Russia-Ukraine war’s impact on Global Economy?
- March 10, 2022
The Ukraine crisis has both magnified threat and complicated the potential solutions of several economic factors. Here’s a look at how global economy can be impacted.
As Russia-Ukraine conflict entered its seventh day on Wednesday, with the former continuing its attacks on crowded Ukrainian cities with lengthy convoy of Russian tanks and other vehicles, the ferocious financial backlash unleashed in the process are visible on around the world and not only on Russian President Vladimir Putin’s situation.
As Russia bears the brunt of the sanctions imposed by the Western nations, including cutting off many Russian banks from interbank payments system SWIFT, the ongoing conflict can hit the industries which depend on supply of raw materials, especially industrial commodities, according to several news reports.
Moreover, the repercussions are also menacing the global economy, shaking financial markets and making life more perilous for everyone across.
Here’s a look at how global economy can be impacted by the ongoing Putin war on Ukraine:
Many European countries are heavily dependent on Russian energy, particularly gas through several vital pipelines. Even if the conflict comes to an end, there is a possibility that the harsh economic sanctions on Russia would make it very difficult for these countries to be able to import gas.
Meanwhile, oil prices surged as supply disruptions mounted following sanctions on Russian banks, while traders scrambled to seek alternative oil sources in an already tight market.
Brent crude futures rose high, touching a peak of $139.13 a barrel, the highest since June 2014. Today stood at $116.09.
US West Texas Intermediate (WTI) crude futures also jumped high, hitting the highest since August 2013 to $130.5 a barrel. Today stood at $112.56.
With global transport already severely disrupted in the aftermath of the pandemic, the war is likely to create further problems. The transport modes likely to be affected are ocean shipping and rail freight. While rail carries only a small proportion of the total freight between Asia and Europe, it has played a vital role during recent transport disruptions and is growing steadily. Countries like Lithuania are expecting to see their rail traffic severely affected by sanctions against Russia.
The world’s unexpectedly robust recovery from the pandemic recession left companies scrambling to find enough raw materials and components to produce goods to meet surging customer demand. Overwhelmed factories, ports and freight yards have meant shortages, shipping delays and higher prices. Disruptions to Russian and Ukrainian industries could delay any return to normal conditions.
Ukraine alone makes up almost half of exports of sunflower oil. If harvesting and processing is hindered in a war-torn Ukraine, or exports are blocked, importers will struggle to replace supplies.
In India, with the severe threat of supply disruptions, companies are left with not many options but to consider hiking prices of daily-consumed edible oils within weeks. According to leading edible oil makers in the country, over 70 per cent of India’s crude edible oil demand is met through imports. For sunflower oil, the share is even higher.
Ukraine and Russia account for 30 per cent of the world’s exports of wheat, 19 per cent of corn and 80 per cent of sunflower oil, which is used in food processing. Much of the Russian and Ukrainian bounty goes to poor, unstable countries like Yemen and Libya, reported Associated Press.
The threat to farms in eastern Ukraine and a cutoff of exports through Black Sea ports could reduce food supplies just when prices are at their highest levels since 2011 and some countries are suffering from food shortages.
The Ukraine war coincides with a high-risk moment for the Federal Reserve and other central banks. They were caught off-guard by the surge in inflation over the past year — the consequence, mostly, of the economy’s unexpectedly strong recovery.
In January, US consumer prices rose 7.5 per cent from a year earlier, the biggest such jump since 1982. In Europe, figures out Wednesday show inflation accelerated to a record 5.8 per cent last month compared with a year earlier for the 19 countries that use the euro currency.
Mark Zandi, chief economist at Moody’s Analytics, told AP, “Now, the fighting and sanctions that have disrupted Russia trade with the global economy threaten to send prices ever higher, especially for energy.” Russia and Ukraine, Zandi added, together produce 12 per cent of the world’s oil and 17 per cent of its natural gas.
The automobile sector is expected to be hit hard by the war. Rise in oil prices, continued shortage of semiconductors and chips and other rare earth metals is likely to add to the industry’s woes. Besides, Ukraine is also home to many companies which manufacture car components for automakers.
As per a report in The Wall Street Journal, Leoni AG, which supplies wire systems made in Ukraine to European auto companies, has shut its two factories in the country. Consequently, Volkswagen AG had to shut one of its plants in Germany.
“Ukraine is not central to our supply chain, but suddenly we discovered that when this part is missing, it is,” the publication quoted a Volkswagen spokesman as saying.
Even before Putin’s troops invaded Ukraine, the global economy was straining under a range of burdens: Surging inflation, tangled supply chains and tumbling stock prices. The Ukraine crisis both magnified each threat and complicated the potential solutions.