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Calculating Ukraine’s economic impact

Calculating Ukraine’s economic impact

The world seems to have entered a new crisis after the start of the Russian military action on Ukraine on 24 February 2022. While Russia has pushed itself in the war, the US-led NATO countries are fighting a proxy war.

The economy is a complex phenomenon, and thus linking it solely to one of the many wars and separating it from other natural and manmade events is difficult if not impossible. Yet I try.

The most obvious impact of the war can be seen in the hikes of fuel prices around the globe.

Ukraine has suffered the most. Once a strong oil, coal and natural gas producer, drilling wells and even nuclear facilities, Ukraine is under intense stress. Much of its capacity to operate and produce oil and gas has been lost. Despite a synchronization of the Ukraine and Moldova grids connecting Ukraine to the Continental European Grid, Ukraine faces electricity shortages as its nuclear facilities, hydro-power generation and a network of thermal plants can be attacked.

The EU heavily relies on Russia for energy. A 10-point EU plan envisions reducing its reliance on Russian energy by at least two-thirds. This would entail finding replacements for an average of 55 million cubic meters of gas a day.

The US has been trying to find a balance point that curtails the Russian economy but does not lead to a recession. The US supply covers over 50 percent of the EU’s and the UK’s additional LNG demand, and 37 percent of all LNG supplies into Europe. However, the US efforts, including the release of fuel from the Strategic Petroleum Reserves, have been unsuccessful. Also, the US and the UK have largely failed in getting additional oil from the OPEC countries.

Meanwhile, China and India have put their national interests first and have been buying Russian oil at cheaper rates. Under a new supply-deal, Russia will increase volumes by up to 10 billion cubic meters per annum from the Sakhalin Island in Russia’s Far East. Russian supply to China will exceed 48 billion cubic meter per year from 2025. India has looked to Russian oil as the latter began offering steep discounts of $35 a barrel—provided India does not cancel the existing 15 million barrels deal.

India, Taiwan, the Philippines, South Korea, Thailand and Vietnam are the largest importers of Russian fuel, all of whom import gas from the Sakhalin-2 and Yamal LNG pipelines. Having joined the sanctions, Japan is forced to seek alternatives from Australia, the US and regional supplies across Asia.

Russia’s position as a leading natural gas supplier to Europe and beyond had checked the proliferation of conflict on the European continent for two decades, to the benefit of all parties. But this time, the US-led opponents seem more tilted to prolong the conflict.

Russia and Ukraine are vital for the world’s food supply, and conflict between these two producers of basic staples has knock-on effects well beyond the front lines. Ukraine has been a major exporter of wheat, corn, barley and cooking oil in the three decades since the end of the Cold War. The former “breadbasket” of the Soviet Union, Ukraine had become a major source of sustenance for many other parts of the world. The war has cut deeply into both Ukraine’s production and its ability to export.

Supplies to the world from Russia, meanwhile, are being affected by both the international sanctions imposed on Moscow as well as by the war’s disruption of shipping routes.

Many countries face a supply crisis. Egypt and Lebanon rely on Ukraine and Russia for more than two-thirds of their wheat imports. In Thailand, close to a third of wheat imports come from Ukraine and Russia. Two-thirds of sunflower oil imports to Malaysia are also from Russia and Ukraine.

Food prices are rising fast. A World Bank index that tracks the cost of food is more than 80 percent higher compared to two years ago. Food prices are predicted to rise by 20 percent this year.

Directly affected poor countries cannot support small farmers in planting crops, which in turn could fill the gaps in the global system. They also cannot support the social safety nets to ensure access to food.

Turkey, Lebanon, Iraq and Somalia are highly reliant on Ukraine for food. The drought-hit countries in the Horn of Africa have experienced follow-on impacts, as they are missing grain from Ukraine, affecting countries such as Kenya, Tanzania, Rwanda, Uganda and particularly the Democratic Republic of Congo. Innocent Africans also have to bear the harms of climate change—food insecurity. Follow-on effects also hit Central America and South America.

Similarly, fertilizer supply has been disturbed. Farmers are not getting fertilizer in the planting season. India first increased its release of commodities into the global system. But as their harvests dropped, it began to prioritize its own food security.

WFP used to purchase half of its food from Ukraine. Buying in the global market costs 50 to 75 percent higher, reducing the number of people WFP can feed. If proper actions are not taken, as many as 100 to 150m more people are expected to go acutely hungry within a year.

Sri Lanka's economic collapse exemplifies how poorer countries are paying the price of Western sanctions on Russia. Sri Lanka is facing its worst financial crisis since its 1948 independence as it is unable to pay for basic imports and is crippled by domestic shortages of fuel, food and medicine.

The global economy is interlinked. Some parts of the world and some segments of population are more vulnerable. As the war prolongs and expands, all countries and peoples will be dragged into the conflict, and all will face economic crisis. Skyrocketing fuel and food prices have invited violent demonstrations in different parts of the world. Perhaps Sri Lankan President Ranil Wickremesinghe rightly says “…by the end of the year, you could see the impact in other countries”.

Nepal has seen unprecedented hikes in the prices of edible oils, petroleum, food grains, cereals, electrical and electronic appliances. The increase in transport costs has led to inflation. Interest rates have been increasing. Nepali rupee is depreciating against the US dollar. Set aside political issues for the moment; Nepal is trying to avoid a possible economic crisis.