The war in Ukraine has left countries that were already facing an energy crisis, soaring inflation, and deteriorating standards of living, in a much worse position socially and economically. This is partly due to policies implemented by governments to curb the spread of Covid-19. The war coupled with monetary policy normalization and supply chain bottlenecks exacerbated by persistent lockdowns in key manufacturing and trade hubs such as such Shanghai and Shenzhen in China, have cast a shadow on the growth outlook of global economies.
An interesting question to ask is: why is it that two countries, Russia and Ukraine, which jointly account for approximately less than 3% of global exports and less than 2% of global imports have wrecked so much havoc on the global economy?
First, that question is not to undermine both countries as significant players in the global scheme of things as they are major commodity producers. Russia and Ukraine combined account for approximately 30% of wheat exports globally. They are the top two producers of sunflower seeds, and are source markets for specialized inputs in the automobile sector. Russia accounts for 14% of global fertilizer exports, and is the largest producerof natural gas, pig iron and nickel. Furthermore, Russia is one of the top 3 global producers of crude oil, and accounts for a significant share of coal and refined aluminum exports. Given the above statistics, the war is bound to have global spillovers.
According to the IMF April 2022 projection, Russia’s economy is expected to contract in 2022 by 8.5%. This is an 11.8% decrease relative to the January 2022 projection. Ukraine’s GDP on the other hand is expected to shrink by almost 40%. GDP growth in various regions and countries has been downgraded due to trade and financial sanctions imposed on Russia to retreat. The most affected regions are those that depend on imports from Russia and/or Ukraine, especially net energy importers such as the euro area.
The inflation outlook has further deteriorated globally. But then again, this might be abstract so let me drive it home. You might have begun revising your budget or stocking up on supplies due to higher food prices and you probably don’t travel the way you used to due to soaring fuel prices, then there are rising electricity prices you’ve likely experienced too. Basically, there is an upward pressure on prices on almost everything largely due to the rise in oil prices.
Since Russia’s invasion of Ukraine, the price of oil peaked at $139 per barrel in March 2022, a price level last seen during the 2008 financial crisis, the price of wheat hit a 14-year peak increasing by 19.7% in the same month, the price of corn increased, and sunflower seed oil prices went over the $2000 mark after an average of $1500 in the months preceding the war. According to the World Bank, this war will lead to an additional 40 million people living below the food poverty line of $1,90 per day, especially in countries with weaker social safety nets and a constrained fiscal space, and could even lead to political and social unrest.
The war has caused a rise in global energy prices amidst declining energy security, high inflation with many countries hitting multidecade highs, and lower output. Conditions are set to further deteriorate as the increase in interest rates by central banks to rein in inflation will reduce consumer demand and investment. The war has also negatively affected trade connectivity as fuel prices and insurance premiums have increased significantly. Even if your country has no direct links with Russia or Ukraine, the impact is felt through your trading partners who have exposure to Russian assets through business ties and local presence albeit many businesses in several industries have severed commercial ties with Russia.
The impact of the war has proved that the world is not ready to wean itself off Russian commodities. The country is a large trading partner among emerging and developing economies that cannot afford this war in the way that advanced economies are capacitated to soften the effects. Divergence in per capita GDP between advanced economies and developing economies is increasing and billions of people are suffering with conditions set to worsen. So, where to from here?