Economic Impact of Ukraine Invasion.

Adarsha Subedi / Kathmandu: The invasion of Ukraine by Russia started on 24th February 2022 is not only affecting the countries involved in the war and their neighbors but also affecting the countries like Nepal, which are heavily reliant on the import of goods. Russia had occupied major cities like Kharkiv, Mariupol, Kherson Makarov, and Chernihiv while other number of cities including Donbas, Odesa, Lutsk are under heavy attack. Donetsk and Luhansk, areas recognized as part of Ukraine internationally, have declared themselves independent states and Russia immediately endorsed the so-called declaration of independency. Many sanctions have been levied by countries over Russia to stop their advancement in Ukrainian territory which has not shown its effect yet and the invasion is causing a lot of complications in and around the world.

Ukraine and Russia have had a challenging relationship for a few years even before the annexation of Crimea by Russia in 2014. After the dissolution of the Soviet Union in 1991 Russia and Ukraine had made close ties with each other. In the years following many of the eastern bloc countries joined NATO partly in response to regional territorial threats involving Russia.

Ukraine sought the same in 2008 by inquiring to be a member of NATO and open to the western world. This was opposed by the Russian government. The first armed conflict started when the pro-Russian government was overthrown in Ukraine in favor of a more democratic government. This led to the annexation of Crimea and the war in Donbas. The current invasion ignited with Ukraine pushing for NATO membership. Russia is justifying its invasion as an attempt to de-nazify Ukraine.

The invasion is having serious implications in Ukraine and around the world. According to the Ukrainian government 23000 people were killed so far including soldiers and civilians. More than 10 million citizens have been displaced from their homes and over 4 million refugees left their homes in Ukraine and headed toward other countries as of March 29, 2022. This is creating refugee problems and population mismanagement in other countries.

Along with the problem mentioned above, many economic implications can be felt around the world. We can see the following effects of the Russia-Ukraine fallout on the economy:

Economic Stagnation

The main economic effect of the invasion must be the economic stagnation the world will face. The supply chain of a large number of goods around the world will be disrupted. Russia and Ukraine both are large suppliers of food and raw materials to the entire world. Russia and Ukraine together account for roughly 29% of the global wheat export market. This gives rise to inflation.

Wheat and corn prices were already soaring. Oil is also seeing inflationary prices. The price of oil has gone from $70-80 a barrel to as high as $114 a barrel. Russia also controls about 10% of global copper reserves and is a major producer of nickel and platinum. These goods may follow suit in increasing inflation.

The world economy is yet to bounce back from the effects of covid 19 pandemic and it looks like it will be a while before the economy reaches normal levels. The increase in global inflation will have the most impact on import-based countries. They will have to pay more for the similar amount of goods they import currently. those countries will have to dive deep into foreign reserves to sustain themselves or cut their imports heavily. UNCTAD has lowered its world growth rate projection to 2.6% from 3.6% due to the current invasion and monetary tightening.

Deep recessions in Russia.

Russia before the invasion of Ukraine was one of the leading economies of the world. It was the 11th largest economy with a 4.3% growth rate in the last quarter of 2021. Russia acted as the main supplier of many global products like food and energy. Russia exported $31.6 billion of precious metals, $12.5 billion of fertilizers, $11.7 billion worth of wood, Cereals worth $9.1 billion, and many other goods.

But now the Russian economy is sinking by the heavy sanctions imposed by other countries. Their growth rate is projected to fall by 1.5% by 2022 and 2.6% by 2023 if the invasion continues. The inflation is also up by 20%. Sanctions toward Russia include freezing all their assets and targeting state-owned banks and wealthy Russian individuals with ties to the government. Russia has only been able to use the revenue earned from current exports and the foreign reserve stored abroad. Russia has received 62 billion euros from selling oil, gas, and coal in the two months since the invasion began. Russia’s stronghold over the supply of oil has benefitted them even while the sanctions are ongoing.

Germany was the biggest importer in the last two months, despite repeated avowals by the government that halting dependence on Russian oil was a priority. The country paid about €9bn for imports during the period. Not only European countries but China and India are involved in buying their oil resources from Russia. The experts are expecting the outputs of Russia to fall significantly however they maintain the position that the rising energy revenues from their allies can keep them afloat.

Depleted Ukraine’s economy.

