By Michel Lamah | Staff Writer
Ukraine’s conflict is a threat to the global economy, limiting growth by increasing inflation, causing millions of Ukrainians to seek refuge, and driving up food and oil prices. Russia’s invasion of Ukraine will have long-term and harmful repercussions for the international economy, with particularly dire repercussions for Russia for a dozen years or more, less severe consequences for Europe for a decade, and even fewer consequences for the United States and the rest of the world economy.
First and foremost, we need to understand that Ukraine and Russia are significant producers of titanium, palladium, wheat, and corn, among other products. Both countries play an essential role in agri-food markets, accounting for 53% of international trade in seeds and sunflower oil and 27% in wheat. Consequently, variations in the supply chain for these products and services would jack up prices, aggravating the situation of the average global customer. This rapid change is particularly concerning for developing nations. As many as 25 African countries, with some of them being the least developed countries, import more than one-third of their wheat from the two rival countries. Soaring food prices will then affect the poorest households, which spend most of their income on food, resulting in famine and civil unrest. More generally, businesses worldwide will have to change their distribution channels, find new suppliers and try to cope with higher trade costs since restrictive measures on airspace have been applied to all trade routes going through Russia and Ukraine.
Secondly, Russia’s oil output will continue to decline without Western technological investment. Russia, just like most countries, began by pumping oil from the most convenient areas. The best opportunities to replace declining oil fields now exist in rough terrains, such as Siberia and shale formations. In both circumstances, oil and gas production necessitates technology beyond Russia’s resources and capabilities. Western forces will decline to supply Russia with the necessary technology, and oil production will decrease in the coming few years unless western joint ventures are formed. Higher oil prices will have a minor impact on the United States and the rest of the world economy. Significant global trade sanctions on trade with Russia will drive oil prices to rise by up to $40 per barrel. However, if a truce is achieved, those prices won’t be as significantly high as they would be today. Nonetheless, Russia will cost the world lower long-run oil production as we shift to oil production in higher-cost locations.
Thirdly, the sizable emigration from Ukraine will cause economic instability in the neighboring countries. The UNHCR estimates that as the crisis begins to unravel, there might be 4 million refugees, depending on border security, the duration of the war, and how the financial system recovers after the military conflict. As part of being Lebanese, we know that accepting war refugees from neighboring countries is a sensitive subject, and that might cause political and diplomatic instability. Eventually, diplomatic unpredictability may cause savings ratios to rise and firms to be somewhat unwilling to invest. Furthermore, European countries may choose to increase defense spending. Perhaps they should have spent more all along; however, that doesn’t change the point: military expenditure will rise without the need for a corresponding increase in productive capacity in Europe. As a result, economic growth will slow, as will European citizens’ standard of living. These consequences will be subtle but significant. Most Europeans would then pay more for energy. It is almost certain that Europe will seek energy from non-Russian countries, albeit at a higher cost than they’ve been paying. This financial impact might be mitigated if Europe decides to abandon its decarbonization policies, which is unlikely.
In a nutshell, the Ukrainian conflict has caused complex global supply chain reconfiguration and mounting trade costs. The significant impact on the world economy could be summarized as rising fertilizer, food, and oil prices. However, this doesn’t give us the entire image as the war resulted in the displacement of millions of Ukrainians around neighboring European countries, which could be a factor of financial and political instability. The Ukrainian war could send the world into a recession as it affects European growth and risks famine and civil unrest in the poorest nations.