Soaring global crisis amid Ukraine war
FEBRUARY 24, 2022 will be added as another important day in our recent history when Russian forces invaded Ukraine.
Prior to that Russia had invaded Georgia in 2008 and Crimea in 2014, without any retaliation from other big powers and invading Ukraine was perhaps prompted by the weak stand taken by other big powers.
The war in Ukraine risks upending Europe’s economic recovery. The Russian invasion caused a massive humanitarian crisis – almost seven million Ukrainians have fled the country.
The conflict and resulting sanctions have disrupted exports from the region for commodities like metals, food, oil and gas, pushing up inflation to levels not seen in decades.
Real economic growth in the European Union is now expected to fall well below 3% in 2022, down from the 4% estimated by the European Commission before the war.
Further trade disruptions or increased economic sanctions could plunge the European economy into recession.
The slowdown in growth is particularly pronounced in countries in close proximity to Ukraine, like Poland and Hungary – countries that are also hosting large numbers of Ukrainian refugees.
Italy and Germany, which are heavily dependent on Russian oil and gas, are feeling the pressure as well.
Russia’s invasion of Ukraine in February 2022 heightened geopolitical tensions between the Western countries and Russia, lowering global growth expectations due to uncertainty about the effects of the conflict, especially on the global supply chain.
In addition, the sanctions imposed on Russia by Western nations have a spillover effect on the global economy.
Conflicts have led to energy supply shocks, commodities and trade supply shocks, rising energy, food and commodities prices, thereby causing global inflation in many countries.
The dispute between Russia and Ukraine began in early 2008 when Ukraine announced its intention to join the North Atlantic Treaty Organization (NATO), but Russia did not accept it.
Shortly thereafter, Russia invaded the Crimean Peninsula in 2014, resulting in violence in Donbus and fierce fighting on the Russian-Ukraine border, on 24 February 2022, which ended up with a Russian total invasion of Ukrainian territory.
While the economic impact of the Russian-Ukraine war may not be fully known until the conflict ends, early economic indicators show some significant consequences to the global economy as a result of this war.
According to a World Bank study the war in Ukraine is causing an enormous humanitarian crisis.
More than 12 million people are estimated to have been displaced and more than 13 million need urgent humanitarian assistance.
Ukraine’s economy is being devastated. Trauma suffered by the population will have enduring consequences.
The war is triggering global ripple effects through multiple channels, including commodity markets, trade, financial flows, displaced people, and market confidence.
In surrounding region, a large wave of refugees will put pressure on basic services. The damage to Russia’s economy will weigh on remittance flows to many neighboring countries.
Disruptions to regional supply chains and financial networks, as well as heightened investor risk perceptions, will weaken regional growth.
The war has markedly eroded near-term global economic prospects. The initial global economic impact has primarily been through commodity markets.
Prices for commodities that Russia and Ukraine supply, including energy, wheat, fertilizers, and some metals, are sharply higher.
In many emerging markets and developing economies (EMDEs), rising food and energy prices are exacerbating poverty and, in some cases, food insecurity, and heightening inflation pressures that were already building.
Financial markets have been volatile amid increased uncertainty and geopolitical tension. Many commodity-importing EMDEs have seen capital outflows and markedly higher borrowing costs.
Expected monetary tightening in advanced economies has also accelerated, heightening vulnerability to financial crisis.
If protracted, the war could further dampen global confidence and weaken global growth, worsen food insecurity, and increase financing costs and the risk of financial crises in some EMDEs.
It could also intensify policy uncertainty and lead to fragmentation of global trade and foreign investment networks— channels that in the past have played a fundamental role supporting growth, poverty reduction, price stability and energy and food security.
These risks could be magnified by ongoing vulnerabilities, including high debt and low inventories of some commodities, such as wheat and oil.
These risks are interrelated and mutually amplifying and could possibly lead to a hard landing for the global economy.
Mitigating the effects of the war on lives, livelihoods and economic growth will require carefully calibrated policies.
A concerted effort will be needed to house refugees, meet their basic needs and foster smooth integration into host communities.
When the war subsides, a large mobilization of resources will be needed for reconstruction in Ukraine.
Under the pressure of higher prices for food and other essentials, governments may be tempted to implement price control and subsidy policies, but these could prove counterproductive.
Instead, appropriately calibrated safety net policies can protect vulnerable groups from sharply higher consumer prices.
Monetary and financial authorities can communicate clear, data-dependent strategies to control inflation, while strengthening macro prudential frameworks to guard against financial stress.
To offset the damage to long-term growth, including from disruptions to global trade and investment networks, reforms to improve business climates, strengthen human capital, and boost productivity are needed.
These policy interventions are all the more important in light of the lasting adverse impact of the pandemic on human capital formation.
Prior to the invasion, the world was focused on the health and economic challenges caused by the pandemic: reversing the severe loss of human capital and supporting the global economy amid an uneven recovery characterized by lingering supply bottlenecks; the withdrawal of policy support; and rising inflation, including for food and energy.
The war has already added an immediate global adverse impact, especially through commodity markets and is worsening near-term global economic prospects and is having significant economic spillovers.
However the Ukraine invasion has strengthened Russia’s role as a major player in Asia and reminded the Western powers of its might and role it can play in shaping the world politics and economy.
—The writer is an author of ‘2020 & Beyond’ and writes on International & Political Affairs.
