The price of freedom and democracy

The Ukraine-Russia war is already having considerable economic consequences in all parts of the globe, including Bangladesh. The currency value of Russia has lost half of its value, and inflation is soaring. Europe is witnessing a significant impact on energy and prices of other products rising and probably set to continue to do so. May be this high payment is the price of freedom and democracy. The European Union (EU) has to accept to pay a higher price to stop this unprovoked war. The future of the EU’s security and its democracy depends on it. The war in Ukraine is the fourth asymmetric shock, as economists call it, that the Union has experienced in the last two decades, after the 2008 financial and economic crisis, the Eurozone crisis, and the Covid-19 pandemic. Any asymmetric shock is a sudden change in economic conditions that affect some EU countries more than others. The war in Ukraine has a much more significant impact on neighbouring countries due to the influx of refugees and heavy dependence on Russian gas. EU leaders met in Versailles and decided to phase out their reliance on Russian gas, oil, and coal very recently. They viewed that they could not feed Vladimir Putin’s war machines through their energy imports. To cut dependence on Russia, they shall opt for diversification of supplies, energy efficiency, and acceleration of renewables.

Primarily a humanitarian crisis, what is the implication for the global economy from the point of the Russian invasion of Ukraine? What could the sanctions and the ongoing conflict means for European economic growth, energy prices, and inflation? Obviously, the whole world is saddened for all Ukrainians at this dreadful time and can only hope that the sanctions imposed on Russia do have some effects. What does the analysis say about the effects on the Russian economy? Conflict in Ukraine has negatively changed the global economy within a few weeks’ time. Just before the conflict started, the Russian economy was the 11th largest economy (as per IMF) of the world. At that time, Russia was a major supplier of energy (gas, oil, and coal) and food. The Russian economy has been battered by unprecedented Western sanctions. At the same time, Western economies were unwilling to face a nuclear opponent on the battlefield. Sanctions imposed include freezing of Russian Central Bank assets, targeting of wealthy Russian individuals and state owned banks, partial restriction to the international payment system SWIFT and Germany’s stoppage of its Russian gas pipeline project. However, the sanctions’ costs to Russia are partly cushioned by higher prices of gas and oil exports and avoidance of restrictions through trade conducted with third countries. The net economic impact on the Russian economy may be bearable for the country.

The economic effects of the war and the sanctions will be felt across the world. The war will adversely affect the World’s GDP and inflation. The war in Ukraine represents a challenge to the global economy, negatively impacting growth and putting upward pressure on inflation. Although Ukraine is not a major trading partner of any developed economy, Russia is a major trading partner of the US, China, Germany, France, and Italy. Economists estimate that the spill-over effects of the war would have a negative impact on global trade. According to the Global Econometric Model, the war will contribute to a fall in Russian GDP by 1.5 per cent in 2022 and 2.6 per cent in 2023 and inflation will rise above 20 per cent due to higher import prices. Besides, currency value will fall due to higher inflation, low confidence in currency, a fall in real income, and disruption of trade. Actions against Russia would reduce foreign direct investment (FDI). Various estimations projected that the conflict would impact global GDP to decline by 0.5 per cent in 2022 and close to 1 per cent by 2023, which would be around $1 trillion of the global GDP. At the same time, it would add three per cent to global inflation in 2022 and 2.6 per cent in 2023. This rise in inflation would raise the costs of living and household consumption.

There are several channels through which the conflict would impact the world economy. Both Russia and Ukraine are major suppliers of commodities, including titanium, palladium, wheat, and corn. Disruption to the supply chain of these commodities would keep prices up, intensifying problems for users, including users of cars, smart phones, and aircraft manufacturers. A significant rise in energy prices would impact the global energy market because Russia is one of the largest global producers of oil. Ultimately this would lead to high inflation. The West’s economic sanctions on trade with Russia appeared to be more severe than the one of 2014. In addition to this, all these large-scale emigration from Ukraine would have negative consequences on the neighbouring states. According to UNHCR, the influx could be around four million refugees in the gradually unfolding crisis. If the conflict continues and if the economies fail to settle down after the war, there is every possibility of a global recession. In that case, political risks and uncertainty may drive up savings ratio and make firms reluctant to invest.

European Union is the most vulnerable of the major economies, given trade links, reliance on Russian energy to meet more than 60 per cent of the energy needs, and the dependence on food supplies. Risks for some European banks have risen, and share prices have fallen. Markets will remain watchful for any default problems regarding firms with strong links to Russia. Ukrainian refugees will be seen as a European problem and present substantial demographic challenges, mainly for Western Europe. There is likely to be higher spending for NATO. Defense spending in NATO and assistance expenditure for refugees shall add to pressure on resources with higher inflation. Global Econometric Model estimated a fall in Eurozone GDP growth by 0.9 per cent in 2022 and 1.5 per cent in 2023. If the sanctions are to be prolonged to Russian energy exports, or if Russia is to lower its gas exports as a tool for leverage, European energy prices would rise and may lead to recession.

The Ukraine-Russia war will have a negative impact on the emerging and developing countries. This war will have repercussions for emerging and developing economies that are energy importers. They will suffer more than Europe due to the rise in the price of fossil fuels. However, it is not just about energy. The impact is on the grains, wheat, maize, sunflower, and fertilizer market. Both Russia and Ukraine are major suppliers. The prices of basic agricultural products are already high. They will probably increase further with major potential for increased suffering and political instability. The economies of developing and emerging countries have been hard hit by the Covid-19 pandemic. The war in Ukraine may make things worse with risks of major unrest related to food and energy price hikes. 

The writer is former Director General of EPB. He can be contacted at hassan.youngconsultants@gmail.com