March of 2023, marks the anniversary of the war between Russia and Ukraine. More than 365 days later, the conflict still rages with the world divided. No, the war still did not inflict any external damage like the Second World War. But damage in fact was done and it has been economic in nature. Right after the conflict began and sanctions were imposed, the world economy suffered heavily. From global changes in fossil fuel prices to supply chain issues, everything took a massive hit. The incident that started in Eastern Europe, now ravages even the most remote corners of the world and keeps on inflicting uncertainties. The international economy is still suffering from the effects of Russia’s invasion of Ukraine on February 24, 2022, a year later. There are shortages of grain, fertiliser, and oil, as well as increased inflation and economic instability in a world already dealing with too much of both.

There is one solace in the war’s disastrous effects: it could have been worse. Surprisingly robust, developed-world businesses and nations have so far avoided a devastating recession, which would have been the worst-case scenario. Yet the suffering has been worse in emerging economies.
Such an effect can be very meticulously inspected if looked at economies like Egypt where food prices and prices of basic groceries have spiked so much, it is almost impossible to keep a family afloat. Although high commodity prices were already one of the concerns listed as potentially impeding the recovery, the possibility that they will stay higher for a much longer period of time is increased by the conflict’s escalation. In consequence, this heightens the danger of persistently high inflation and raises the likelihood of stagflation and societal instability in both developed and developing nations.

A sharp increase in consumer costs that was caused in part by the war’s impact on oil prices has gradually subsided in the United States and other rich nations. That has raised optimism that the U.S. Federal Reserve’s battle against inflation will back down from raising interest rates, which have threatened to send the largest economy in the world into recession and sent other currencies down against the dollar. Late last year, China likewise abandoned harsh zero-COVID lockdowns that had slowed the expansion of the world’s second-largest economy. Moreover, some serendipity has been helpful: as Russia entirely turned off gas to Europe, a warmer-than-normal winter has assisted in bringing down natural gas prices and containing the effects of an energy crisis. Yet, the price of oil and gas was high enough to mitigate the effects on the energy-exporting Russian economy.

According to Adam Posen, President of the Peterson Institute for International Economics, although the conflict is a human tragedy, its effects on the global economy are just a temporary shock. Yet, the conflict is hurting people in huge and subtle ways. For instance, natural gas prices in Europe are still three times higher than they were prior to Russia amassing soldiers on Ukraine’s border.

The war taking place during a global pandemic perhaps made the entire ordeal have an even rougher effect. According to the World Bank, if energy price shocks continue to affect the region, economic activity will remain severely depressed over the next year, with only 0.3% growth anticipated in 2023. Yet thus far, the area has fared better than anticipated in the face of Russia’s invasion of Ukraine. Due to above-expectation growth in several of the region’s strongest countries and the sensible continuation of stimulus packages from the pandemic era by certain governments, regional production is now anticipated to decrease by 0.2% this year.
Although economic activity is marred by the loss of producing capacity, degradation to arable land, and lower labour flow as even more roughly 14 million people are reported to have been displaced, Ukraine’s GDP was expected to fall by 35% last year. Recent World Bank projections indicate that $349 billion in recovery and rebuilding is required across the infrastructural, production, and social sectors, which is more than 1.5 times the size of Ukraine’s pre-war GDP in 2021. The war’s effects on trade disruptions, food and fuel price shocks, and the global economy as a whole have all contributed to rising inflation and a tightening of financial conditions globally. Due to troubled supply chains, rising financial stresses, and a fall in consumer and company confidence, activity in the euro area, the major trading partner for EMDEs in Europe and Central Asia, had significantly declined in the second half of 2022. Yet, the invasion’s greatest negative repercussions are the sharp increases in energy costs and the significant decreases in Russian energy supplies.

The growth predictions for 2023 have been broadly revised downward across EMDEs in Europe and Central Asia due to the high degree of uncertainty surrounding the region’s future. War that lasts longer or gets worse has a greater chance of splintering worldwide commerce and investment as well as causing much more harm to the economy and environment. With the high levels of debt and inflation, the potential of a financial crisis is still quite significant.

The nations with a medium to high dependency on natural gas imports for heating (roughly about 30% of energy consumption), industry, or electricity, as well as nations with tight ties to EU energy markets, were predicted to be hurt, which really was not that far off a notion. These nations must get ready for gas shortages and establish emergency measures to lessen the worst effects on people and businesses. These preparations should include energy conservation, improving energy efficiency, and instituting quota/rationing schemes. Campaigns to improve behaviour that emphasise heating efficiency in houses and buildings, including resealing windows and putting in insulation, need very little money and produce noticeable results right away.

