How’s The Ongoing War Between Russia And Ukraine Impacting The Global Economic Condition

When the Russian army invaded the Ukrainian borders back in February, no one knew just how long the conflict would last and how it would send shockwaves through the rest of the world.

Now, the war is approaching its 4th month and the economic fallout is as clear as day and the future doesn’t look bright either.

Following the Coronavirus pandemic, there was already a great global inflationary pressure, with rising prices of food and energy and disrupted supply chains. The war between Russia and Ukraine only alleviated the supply and demand tensions, which damaged consumer sentiment and is, overall, threatening global economic growth.

Global Financial Markets

The war has a dampening effect on the global financial markets. Investors are feeling the heat, as their decisions are rattled because of the inflation and how it is affecting global growth.

The International Monetary Fund is predicting the inflation rate to reach new heights in every country in the world. This, in turn, is prompting investor questionnaire to push yields higher and sell bonds. Many investors also expect central banks to hike up interest rates so that the prices can be controlled to an extent. Such a move can cause an increase in market sell-offs.

Inflation in energy, agribusinesses, and supply chains is moving unchecked and, like a nuclear reaction, all of them are triggering a myriad of follow up consequences. All the assumptions about an interconnected globalized economy are now proven to be false.

Global Economic Growth Crisis

With both IMF and The World Bank lowering their forecasts of global growth, the shockwaves from the war are continually felt by investors and consumers around the globe.

The IMF Global Growth Projections for the years 2022 and 2023 have weakened, citing that the conflict between the two countries will grow wider, adding to the inflation and magnifying significant policy changes. Similarly, at the World Bank, the global growth forecast for 2022 has gone down a full percentage point.

The reason behind the downturn from both sources is the expectation of intensive supply shocks and a dramatic rise in the prices of commodities, especially those that are being supplied by Russia and Ukraine.

Russia is one of the major suppliers of gas, metals, and oil while Ukraine deals majorly in the supply of wheat and corn. So, the reduced supply of these commodities around the world has caused their prices to go up by a lot.

Food Prices

With the conflict merging with other disruptions, such as inflation, the pandemic, and supply chain constraints, it is posing a threat to the global food supply.

Both Russia and Ukraine are seen as global “Bread Baskets,” which essentially means major food producers. They are not only the exporter of key food staples, such as wheat, but also are a major fertilizer supplier all over the world.

Other than Russia and Ukraine, there are around 4 major food producers altogether. All six roughly supply 60% to 70% of agricultural commodities globally. Russia and Ukraine are responsible for 30% of that supply, as they export an exuberant amount of wheat and sunflower. And since the markets are interconnected, this disruption in the supply has created a vast impact on food prices.

Now, this instability has started to create a “whiplash effect,” best described as an abrupt change in directions, in the food supply chain. While the implications are not as easy to project, the crisis is guaranteed to have secondary effects on several other bread baskets around the world.

IMF also indicated that the rise in food prices may have a multitude of other concerning impacts. The International Monetary Fund said that with the increase in fuel and food prices, there is a significant increase in the likelihood of social unrest in unstable and underdeveloped countries.

Final Words

The intensity of the impact of this war on the global economy now depends on how long it lasts and the scale of disruption and devastation it causes.

However, there are little to no signs that Russia is willing to back down anytime soon regardless of the international sanctions. These sanctions have adverse effects on some of the most vital sectors of Russia, from gas and oil to the entire financial system. Nonetheless, analysts have suggested that the sanction are not likely to deter President Vladimir Putin from his objectives.