The Bloody Business of War (Part II)

The most severe of the impacts of the Russo-Ukrainian conflict are likely to be the economic impacts: these include Supply Chain Disruptions, Changes in International Transport & Logistics, and Global Inflationary Pressures.

Supply Chain Disruptions & Commodity Prices

A supply chain is defined as the sequence of processes involved in the production of goods and services, and with recent developments, Russia’s lies in tatters with a projected 11% decrease in real GDP over Q2 and Q3 of 2022, not recovering to usual production levels until 2026. With scores of major Western firms (from McDonalds to Sony to 3M) pulling out from Russia’s markets and manufacturing in the country, its means of production have been destabilized, which will undoubtedly fuel the semiconductor shortages the world is already experiencing alongside many stages of production in automotive and industrial manufacturing coming to a screeching halt. Supply chain disruptions also cause what is arguably one of the most crippling effects of the conflict between Ukraine and Russia which is bound to affect global trade - the rising prices of commodities.

Russia is the world’s second largest oil producer and provides Europe two-fifths of its natural gas supply , which is used to heat roughly half of European households. Moreover, The two warring states are known as the "breadbasket of Europe" and export a quarter of the world’s wheat and 35% of fertilizers used in the global agriculture industry. As long as the conflict rages, oil prices will remain higher than US$100 per barrel with gas prices seeing a 50% increase on top of increases due to the pandemic. Furthermore, Russia and Ukraine being large producers of industrial metals, had a direct impact on its prices. For example, Aluminum and Nickel, both hit a record high of $3,466 a ton and $25,240 respectively at one stage. Similarly, wheat prices also reached a peak price of $384 a ton immediately after the invasion. The effect of high prices for foodstuffs will be felt most severely in nations facing food insecurity, particularly in the Middle East and sub-Saharan Africa, such as Kenya and even Egypt, which itself is the largest wheat importer in the world, and purchases half of its 13 million tons consumed annually from Russia, and since wheat makes up almost 40% of the caloric consumption of Arab nations, these countries are highly dependent on agricultural imports from the Black Sea. Overall, inflation coupled with skyrocketing prices for basic commodities will be detrimental for poorer nations and households of lower income groups (who may be forced to choose between heating their homes or feeding their families).

Transport & Logistics

The disruption of transportation, most notably air and ocean freight, is another major economic impact for the world. Most flights to and from Ukraine and Russia have been suspended and most airlines are seeking to avoid the Russian airspace which effectively eliminates over 10 million miles of air space from international freight routes. Flights are forced to take longer routes, increasing fuel costs which is further worsened by soaring oil prices. Certain carriers are also implementing war risk surcharges. The skyrocketing oil prices have affected ocean freight as well and with Russian forces shutting down shipping in and out of the Sea of Azov — one of Ukraine’s access points to ocean trade and a vital trade route for global grain supplies, cargo movements have been retarded and ocean freight rates have rocketed. In essence, global logistics have severely suffered due to this conflict and producers are less willing and able to supply their goods to different parts of the world leading to severe shortages that will worsen in the coming months.

International Inflation

The War, in its first month, has caused a cascading slide into global recessions and inflation. Even by mid-February, over a week before the war, 15 countries with advanced economies and dozens of LEDCs have experienced more severe inflation over two months than the last twenty years. With the advent of Russia’s invasion into Ukraine and subsequent shortages and sanctions, real output has diminished worldwide, while monetary supply has continued to rise (for example, over 40% of all US dollars in circulation have been printed during the pandemic). Russia itself has found its currency non-convertible, and consequently, its debt has skyrocketed as the ruble’s value crumbles with each passing day and banks have been forced to exponentially increase interest rates up to 20% to reduce inflation, which was at 2.09% for consumer goods in just the week of March 11. Eastern European and heavily import-dependent nations that formed Ukraine and Russia’s trade circle have become extremely vulnerable and are caught between a rock and complete economic collapse, while the rest of the world hangs in a limbo with dampened forecasts and limited imports of crucial natural resources from Russia and Ukraine. In the meanwhile, we all hold our breaths, hoping that the world emerges without overcast skies and the fear of hellfire when we look up once again.

Article Written by Dhruv Mathur and Ivannah Jacob

Edited by Revant Biswas