Russia Ukraine war is not just limited to the conflict region, but it will impact the entire global economy that has been reeling under pressure from the economic meltdown and Covid-19 pandemic for the last couple of years.
The expectation of a large scale war in Europe was not part of the economic recovery plan that the world over has been dealing with for the past two years. The war on Covid-19 pandemic is about to be over globally, with the number of those affected by the virus falling across countries of Europe, the USA and Asia. It is widely accepted that the global economy has been stressed beyond order trying to accommodate the health and economic impact of Covid.
Naturally, almost no national leader of significance considered that a different form of war, and this one literally a deadly invasion and combat, could burden this slow recovery further. Indeed, one has to be fairly alien to the human race in order to wedge war at a time when loss of lives owing to the pandemic has a cloud of grief overhang over large parts of Europe.
Russia, not too unlike China, suppressed the information on the pandemic in order for the administration in Moscow to look good. If the claim that the Russian Sputnik V Covid vaccine was delivered effectively and quickly and therefore health disasters could be largely avoided within the country, it hardly justifies war on others who might not have been so fortunate for various other reasons.
The political justification that Russia is threatened by Ukraine also stands on a fairly weak ground because of considerable and well-known differences between the two countries in terms of economic power and capabilities. The economic impact of war is unlikely to stay within the borders of these two countries only. Let us discuss the two main routes through which the global geopolitical crisis arising from this war affects the world economy. There are obviously many more that this brief article shall not be able to accommodate.
Trade links
International trade is the first and foremost route through which crisis takes the form of global contagion. Once war breaks out disruptions in logistics become a serious stumbling block for the passage of commodities. It is commonly known that the import of oil is about 90% of import bills for many countries in Europe and Asia. The bulk of this import arrives from the Middle East, but Russian pipelines for oil and natural gas are also very important for many European countries. If the flow of goods is disrupted, as happening under the current circumstances, commodity prices would soar in no time.
Ukraine is a large exporter of iron and steel, animal and vegetable oil including sunflower seeds and oil, electrical equipment, railway parts, ores and minerals, etc. According to the data from the UN Commodity Trade Statistics database, of the 96 commodities that have a positive share in Ukraine’s trade basket the country has a comparative advantage in 24 commodities, and it is specialized in the export of cereals. Ukraine exports more than 27 times its ‘fair share’ of cereal exports compared to other trading nations. For Europe and beyond this implies that inflation starts from breakfast.
To be precise, which countries are likely to be affected by the raging war in Ukraine? China is Ukraine’s biggest trade partner (by exports), and yet they did not categorically denounce the war on Ukraine. Not surprisingly, Russia is a bigger trade partner and political ally of China. However, in 2020, Ukraine exported $7.1bn worth of goods to China, 14.5% of Ukraine’s total exports. But, China relies on Russia for access to western European export markets and the international financial system.
In terms of trade, Russian exports to China are seven times more ($49.1bn) than those of Ukraine. These statistics suggest that global trade must fall owing to the escalation of the crisis. Poland and Russia were Ukraine’s second and third-largest export partners, respectively, and Ukraine exported $3.3bn and $2.7bn worth of goods to these countries in 2020.
The geopolitics of Eastern Europe is closely connected with the movements of goods and services among these neighbouring countries and all of these would also be seriously disrupted. It might be useful to know that many of the transition and developing countries are part of a global value chain where the production of goods and services are conducted up to a limit that defines the scope of comparative advantage for respective countries.
Apart from production technologies, these comparative advantages are also guided by access to finance or credit, which allows countries to produce only up to a stage beyond which it sells off the semi-finished good to another country for further processing as part of the global value chain (GVC). Since Ukraine is also involved in many such GVCs, the present war shall disrupt production and economic activities in other trading countries as well. Consequently, supply chain problems will continue although it was hoped that the world shall be coming out of these disruptions once the lockdowns are relaxed and production returns to normalcy.
Economic sanctions
Over the last two decades the principal instrument to inflict a penalty on countries that deviate from the internally agreed-upon policies, whether nuclear proliferation, engagement in armed conflicts or terrorism within and outside the borders have been economic sanctions. This has been used against Iran, North Korea, Cuba, partly against India and Pakistan and now full scale against Russia. These sanctions take various forms, often according to the plans and mandates of the state, but also as voluntary withdrawals and restrictions by private entities.
Most of the time, the multilateral agencies lead the way to how and when these sanctions would take shape; but the multi-pronged sanctions could paralyze an economy and strip its power to even buy food and medical supplies at times. This is what the present sanctions on Russia intend to achieve in addition to secluding the Russian economy completely from the world order.
From severing trade relations to the withdrawal of investments, discriminatory economic policies on Russian businesses and products, for example, Canada ordered the removal of all Russian commodities from the shelves of their supermarkets, boycotting Russian brands and above all putting Russia out of the financial network through de-linking SWIFT services which are at the core of international funds transfers globally.
Note that many of the service providers that choose to or have been pressurized to impose sanctions are private entities, such as SWIFT, which is a Belgian company earning returns from its use. The impact of this withdrawal means less business, lower profit and disruption in the network. Millions of workers all across the globe are engaged with such services who risk losing jobs and facing salary cuts at a time when people are still grappling with the economic impact of Covid.
On the supply side, denial to buy Russian exports by the majority of the western nations is a blow to producers and sellers in Russia who are not necessarily party to this war. Businesses of few types, such as ammunition dealers or oil producers are sometimes directly involved in shouting war cries for their own benefit, and everyone else is a loser.
Indeed, the magnanimity of this crisis could precipitate another economic recession world around, mainly via the extremely high price of Brent crude translating into local inflation and significant disturbance in production and consumption. Sanctions are already decimating the Russian economy, with the Ruble in freefall, while companies are looking to divest. Investment conditions in eastern Europe will weaken as investors urge caution and await a peaceful outcome.
Even if the invasion ends soon, for many investors political stability will significantly rise as a key site selection factor throughout central and eastern Europe. That Ukraine will have to completely rebuild their country is beside the global impacts discussed above. It typically means that investments that could be directed towards human welfare and climate change will again have to be deployed to raise a country from the ravages of war. The opportunity cost of this war is not easily measurable.
Under the circumstances, there seems no reason to decry the war on Ukraine as an attack on humanity and the main perpetrator to be identified as a candidate for bringing about a global crisis to be served with justice. The weakness of international institutions in agreeing to common grounds is a gap that warmongers will always explore. The account of economic losses, if not their political ideologies, should make some dent in the inflexibility of many countries in signing a viable global resolution against such wars.
Also read: Inflows and outflows: How sensitive is the Indian economy to Foreign Portfolio Investments?
(Saibal Kar is Professor of Economics, Centre for Studies in Social Sciences, Calcutta & Research Fellow, IZA Bonn.)
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