War and Peace have been the two constant phases of human history. With the advent of the modern state and global trade, a wartime situation has put more implications and stakes on the overall sustainability of world politics. The 20th century witnessed two World Wars, which not only reshaped the way global politics had been streamed but also generated new frontiers for the economy and international relations. A wartime situation invariably clutters the global harmony with crisis and depression. But the economy and corporations always find a way to move on amid all the uncertainties.
The 21st century witnessed its first huge setback during the Covid-19 Pandemic. Two years on, when the global economy started readily to pass over the covid damages, Russia’s invasion of Ukraine on February 24 altered the situation yet again. Whereas experts around the world assumed that Ukrainian President Volodymyr Zelensky’s government would not last a week against Russia’s full-scale invasion of the country, the war has been going on for five months now.
Tens of thousands of people have been killed, millions have fled, and towns have been left in ruins as a result of Russia’s attack. Moscow called its attempt to demilitarize Ukraine and defend Russian-speaking communities a “special military operation.” Ukraine’s president, Volodymyr Zelensky, declared that Russia had “set embarked on a path of evil.”
Where It All Started
After months of threatening military manoeuvres, Russia launched a full-scale attack on Ukraine on February 24, 2022. During the first month of the war, Ukrainians fought back against many Russian attacks, launched counter-offensives, and took back some territory, most notably the area around the capital, Kyiv. On March 2, the UN General Assembly (UNGA) passed a resolution with a large majority that reaffirmed Ukraine’s sovereignty and territorial integrity.
Numerous cities in Ukraine have been partially leveled by the fighting, and thousands of civilians have died and been injured. The UNHCR reports that more than 5.2 million refugees, predominantly women, and children, have fled to nearby nations. Additionally, the International Organization for Migration estimates that as of June 23, more than 6.2 million people were internally displaced, even though 5,5 million of those individuals have already returned to their original places of residence.
Resolutions passed by the European Parliament have drawn attention to the plight of women and children fleeing the conflict. Hard-hitting sanctions have been enacted by the EU and its allies, both inside and outside of NATO, with the intention of seriously harming the Russian economy.
The conflict has become Europe’s most serious security crisis since the end of World War II. The future impact of the war on economies is mostly uncertain, as it is dependent on a number of factors, including the conflict’s duration and the policies followed by nations and corporations to find other sources of energy, raw materials, and food. Not just because of the war but also because of the Russian blockade of Ukraine’s Black Sea ports, cereal and oil seed exports from Ukraine are suffering severely.
The Economic Impact of the Conflict
The armed conflict between Russia and Ukraine is indeed the biggest security crisis in Europe, as mentioned above. The globalization effect, however, does allow the footprints of the crisis to be limited within the borders of the European continent, let alone only Russia and Ukraine. The most influential out of all the elements which are affected by this war is the global economy. Given the time, socio-economic structure, and global market reliability, the sanctions imposed upon Russia, has a bigger implication on the future of the international economy. Before getting into the details, let’s see what these sanctions really are and what their consequences can be.
Economic sanctions have mixed results in terms of actual data. Trade restrictions, for example, might increase expenses for the target nation while simultaneously harming the sanctioning countries. Countries with significant economic relations are particularly hard-harmed by decreased growth projections. By using an economic analysis method called Gravity Regression Approach, detrimental impacts of economic restrictions on commerce were found. It was observed that sanctions might do more harm if imposed multilaterally. In the event of unilateral sanctions, the subject may be allowed to sell or purchase commodities and raw materials from non-sanctioning third nations.
Taking a look at previously conducted research perhaps will give a more solid insight into the subject. In their research journal, Neuenkirch and Neumeier (2015) examined the impact of international sanctions imposed by the United Nations and the United States. They employed panel data estimate methodologies and a sample of 68 nations from 1976 to 2012. They discover that UN sanctions have a reasonably strong and statistically significant effect, reducing the target country’s income per capita growth rate by 2.3-3.5 percentage points, but US sanctions have a significantly lesser effect, accounting for a 0.5-0.9 fall in GDP growth.
Furthermore, and more in relation to the subject at hand, Hoffmann and Neuenkirch (2015) look at how sanctions affect Russian stock returns. It has been discovered that when the crisis escalates, Russian stock returns fall. The (de-)escalation of the crisis in Ukraine, in particular, accounts for a total variance of 6.5 percent in the Russian stock exchange. Dreger et al. (2016) investigate the impact of Russia/Ukraine-related bans and a drop in oil prices on the ruble’s daily exchange rate. They discovered that the price level is influenced more by the price of oil than by economic restrictions.
The takeaway from the discussion above is that when a sanction is imposed, especially on a large economic contributor such as Russia, the following repercussions are bound to affect the broader portion of the global economy. When that happens, it will not only mean a deterioration in a particular nation’s standing in the global market, but it will affect the very lives of people living in those countries along with their lifestyles. As of now, the world has seen a spike in oil prices along with inflation of foreign currencies. The stock market took dramatic turns and twists over the past few months, and it still persists.
It is also necessary to understand how both Russia and Ukraine affect the global economy. Russia is the world’s third-largest producer of oil, the second-largest producer of natural gas, and one of the top five producers of steel, nickel, and aluminum. It is also the world’s largest wheat exporter, accounting for over 20% of worldwide commerce. Ukraine, on the other hand, is a leading supplier of corn (6th largest), wheat (7th), sunflowers (1st), sugar beet, barley, soya, and rapeseed. Both of these countries are key contributors to the international economic infrastructure as apparent. This means a conflict and subsequent sanctions can sway the balance of the most basic commodities around the world.
