Ukraine-Russia Conflict – Ramifications for Global Economy

Battered by the infamous Covid 19, the world economy has been struggling to recover its dramatic losses to date. Thereby, a protracted conflict between the two breadbaskets of the World – Ukraine and Russia – does not go easy on global markets or overall economic growth. Besides the two countries providing 30% of the World’s wheat and barley, the Russian Federation has long been a top natural gas supplier and one of the largest fertilizer exporters.

Coupled with the shock caused by the pandemic, the Ukraine-Russia conflict has substantially pushed commodity prices up. In fact, food prices have risen by nearly 35% within a year frame, hitting the highest mark ever recorded. Meanwhile, crude oil prices have increased by approximately 60% and fertilizer rates have more than doubled. Such an upward trend only creates a negative outlook that shall prove particularly significant for the most vulnerable of the world.

According to the estimates of the FAO, since 2019 an additional 77 million people have been pushed to live in extreme poverty. Africa, Asia, Latin America, and the Caribbean top the list of affected regions.

Impact on Global Food, Energy, and Financial Markets

The war between Ukraine and Russia has yielded negative outcomes not only regionally but on a worldwide scale. Being essential food and energy suppliers, the unrest between the two countries has resulted in significant production and export challenges. In turn, these challenges limited the availability of certain products on the market, pushing the prices even higher. Although the markets have been disturbed in a number of areas, the consequences for the poorest and the most vulnerable are exceptionally severe.

The same trend has been retained on the supply side as well. For instance, small households and farmers are the first victims of increased fertilizer prices and their limited availability on the market. Many of them might face a drop in crop yields in the near future. This problem might materialize even sooner for those countries that are dependent on a large number of smallholder farmers.

Energy markets have been on their tight side for the last couple of years. Although the crude oil and gas prices are well above the average of their usual rates, they are pretty volatile. Spikes in energy prices can yield counteracting effects. On the one hand, investors might be tempted to go back and expand on extractive industries and fuel-based energy creation. This would undermine the efforts made toward decarbonization. Conversely, rising prices could also speed up the transition toward alternative energy sources. Although, as of now it is hard to say which of the two effects has a better potential to prevail.

In addition to the above, many countries across the globe have been on the verge of a debt crisis. The debt burden has been particularly heavy for small states and developing island nations. Overall, the cost of debt servicing has been demonstrating an upward trend for developing countries over the last decade. Moreover, net-food importer countries have recorded an above-average increase in borrowing costs since the start of the conflict between Russia and Ukraine.

Consequences of Conflict for Ukrainian and Russian Economies

Ukraine-Russia conflict translated into acute crisis for both countries. Ukraine’s vital infrastructure has been demolished or rendered unusable. Human capital has been eroding at a significant pace with an acute impact on children. Financial measures taken by Ukraine’s regulatory bodies including capital controls, banking restrictions, and tax deferrals have saved the country from financial collapse. However, in many areas of the state economic activities have stalled and many businesses have been forced to leave the market. Damaged transit routes and a loss of access to the Black Sea have impeded trade. According to the World Bank, the GDP of Ukraine is expected to fall by 45% as the country’s overall output has been halved.

Imposed a large number of sanctions, Russia has fallen into financial turmoil. The country has been assigned a selective default credit rating facing a high probability of future sovereign default. With sanctions triggering a collapse in domestic demand, the Russian economy is set to decline sharply. Many foreign companies have withdrawn from the country’s market, deteriorating the overall investment outlook. According to the World Bank estimates, Russia’s GDP has gone down by 11% for the year 2022.

Implications for Central Europe, Central Asia, and South Caucasus

Ukraine-Russia conflict has caused a huge refugee crisis with over 7 million people being displaced within Ukraine. Meanwhile, millions have been reported to have fled to neighboring countries. According to the current estimates, 25% of those displaced have crossed the border. These waves of international refugees are primarily being handled by Central European countries testing their capacities to mobilize and effectively distribute aid. Moreover, integrating refugees into host societies might arise as a challenge. Health, education, and protection systems of the recipient countries have been struggling to deliver services, especially to marginalized groups and more remote areas.

Ukrainians have not been the only ones fleeing the country. Hundreds of thousands of Russians have left the state owing to a number of political, social, and economic decisions made by the federation. This could mean the loss of income or jobs for many migrants in Russia from Central Asian Countries. These economies might be looking at a decline in remittances that they have long been dependent on. For example, according to the estimates of the World Bank, the Kyrgyz Republic as well as Tajikistan are expected to have shrinking economies, wider deficits, and exchange rate devaluation.

South Caucasian Countries including Georgia and Armenia have been facing the consequences of war spillovers from Ukraine-Russia Conflict. Heavily reliant on Russian produce, restrictions on the export of agricultural products as well as rising prices might adversely affect these economies. However, it is worth noting that the influx of migrants from the Federation to these two countries might as well offset some of the negative impacts and boost domestic demand. The inflow of educated and skilled workers could as well indicate improvements in local labor markets.

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