World Economy: Impact of Russia’s full-scale invasion of Ukraine

Event

Russia’s invasion of Ukraine has a devastating impact on Ukraine. The Russian economy is also likely to be affected by the tightening of western sanctions, as by the depreciation of the rouble and the sharp drop in confidence. 

Impact

Looking ahead, the crisis is likely to have ripple effects on other countries. On the political side, Moldova and Georgia are the most at risk, given their willingness to have closer ties with the EU and, for Georgia, to join NATO. Like Ukraine, both countries signed an association agreement with the EU. So did Armenia. However, despite sporadic tensions between Russia and Armenia, the latter seems less at risk, as it already relied on Russia for its security, and as it is a member of the Eurasian Economic Union (along with Russia, Belarus, Kazakhstan and Kyrgyzstan). Tension is also rising in the Baltic states, given their geographical location, as a Russian minority is living there, and more fundamentally, as Russia opposed the fact that they joined the EU and NATO. Nevertheless, the military risk is mitigated by their NATO membership (unlike Ukraine).
 
On the economic side, the crisis has a large impact on commodity prices, notably on oil and gas prices that surged, but also on wheat, given that Russia and Ukraine are major exporters (about a third of global wheat exports), corn (about a fifth of global exports) as well as on metal prices. Indeed, Russia is an important producer of aluminium as well as copper, nickel, platinum and palladium. Ukraine is a large supplier of noble gases (input for chip production) and a producer of car parts, which is likely to affect the automotive sector.
 
The impact of higher energy prices would affect the EU in the first place, as the EU relies on Russia for about a quarter of its oil supply and for more than a third of its gas supply (with large discrepancies across member countries in terms of reliance on Russia’s gas). But, other oil importers would also be affected. Especially Turkey, whose economy is likely to be hit by the increase in energy prices as well as by lower tourism revenues, as tourism from Ukraine and Russia represents a significant part of tourism arrivals. Its exports to Ukraine, Russia and the EU are also likely to be affected. Indeed, Turkey is supporting Ukraine, notably with arms deliveries, even if President Erdogan tried not to jeopardise its relations with President Putin. The crisis comes at a time when the Turkish economy is already suffering from sharp lira depreciation and very high inflation amid unorthodox monetary policy. A sharp increase in grain prices would have an impact on inflation and could lead to increased social unrest, as witnessed in 2008. Large grain importers are likely to be affected, notably in North Africa and the Middle East (e.g. Egypt – the world largest wheat importer – and Lebanon), but also elsewhere (e.g. Bangladesh). All in all, it is too early to assess the impact of the conflict on the global economy as its severity will depend on how the situation evolves on the front lines. However, it clearly clouds the outlook in the short term.

Analyst: Pascaline della Faille - P.dellaFaille@credendo.com