The global community has watched helplessly as the war between Russia and Ukraine. This has lingered despite diplomatic efforts from UN and EU nations. There seems to be no hope in sight as the humanitarian crisis increases geometrically.
Experts and analysts have argued that when the dust settles, global survival will feel the heat of the war. Away from the political or territorial gains of the war, the reverse is the negative implication of the conflict global on global economy.
According to recent analysis, the war will affect the global economy in three ways, price of commodities, financial sanctions, and disruptions in supply-chain.
Prices of commodities
As the global impact of sanctions will be limited, it is expected that the most serious effect of the Russia-Ukraine conflict for the world economy will come in the form of higher prices of commodities.
Prices of commodities prices could skyrocket due to three factors: concerns around supplies, the destruction of physical infrastructure, and sanctions.
The major assumption is that neither the EU nor the US will impose a ban on Russia’s hydrocarbons exports. Even in the absence of an embargo, prices for oil, gas, base metals and grains will jump.
Prices of oil will remain above US$100/bbl as long as the invasion of Ukraine continues.
The threat of sanctions on Russian hydrocarbon exports and uncertainty surrounding supplies will worsen existing market tightness. Some oil traders are also avoiding Russian oil out of concern about US secondary sanctions on financial transactions with Russian entities.
Prices of gas will soar by at least 50% this year, on top of a five-fold rise last year. Europe has limited gas stockpiles, and there are concerns about gas supplies for the 2022/23 northern hemisphere winter season.
Recall that Russia is also a major producer of several base metals (aluminium, titanium, palladium and nickel), all of which will register price jumps.
Following spikes in all of these markets last year, prices will remain at peak levels as long as the conflict continues. This will have a substantial impact on industrial sectors such as the automotive industry across the world.
The prices of agricultural commodities such as wheat, maize, barley and rapeseed will soar.
The pain is that Ukraine and Russia account for more than a quarter of the global wheat trade and produce 12% of calories consumed globally. Disruptions to trade routes in the Black Sea would increase pressure on grains prices.
Sanctions imposed by US and EU on Russia
It will be recalled that on February 28, the US unveiled a sanction package targeting the Central Bank of Russia (CBR).
The EU towed the same path, and consequently, these sanctions will prevent the CBR from accessing about half of the US $643bn that it holds in foreign-exchange reserves by blocking its ability to convert assets held in US dollars and euros into rubles.
The measure also prevents Russia from accessing its emergency sovereign wealth fund, the National Wealth Fund (NWF).
Furthermore, the US and the EU have announced that some Russian banks will be cut off from SWIFT, the global payments system. The US and the EU had previously adopted a cautious approach to sanctioning Russia. This is just as trade ties between Russia and the EU made European policymakers reluctant to impose stringent measures on Russia.
This restraint has disappeared to some extent. However, measures aimed at preventing Russia’s energy exports are still off the table, reflecting fears in European capitals that sanctions of that nature would send EU economies into recession.
The US Treasury has planned carve-outs from sanctions for Russian energy exports, and Russian banks involved in the energy trade will not be excluded from SWIFT. The economic impact of EU and US sanctions will therefore be light outside Russia, although Western companies that are highly exposed to Russia will still be affected”.
Another aspect of the negative impact of the war on the world’s economy is the disruption in supply chains.
Financial sanctions will deal a negative blow on supply chains and trade, as companies will struggle to find financial channels through which to conduct trade with Russia. In addition, the possible destruction of some transport infrastructure such as ports in Ukraine will worsen existing supply-chain issues.
Disruption to supply chains
This come from three sources which include difficulties affecting land-based routes, restrictions on air links, and the cancellation of sea freight routes from Ukraine. Land-based trade routes between Asia and Europe will be affected as transit through Russia becomes more difficult or impossible from a compliance, reputational or safety perspective.
This will particularly affect some Chinese companies, which had increased their traffic over land-based routes through Russia (en route to Europe) as an alternative to sea and air freight during the coronavirus pandemic.
On aviation, air ties between Russia and Europe and, in turn, Asia and Europe will be severely affected following the decision of EU countries to close their airspace to Russian aircraft and cargo and Russia’s reciprocal measure to close its own airspace to European planes
Statistically, before the outbreak of COVID-19, about 35% of global freight was being transported by air, about half of which was carried on passenger planes. Sea freight routes through the Black Sea will be cancelled for several weeks following Ukraine’s decision to shut down commercial shipping and Turkey’s move to restrict transit through the Bosphorus.
This situation will have a notable impact on grain shipments transiting through Ukrainian, Russian, and possibly Bulgarian and Romanian ports. Also, global inflation will rise above 6% in 2022. Higher commodity prices will fuel global inflation this year and possibly in 2023.
Researchers have already forecasted global inflation of nearly 6% this year, but now that mark is expected to be exceeded, given the huge spike in commodities prices. The rise in inflation will offset the positive impact of higher commodities prices for producers.
Higher prices will also raise tricky questions for central banks. They had embarked on a course of monetary tightening to curb inflation but may now be concerned about the impact of the Russia-Ukraine conflict on the post-coronavirus recovery.
Conclusively, while the two warring countries shelve their artilleries, the curtains will unveil a shift in status quo. The economic impact of the conflict will be felt mostly in Ukraine and Russia, which will both experience sharp recessions this year.
The major eastern European countries that are mostly exposed to trade with Russia, such as Lithuania and Latvia, will also take a hit from the conflict. Elsewhere in Europe, the EU will suffer from an energy, supply-chain and trade shock
