Shaky Links: How the Russia-Ukraine War is Impacting the Global Economy

On February 24, 2022, Russian President Vladimir Putin shocked the world by announcing the start of a “special military operation” to “demilitarize” Ukraine. Since that announcement, Ukrainian President Volodymyr Zelensky and his Western allies have produced an astonishingly successful defense of Ukraine, taking back more than half of the land seized since the start of the war. While the war in itself is a significant global event, it also had a much more extensive impact on the global economy by creating shortages of critical supplies and disrupting supply chains.

Perhaps the biggest impact of the war was the reduction in global supplies and commodities. Ukraine and Russia are part of what is known as the “global breadbasket”, supplying almost 30% of the world’s wheat and 75% of the world’s sunflower oil. Many African and Asian countries, including Tunisia and Indonesia, depend heavily on grain imports from these countries to feed their populations, and the war has hit these countries hard. Another big hit is the energy market. Part of the Western response to Russian aggression was the enactment of financial sanctions and a freeze on trade with Russia, which hurt Russia’s ability to finance its war. However, this process has affected many European countries in turn since Russian gas accounts for 10% of the global supply and many European countries, especially Germany and Lithuania, rely heavily on Russian gas to keep the lights on. Finally, Russia controls a significant market share in the export of metals such as aluminum and nickel that are critical to the function and manufacture of everyday equipment and transportation such as airplanes, cars and batteries . As in the food and energy sectors, metal prices are showing record levels, with the biggest one being the nickel market, which has reached its high mark in 10 years. The bottom line is that the global economy has been clouded by this war and is slowly trying to respond to those changes.

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These macroeconomic changes have, in turn, major implications for citizens all over the world. According to some estimates, European energy costs have more than doubled due to this trade imbalance. These shortages are drastically increasing global inflation and hurting consumers around the world; the European Central Bank recorded the highest inflation since it started producing those statistics, at more than quadruple 2%. The global inflation rate as a whole has risen to 3% specifically because of the Russo-Ukrainian War, which translates into billions of dollars coming out of the consumer’s pocket. This reduced global production and overall consumer spending is contributing to the International Monetary Fund’s outlook: “Global growth is forecast to slow from 6.0 percent in 2021 to 3.2 percent in 2022 and 2.7 percent in 2023.” Organizations such as the Federal Reserve of Dallas are saying that “War-related energy and food price increases have some parallels with previous crises, such as the oil shocks of the 1970s.” All this damage has led to one of the sharpest declines in European consumer confidence ever recorded. There is a general feeling of distress that has taken over the world market, and this will ease with time.

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In response to all these pressures, Western countries are reshaping their supply chains and their relationship with the global market. EU countries are closely coordinating actions to address rising prices and shortages of supplies. The EU agreed to phase out dependence on Russian fossil fuels as quickly as possible and banned almost 90% of all Russian oil imports by the end of 2022. The EU also agreed on new measures to secure and share gas supply in the EU, as well as to limit the volatility of gas and electricity prices. The US government is also taking a hard line on Russian aggression and its effects, with the US leading talks to enforce a price cap on the sale of supplies from Russia, balancing the global supply needs and prevent Russia from profiting from the war. The United States has announced that the sanctions, which were imposed in response to Russia’s actions in Ukraine and interference in the United States elections, have led to a decrease in Russia’s GDP, a decrease in foreign investment and ruble depreciation. Governments are responding, and over time the effects will moderate.

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The ongoing Russian-Ukrainian War has had major consequences on the global economy. Disruptions in supply chains and shortages of critical goods have resulted in increased inflation and reduced economic growth. These changes have had a significant impact on the livelihoods of citizens around the world, particularly in developing countries, where the majority of citizens live below the poverty line and are already struggling to make ends meet. The trade imbalance and energy shortages caused by the war added to the already dire economic situation in these countries. In addition, the war also led to a reduction in consumer spending, as people are forced to spend more on essential goods and services. However despite the hardships, there is light at the end of the economic tunnel, and only time will tell about the effectiveness of the response to the Russian aggression and its economic consequences.

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Photo Caption: Russian and Ukrainian flags as puzzle pieces

Photo credit: Pixabay


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