The Russia-Ukraine conflict, originating with Russia’s 2014 annexation of Crimea and subsequently escalating in the Donbas region of eastern Ukraine, intensified in February 2022 with Russia’s full-scale invasion. While initial territorial gains were achieved, Ukrainian resistance effectively countered the advance on major urban centers, leading to subsequent Ukrainian counteroffensives. This protracted conflict has resulted in substantial casualties and persists.
Beyond the profound human cost, the war has inflicted significant economic damage upon Ukraine, Russia, and the broader global community over the past three years. The conflict precipitated a global economic shock characterised by cost-push inflation, a manifestation of supply-side pressures, as the world experienced the most substantial commodity shock in half a century. Disruptions to supply chains, particularly stemming from Ukraine’s pivotal role in the global crop market, notably wheat and sunflower oil, contributed to worldwide food inflation. Furthermore, the imposition of sanctions on Russia has severely impacted the global energy market, resulting in escalated supply costs and, consequently, further cost-push inflationary pressures.
As the war in Ukraine approaches its third year, a renewed impetus for peace is emerging, prominently from Donald Trump. His proposed peace initiative extends beyond direct negotiations between Russia and Ukraine, holding the potential to deliver economic relief to nations such as Bangladesh, which have been adversely affected by the conflict’s economic repercussions.
Prior to the 2022 conflict, Bangladesh’s economy demonstrated robust performance, maintaining macroeconomic stability and achieving notable growth even amidst the COVID-19 pandemic. However, the war has significantly destabilised the nation’s economic landscape. Inflation surged from 6% to 9%, accompanied by a rapid devaluation of the Bangladeshi Taka against the US dollar, escalating from 85 to 120 Taka per USD within a single week. Moreover, foreign exchange reserves diminished significantly, declining to 20 billion USD from a peak of 48 billion USD in August 2021. The Russia-Ukraine conflict has exerted a substantial impact on Bangladesh’s economy through escalating import costs for essential commodities, including fertilizer, wheat, and poultry feed, directly affecting domestic food prices and reducing protein intake for millions. Disruptions to global supply chains, particularly in the Black Sea, have further inflated freight costs and commodity prices. While recent global price stabilisation offers some respite, Bangladesh’s garment exports to Russia have drastically declined, from a projected $1 billion pre-war to $369 million in 2023-24 and a mere $148 million in the first half of 2024-25, compared to nearly $700 million in FY21. Western sanctions have also impeded Bangladesh’s transactions related to the Rooppur Nuclear Power Plant and access to low-cost Russian fuel.
A potential peace initiative, however, offers prospects for economic relief through increased exports to Russia, smoother imports, and resolution of investment issues, including payment challenges for the Rooppur project. Nevertheless, uncertainty persists due to the exclusion of the European Union and Ukraine from current negotiations, raising concerns about potential opposition to lifting sanctions and the impact on Bangladesh’s access to EU market opportunities.
The Russia-Ukraine conflict has severely disrupted global supply chains, evidenced by war risk surcharges imposed by shipping companies and subsequent increases in product prices. Trade embargoes and sanctions on Russian vessels have exacerbated these issues, leading to a shortage of ships and containers and a significant escalation in freight charges. Notably, the Bangladeshi vessel Banglar Samriddhi was struck by a missile at Ukraine’s Olvia port in March 2022, highlighting the direct dangers. Industry experts anticipate a stabilisation of shipping costs and supply chains upon the cessation of hostilities. Furthermore, the conflict has driven up transportation costs for essential commodities, with crude oil prices escalating from $70 to $120 per barrel and corresponding increases in LPG prices, all of which are expected to subside post-conflict.
The Russia-Ukraine war has significantly disrupted global food markets, notably impacting wheat prices, which surged from $360 to $522 per ton before declining to $254 per ton. This has adversely affected Bangladesh, reliant on both nations for 60% of its wheat demand. The conflict caused supply chain disruptions, tripling to quadrupling freight charges and inducing a dollar liquidity crisis. This, coupled with Letter of Credit (LC) margin increases from 20% to over 100%, forced many Small and Medium-sized Enterprises (SMEs) to close. Industry experts anticipate relief in palm oil, soybean oil, and other edible oil markets, alongside reduced import costs for lentils, maize, and chemicals, upon the war’s conclusion. However, expanding commercial relationships is deemed essential for realising these benefits.
Bangladesh’s export value to Ukraine currently stands at 136 million USD, with key exports including Knit T-shirts (24.1 million USD), Knit Sweaters (18.8 million USD), and leather footwear (16.4 million USD). Upon a peace agreement, Ukraine’s economy is expected to stabilise, facilitated by increased capital inflows from EU and US foreign aid. This stabilisation is projected to drive a surge in Ukrainian import demand, presenting a significant export opportunity for Bangladesh. Given the sustained demand for Bangladeshi Ready-Made Garments (RMG) in Ukraine, even during wartime, a notable increase in demand is projected in a stabilised economic environment.
While a Ukraine peace deal may contribute to Bangladesh’s economic recovery, the current economic climate remains more volatile. Bangladesh’s foreign exchange reserves, at USD 24.30 billion (approaching USD 20 billion under the IMF’s BPM-6 methodology), are pressured by a widening financial account deficit despite a narrowing current account and trade deficit. The FY2023-24 trade deficit reached over USD 22 billion, and the current account deficit was USD 6.5 billion, both due to declining financial account receipts, including reduced Foreign Direct Investment (FDI) and loans. The trade deficit stems from import expenses exceeding export earnings, with import reduction deemed unfavourable due to production-driven imports. Although a peace deal may mitigate import costs, it is unlikely to resolve the trade deficit fully.
Bangladesh aims to bolster governance and institutional capacity with external assistance, addressing persistent challenges like the banking sector’s high non-performing loans (NPLs), which reached BDT 211,391 crore (12.56% of total loans) by June 2024, attributed to political influence. Simultaneously, despite GDP growth, domestic resource mobilisation remains weak, with a tax-GDP ratio of only 7.6%, the lowest in South Asia, and a decline from 10.99% in FY 2010 to 8.26% in FY 2023. Urgent structural reforms are necessary to improve revenue mobilisation. These include increasing direct tax revenue, establishing a dedicated tax policy division, implementing value-added tax (VAT) reform, automating tax administration, and implementing efficient wealth taxes. These reforms are crucial for stabilising the fiscal situation, reducing reliance on borrowings, and achieving equitable income distribution.
A Ukraine peace deal presents a potential catalyst for Bangladesh’s economic revival, though it is not a singular panacea. While the conflict’s resolution could alleviate immediate pressures—reducing import costs, stabilising supply chains, and potentially restoring garment exports to Russia—Bangladesh faces deeper, systemic challenges. The deal could stimulate Ukrainian demand, offering export opportunities, but the nation’s economic volatility, characterised by dwindling reserves, trade deficits, and a fragile financial sector, necessitates comprehensive internal reforms. These reforms, focusing on governance, revenue mobilisation, and institutional capacity, are critical to ensuring long-term economic stability. While a peace deal could provide a much-needed boost, it is the combination of external relief and internal restructuring that will ultimately determine the resilience and resurgence of Bangladesh’s economy.
Author: Abu Yousuf Abdullah
