reported NYT. The shortage in the supply of these metals have resulted in removing half of global nickel exports for kitchenware, mobile phones, medical equipment, transport, buildings, and power; palladium for catalytic converters, electrodes, and electronics; and a quarter of aluminium for vehicles, construction, machinery and packaging would result in huge upside pressure on prices, NYT added.
The global financial services group Nomura has expected Indonesia to benefit due to the rise in the prices of crude oil. “It will widen Indonesia’s current account deficit (CAD) by 0.2 per cent of GDP at a time when less stringent mobility curbs this year are allowing people to travel more and subsidised retail prices are leading to higher fuel consumption and oil imports,” Nomura analysts stated.
Russia (3.5%) and Ukraine (0.5%) are too small of an economy to result in a global crisis, as per the world economics. Although it is very imperative, Lars Stemqvist, the chief technology officer of Volvo, the Swedish truck maker, has said that it’s too early to gauge the precise impact of an armed conflict. However, a sharp eye has to be kept on the economic repercussions of the Russia-Ukraine conflict as it is predicted to result in recession and inflation in certain countries.
How War in Ukraine Threatens the World’s Economic Recovery. (2022, February 22). Bloomberg. https://www.bloomberg.com/news/features/2022-02-25/war-in-ukraine-how-the-ukraine-russia-conflict-could-impact-the-global-economy
Sullivan Becky. (2022, February 24). How Russia’s invasion of Ukraine could impact you. NPR. https://choice.npr.org/index.html?origin=https://www.npr.org/2022/02/16/1081185004/russia-ukraine-invasion-us-impact
Cohen, P., & Ewing, J. (2022, February 22). What’s at Stake for the Global Economy in the Russia-Ukraine Conflict. The New York Times. https://www.nytimes.com/2022/02/21/business/economy/ukraine-russia-economy.html
Wadhwa, P. (2022, February 25). Russia-Ukraine crisis: India economy to be among worst hit in Asia - Nomura. www.business-standard.com. https://www.business-standard.com/article/economy-policy/russia-ukraine-crisis-indian-economy-among-worst-hit-indonesia-to-benefit-122022500400_1.html
Janda, M. (2022, January 29). How Russia’s Ukraine conflict could reshape economics and markets even if it doesn’t end in war. ABC News. https://www.abc.net.au/news/2022-01-29/ukraine-crisis-economic-and-market-fallout/100786018#:%7E:text=In%20the%20short%20term%2C%20it%20is%20widely%20acknowledged,be%20cut%20off%20in%20the%20event%20of%20conflict.