On the day of the invasion, financial markets throughout the world plummeted while the prices of oil, fossil fuels, metals, and food commodities skyrocketed. Following the current events, Brent oil prices surpassed USD 100 per gallon for the very first since 2014, while TTF gas prices in Europe reached a record EUR 192 on March 4. While high price changes were previously acknowledged as a danger to the recovery, the conflict’s intensification raises the chance that commodities costs will remain high for much longer. As a result, it exacerbates the possibility of long-term high inflation, raising the risks of disinflation and societal unrest in both established and emerging economies.
It does not stop there. Leading up to the war, enterprises in the United Kingdom, the United States, and China reported some relief from supply chain restrictions, albeit they were still growing in the Eurozone. Recent events are likely to undo some of these advances. Russia and Ukraine are major producers of basic metals like nickel, aluminum, and palladium. Delays in their purchase might have an impact on industrial production as well as the larger supply chain. Other interruptions are predicted as a result of a lack of equipment imported from the region, particularly in industries such as car manufacturing. Several German automakers have already reduced output owing to a lack of wiring systems from Ukraine. The region’s significant worldwide share of fertilizer production might potentially have an influence on food production, affecting the world’s food chain.
The conflict further affects other countries, small and large alike, with weak economic growth. For example, Lithuania, whose exports to Russia account for 6% of its GDP, maybe the most vulnerable to trade frictions as a result of the crisis. According to the Kiel Institute, economic sanctions on Russia might reduce Lithuania’s GDP by roughly 2.5% in the long run, while Latvia and Estonia could experience a 2% decline in the growth of their economy in the long run.
The repercussions on economies outside of Europe will be seen through higher prices and trade frictions. According to IMF projections, a 10% rise in crude oil prices that is purely supply-driven would reduce global GDP by 0.1% to 0.2%. If this trend continues, we may expect a shift of money from oil-consuming nations to oil-producing nations, which have a lesser proclivity to spend. This might have a detrimental effect on investment in oil-importing countries due to a drop in profitability. Meanwhile, as commerce with Russia shifts away from the West and toward other regions, some countries may profit in the short-term run.
Adding to that, a potential decline in gas availability, in addition to rising gas costs, is one possibility that might intensify the crisis’s impact on several European economies. Because it receives 30-40% of its fuel supply from Russia, the area is especially vulnerable to a gas supply disruption. While not our main scenario, if the Eurozone cuts off access to Russian gas, its GDP may decrease by roughly 2%.
Russia-Ukraine War: What Are the Obligations of Brands?
Demand and supply, even though still the primary factor for brand-customer relations, is not the only one in the powerplay. Today’s consumers expect more from their brands. A brand’s social image is as important as its products because consumers link their own social image with the brand’s. Therefore, purchasing from an unethical brand expresses one’s unethical consumption. Sensible and socially woke individuals expect brands to do more than just sell products. They want brands to be more vocal, more conscious, and more political. And the fact that brands are equipping themselves with more and more CSR models just shows the intensity of human agency behind decision-making.
Sevendots team conducted a Pulse survey of 1600 in the UK and USA to understand what consumers expect today. They found out that only 14 percent of people in the USA and 9 percent in the UK do not think brands should get mixed with politics. However, a vast majority wanted brands to get involved in political and social issues. Some also commented on the extent or nature of it. At a minimum, people would like to see some level of advocacy or outward communication. Some wanted to see more effort and expected credible and directed humanitarian efforts. More or less, everyone expects a response from the brands. But the response cannot be a mindless brand-plugging marketing scheme. It has to be a conscious and genuine effort to address the issue at hand.
The Ukraine-Russia War has created a new political scenario for the brands to take quick action. The war has seen one of the toughest economic sanctions in history, and consumers want brands to follow through. Many brands halted their operations in Russia and funded humanitarian projects to support the refugees. Initially, the luxury brands came under criticism for their association with Russian oligarchs and silence over Putin’s invasion. However, slowly they started to take a stand. LVMH closed its 124 stores in Russia. It also made a donation to Red Cross for humanitarian relief. Chanel closed its 17 stores. Burberry and Hermès closed three of their stores in Russia. Tesco, Asda, and Sainsbury’s, UK’s major grocery stores, have stopped buying and selling Russian products. Tesco will no longer buy any product from Russia, although it will continue selling the products it currently has in stock. Asda said it would remove all Russian products from its online and offline outlets and donate about one million pounds to support Ukraine.
Grammarly, the app that corrects grammatical errors, was founded by Ukrainian-born Max Lytvyn and Alex Shevchenko. The app has suspended its operation in Russia and Belarus and will “donate all of the net revenue earned from Russia and Belarus since the war started in 2014 through 2022 to causes supporting Ukraine.” According to the founders, this amounts to a five-million-dollar donation. Grammarly has also changed its logo to Ukrainian colours to show solidarity with the country. Apple and Google Pay have stopped processing payments from a number of Russian banks. Visa and Mastercard have also suspended ties with a number of Russian financial institutions. However, Mastercard is still working with regulators until their compliance obligations evolve.
Author- Mohammad Sifat & Nayeema Nusrat Arora