March 25, 2022

Global Financial Effects of Russia’s War on Ukraine

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The atrocities unfolding in Ukraine make international news night after night as Putin continues his invasion of the country.

Russia’s war on Ukraine has shattered peace in Europe, forcing millions of people to flee their homes in search of refuge. The effects of this senseless violence spread much further than the Russian/Ukrainian border — affecting oil and gas prices as well as the overall cost of living worldwide.

In this article, we will examine why Putin has unleashed this war and explore the consequences his actions will have on the global financial stage.

Why Are Ukraine and Russia at War?

There is never a good enough reason for war. However, Putin remains adamant that his attacks on Ukraine are neither an invasion nor a war but rather a “special military operation”.

The Russian leader’s initial aim was to overrun Ukraine, putting an end to its desire to join the Western defensive alliance NATO. He declared to the Russian people that his goal was to “demilitarise and de-Nazify Ukraine” to protect people subjected to what he called “bullying and genocide” by the Ukrainian government. He insisted that “it is not our plan to occupy the Ukrainian territory. We do not intend to impose anything on anyone by force.”

However, there were no Nazis or genocide, and Ukraine dismissed the claims as mere inventions by the Russian president. Nevertheless, Russia has bombarded cities across Ukraine with brutal force.

Russia’s war on Ukraine continues now. According to the BBC, the latest from peace talks suggest Russia is no longer seeking to overthrow the government and is instead aiming for a neutral Ukraine. Russia's vision of neutrality would mean a Moscow-friendly government in Kyiv that defers to the Kremlin, preventing Ukraine from joining either NATO or the EU.

Whatever the results of the war are, one thing is for certain: it will have long-lasting effects on the financial health of people around the world.

What the War Between Russia and Ukraine Means for the Rest of the World

Despite being mainly a humanitarian crisis, the conflict in Ukraine has negatively changed the global economy in less than a month.

A Breakdown of the Russian Economy

Before the invasion, the Russian economy was the 11th biggest economy, according to World Bank data, being a key supplier of commodities such as energy and food. Now, it faces some of the harshest sanctions imposed by the West. Here is a list containing the main sanctions in force against Russia include:

  • Luxury goods, vodka and travel: Sending luxury goods to Russia has been banned by the EU and UK. The UK will also put a 35% tax on some imports from Russia, including vodka. All Russian flights have been banned from US, UK, EU and Canadian airspace. The G7 is stripping Russia of its "most favoured nation" status, which means it will lose many trading benefits.
  • Oil and gas: The US is banning all Russian oil and gas imports, and the UK will phase out Russian oil by the end of 2022. The EU says it will switch to alternative supplies and make Europe independent from Russian energy before 2030.
  • Financial measures: Western countries have frozen the assets of Russia’s central bank to stop it using its $630bn (£470bn) of foreign currency reserves.

As a result of the sanctions, Russian inflation is likely to soar, resulting in weaker real incomes and disrupted trade. However, the economic effects of the war will extend far beyond the borders of Russia.

Global Economic Effects of the War Between Russia and Ukraine

The war between Russia and Ukraine represents a challenge for the global economy, harming growth and putting pressure on inflation when rates are already at high levels.

The Ukrainian and Russian economies are key suppliers of metal commodities such as titanium and palladium. Disruptions to the supply chain of these items would keep prices high, which will have a substantial impact on industrial sectors (such as the automotive industry) across the globe.

Secondly, significant hikes in energy prices are already impacting the West due to Russia being one of the world’s largest oil producers (just behind the US) and energy exporters. British and European gas prices both hit records high in March as the conflict continued to wreak havoc on energy markets, exacerbating the cost of living crisis. 

Although, there are hopes that the conflict will act as a catalyst for greener energy use, as countries may be forced to turn to renewable energy sources. 

Higher commodity prices will fuel global inflation this year and possibly in 2023. The EIU predicts that the conflict will cause inflation to exceed the previously forecasted 6% this year. The EIU has also revised its global growth predictions. In 2022, global growth will stand at 3.4%, down from the previous forecast of 3.9% — however, it’s not expected to cause a recession.

Russia’s war on Ukraine has triggered a humanitarian crisis, with Ukrainians forced to flee the country in their droves. The UNHCR says there could be 4 million refugees as the crisis unfolds, leading to an economic shock of uncertain duration and magnitude. 

War rarely just affects one country. The war between Russia and Ukraine will have both social and economic effects on different parts of the world to varying degrees. Even a swift resolution won’t guarantee the reversal of the damage already caused.

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