It’s been barely two weeks since Russia invaded neighboring Ukraine, but the global economy already seems a world away from two weeks in the past.
First and foremost, the war itself is enormously tragic not only for the Ukrainian people but also for the Russian people who have nothing to do with what Putin calls a “special operation.”
Retaliatory sanctions that were swiftly deployed by western governments have upturned the world’s 11th-largest economy, and the aftershocks are now being felt across the world.
From inflation to global supply chains to the energy markets, the heavy economic toll of the war is threatening to damage the still frail economic recovery worldwide.
Here are the 4 likely economic impacts of the Russia/Ukraine War:
- Inflation of Goods Will Rise
Before Russia attacked Ukraine, inflation in the US was already concerning, with the CPI up by 7.5 percent over the last year in January – a 40-year high.
The concern has now shifted to how much more inflation might rise and how the Federal Reserve and other central banks will respond.
Maersk and Mediterranean Shipping, two of the world’s largest ship operators, are temporarily suspending service to Russia, adding stress to a global supply chain that’s already struggling.
Russia isn’t the only nation experiencing difficulties at its ports. Around the world, hundreds of vessels are stuck as customs authorities implement new rules in light of the sanctions.
The black sea, known for key routes for foodstuff and oil, has seen a dramatic drop in shipping activities. This is because commercial ships are attempting to avoid the active conflict zone.
The invasion will also spark anxiety around personal finances. Households spending a significant of their incomes on heating and fuel will have less cash for other goods and services.
- Energy Prices Will Rise
Russia supplies 19 percent of the world’s oil.
Before the Russia/Ukraine war began, oil and gas prices were already rising.
Just last week, the international oil benchmark of Brent crude reached an 8-year high. The International Energy Agency announced plans to release 60 million oil barrels from emergency stockpiles to address the skyrocketing prices.
This may not be enough as Shell, BP and Norway’s Equinor plan to cut ties with Russian state-backed oil groups. Europe is especially vulnerable as it has done little in recent years to cut its dependence on Russian gas.
When oil prices surge, gas prices surge in tandem, impacting everything – transportation, logistics, air freight, air tickets, etc.
- Rise of Debt
The conflict could also spill over to debt if the Ukraine crisis continues.
The US and western nations allied to Ukraine have barred 7 Russian banks from accessing the SWIFT (Society for Worldwide Interbank Financial Telecommunication) network. SWIFT is an international payments system that facilitates money transfers between nations.
This move will not only hurt Russia. Western institutions also risk losses from debts that can’t or will not be repaid.
The Rouble (Russia’s currency) sank 30 percent after the SWIFT ban and other new western sanctions. The collapse in value reduces the currency’s buying power, and the ordinary Russians could end up with wiped-out savings.
In a bid to pause a slump in the value of its currency, Russia has more than doubled banks’ interest rates from 9.5 to 20 percent. Putin has also barred citizens from transferring money outside of the nation, including debt payments.
- Companies with A Large Presence in Russia Will Be Impacted
The invasion of Ukraine has been rapid and dramatic, but the impact on companies with a large presence in Russia will be sluggish and less spectacular.
Russian companies will likely be the main economic loser from the conflict, and the fallout will almost certainly be more severe over time.
The signs are already starting to point that way. The Russian stock market has fallen significantly since the beginning of the invasion. The MSCI All Country World Index fell to its lowest level in almost one year.
Sanctions will gradually take a toll, and Russia’s heightened investor uncertainty and growing isolation will weaken trade and other economic links.
Conclusion
The medium- and long-term consequences of Russia’s invasion of Ukraine will depend on the length and scope of the conflict, the severity of Western sanctions, and the likelihood that Russia might retaliate.
Putin’s desired endgame is unclear. It remains to be seen how the Russian government will react to the sanctions or whether further penalties will be imposed.
If the sanctions and counter-responses escalate, the impact will be large not only to Russia but also to some extent to the rest of the global economy.
