By Matthew Eloyi – The fact that Russia launched a military invasion of Ukraine on February 24, 2022, in a massive escalation of the Russo-Ukrainian conflict that began in 2014, is no longer news. It is Europe's
biggest military confrontation since World War II. The invasion resulted in the largest refugee
crisis in Europe since then, with over 3.1 million Ukrainians fleeing the country.
The conflict, which has continued to linger, is a big setback for the global economy, causing
growth to slow and prices to rise. Aside the misery and humanitarian disaster caused by Russia's
invasion of Ukraine, the world economy as a whole will suffer from weaker development and
higher inflation, if the war continues in the next six months.
There will be three major channels through which the effects will be felt. One, increasing costs
for commodities such as food and energy will drive inflation higher, diminishing the value of
incomes and putting downward pressure on demand. Two, adjacent economies will face
disruptions in commerce, supply chains, and remittances, as well as an unprecedented increase in
refugee movements. Finally, lower company confidence and increased investor uncertainty will
put downward pressure on asset values, tightening financial conditions and perhaps causing
capital outflows from emerging markets.
Russia and Ukraine are important commodity producers, and the interruptions have driven up
worldwide prices, particularly for oil and natural gas. Food prices have risen sharply, with wheat
shipments from Ukraine and Russia accounting for 30% of global exports.
Countries with direct trade, tourist, and financial exposures will face extra pressures in addition
to global spillovers. Oil-importing economies will experience larger fiscal and trade deficits, as
well as increased inflation pressure, though some exporters, such as those in the Middle East and
Africa, may benefit from higher prices.
Increased food and fuel prices may exacerbate the danger of unrest in several countries, ranging
from Sub-Saharan Africa and Latin America to the Caucasus and Central Asia, while food
insecurity in parts of Africa and the Middle East is likely to worsen.
In Ukraine, the toll has already been enormous. Unprecedented sanctions against Russia will
stifle financial intermediation and trade, resulting in a deep recession in the country. The fall of
the ruble is boosting inflation, further lowering people's living standards.
Because Russia is a major source of natural gas imports, energy is the primary spillover channel
for Europe. Wider supply-chain disruptions could have serious consequences. These
repercussions will exacerbate inflation and slow the pandemic's recovery. Eastern Europe will
face increased finance costs as well as an influx of refugees. According to UN estimates, it has
absorbed the majority of the 3 million refugees who recently evacuated Ukraine.
Additional spending on energy security and defense budgets could put economic strain on
European countries. While foreign exposure to Russian assets is small by global standards,
pressures on developing markets could increase as investors seek safer havens.
African countries are also vulnerable to the war's consequences, owing to rising oil and food
costs, diminished tourism, and the possibility of problems accessing international credit markets.
The dispute arises at a time when most governments have limited policy options to mitigate the
shock's effects. This is expected to exacerbate socioeconomic pressures, public debt
vulnerability, and scarring from the pandemic, which was already wreaking havoc on millions of
homes and businesses. Record wheat prices are especially worrying for a region that imports
around 85% of its supplies, with Russia and Ukraine accounting for one-third of that.
The consequences of the war between Russia and Ukraine have already shaken not just those
countries, but also the region and the rest of the world. While some effects may take years to
manifest, there are already clear signs that the war and the resulting increase in the cost of
essential commodities will make it more difficult for policymakers in some countries to strike the
delicate balance between containing inflation and supporting the pandemic's economic recovery.