Ukraine’s economy will suffer a bad fallout from the invasion. The future is still not clear but assumptions can be made. All their resources now are dedicated to defending their country. Russian Invasion is expected to Shrink Ukraine’s Economy by 45.1 Percent this Year.

Europe and Central Asia region are expected to bear the brunt according to the World Bank’s latest economic update. The region’s economy is now forecast to shrink by 4.1 percent this year, compared with the pre-war forecast of 3 percent growth, as the negative economic shocks from the invasion compound into the ongoing impacts of the COVID-19 pandemic. This would be the second contraction in as many years, and twice as large as the pandemic-induced contraction in 2020.

Ukraine needs massive financial support immediately as it struggles to keep its economy going and the government running to support Ukrainian citizens who are suffering and coping with an extreme situation. President of Ukraine Vladimir Zelensky has stated the need for 7 billion a month to make up for economic losses.

Russian oil ban and repercussions in other countries

The sanctions imposed not only affect Russia but also negatively impact the countries imposing the sanctions. Especially the Europe region and its economy will be more vulnerable to these sanctions. As already mentioned mainly Eastern Europe is facing huge impacts. The European Union does a lot of its business with Russia. Several large European countries like Germany and Italy are heavily dependent on Russian gas. They are still reliant on Russian gas. Due to the Russian stronghold on the oil market, these countries are facing even higher prices on the import of gases with limited supply.

Germany’s economy is now expected to expand only 2.1% this year, down from 3.8% previously, while Italy’s growth will be 2.3% compared to an earlier forecast of 3.8%. They have a direct pipeline connection with Russia for the supply of gas. Thus, substituting will take a substantial amount of time. EU is stepping up efforts to rapidly diversify its basket of energy providers and is reaching out to other gas exporters such as the US, Norway, Qatar, Azerbaijan, Algeria, Egypt, Turkey, Japan, and South Korea.

In the US they are trying to buy non-Russian natural gas from other parts of the world to keep up with demand, along with using their reserves. The USA had tapped into its reserves which can only be invoked by the president to offset the increasing oil prices. American President Joe Biden announced that the United States would release more than 180 million barrels of oil from its strategic petroleum reserve over the next six months. Much like the US, Europe, Japan, and others are expected to join in releasing more from their reserves, adding about 30 to 50 million barrels to the world market over the six months.

Russia is the world’s third largest oil producer, exporting 5 million barrels of crude a day, or about 12 percent of the global market, according to the International Energy Agency (IEA). About 60 percent of Russian oil goes to Europe and 20 percent goes to China. The agency also has estimated that sanctions and private-sector decisions not to buy from Russia will take 2.85 million barrels of Russian oil per day off the world market.

Nepal still being far from all the action is bearing heavy burdens of the invasion. Nepal is mostly reliant on imported products from foreign countries. Goods and services of almost 41.5 percentage of total GDP are imported by Nepal to sustain the economy. Now with the invasion, the inflation of baskets of goods has been increasing rapidly. The policymakers have come up with a solution to ban the import of all kinds of readymade liquor, readymade cigarettes and tobacco products, and snacks like potato chips, for consumption until foreign exchange recuperates. The government has temporarily banned import of diamonds, mobile sets that are worth more than $600, and color televisions over 32 inches. Likewise, Imports of jeeps, cars, and vans [except ambulances and vehicles that carry dead bodies], motorcycles above 250 cc, all kinds of toys, and playing cards have also been banned. Central Bank has also slashed the daily import quota of gold to 10kg. Nepal needs to focus on more work like import substitution and attracting foreign tourists to increase foreign reserves to improve its economic position.

Through this invasion, we can see the global level effect on the lives of people and economies of the countries. The longer the invasion lasts the bigger the damages need to be fixed. The faster the conflict stops, the sooner we can start the recovery. The greatest harm economically, infrastructurally, and human loss-wise is likely to be felt by Russia and Ukraine. But their echo has been felt around the world in the form of economic stagnation, refugee problems, and energy cuts. Thus, there are many future outlooks we can work on to make everything normal but the first effort starts with negotiations and ceasing the invasion.

(Editor’s Note: Mr. Adarsha Subedi is undergraduate student at Kathmandu University School of Arts. Mr. Subedi has keen interest on economics, finances and policy making. Nepalekhabar has been promoting creative ideas and write up of young people. How do you find this article, please share your comment at : info@nepalekhabar.com)