Direct supply lines with Russia and Ukraine, as well as supply networks that go through Russia to reach Asia, have all collapsed as a result of the commencement of the conflict and the ensuing sanctions. Because of this, the cost of various raw materials, energy, intermediate goods, and transportation services has dramatically increased. For instance, the cost of fuel has doubled and the cost of gas has quadrupled. In the medium future, more price increases are anticipated. Because of this, businesses are now expected to prioritise digitization initiatives and discover possible savings. Our survey-based analysis reveals that the conflict is leaving many businesses in a significant lot of confusion, with 41% still unable to determine the impact on their firm. 46 percent anticipate a decline in sales and 47 percent a decline in profitability as a result of the conflict in Ukraine. In addition, 80% believe that the Ukrainian conflict will have a detrimental effect on their business for more than a year. 40% are concerned about adverse consequences lasting more than three years.

Due to many shortages as well as elevated commodity and raw material costs, such as those for metals, semiconductors, cobalt, lithium, and magnesium, the crisis is unquestionably having a significant impact on the already stressed automobile sector. Major Western European automakers are supplied by Ukrainian auto companies; some of these facilities have stopped operations, while other plants all over the world are already preparing for outages due to chip shortages. Higher fuel prices would also hurt businesses that transport goods by sea and air, with airlines being especially vulnerable. First, it was predicted that gasoline will make up approximately a third of their overall expenses. Second, Russian airlines are not allowed to enter the US, Canada, or Europe, and Moscow has responded by forbidding European and Canadian aircraft from entering its airspace. Airlines now need to take longer routes, which will result in greater expenses. As revenues continue to decline as a result of the epidemic, airlines will eventually have little flexibility for cost increases.
If anything, the war negatively affected Russia and Ukraine the most. The sanctions and a drop in oil prices have hurt Russia’s economy, while the fighting and the loss of Crimea, a crucial industrial and tourism magnet for Ukraine, have hurt Ukraine’s economy.

After the conflict, the Russian economy would face severe hardships and experience a severe recession. With the improvement from last year, Coface’s revised GDP prediction for the year is now at -7.5%. As a result, we have reduced the country’s risk rating from B (quite high) to D. (very high). Major Russian banks, the Russian central bank, Russian sovereign debt, a small group of Russian public officials and billionaires, and the restriction of high-tech component exports to Russia are all notable targets of sanctions. These actions further pressurise the already-collapsing Russian ruble and will cause a spike in consumer price inflation.With a recurrent current account surplus, low levels of government external debt, and significant foreign reserves, Russia has developed relatively robust financials (app. USD 640 bn). The latter, however, cannot be used by the Russian Central Bank because of the freeze placed by western depositary countries on them, which lessens the efficacy of the Russian reaction. A rise in commodity prices, notably for its exports of energy, might be advantageous for the Russian economy. Yet, EU nations declared their determination to restrict Russian imports. Given the significance of such inputs in the Russian mining and production sectors, limiting access to Western-produced electronics, computers, telephones, automation, and information security technology will be detrimental to the industrial sector.
Even more significantly, the war has had a negative influence on Ukraine’s economy. Crimea, a crucial economic centre for the nation, is no longer under its authority. Together with substantial ports and industrial hubs, Crimea was home to a sizable chunk of Ukraine’s tourism economy. Ukraine’s economy has been significantly impacted by the loss of Crimea, and since the crisis started, the GDP of the nation has decreased by more than 10%. The economy of the nation has been significantly impacted by the fighting in eastern Ukraine. The area served as a key industrial centre for Ukraine, and the fighting has caused output to fall and job losses to occur. Russia, one of Ukraine’s biggest business partners, has seen a drop in trade as a result of the conflict. Exports from Ukraine to Russia decreased by 60%, and commerce between the two nations plummeted by 40%. The amount of foreign investment in Ukraine has decreased as a result of the conflict. As the crisis has made it more challenging for Ukraine to access foreign money markets, investors are leery of investing in that nation.

It truly has been a rough ride. As the war continues, so does the suffering of the global economy and subsequently, the marginal people. It is still unknown when and how the conflict will come to an end. But the damage it has caused can be referred to as no less than havoc from a modern perspective, where economy is the greatest asset of each nation.

Author- Shiddhartho Zaman

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