100 days of war in Ukraine: a devastating economic tsunami

100 days after Russia’s invasion of Ukraine, there is not a single country in the world that is unscathed by the economic tsunami resulting from the war launched by Russian President Vladimir Putin on February 24. The big picture is more inflation, lower growth and an increase in poverty and inequalityin an economic environment that was beginning to recover with some optimism from the Covid-19 crisis.

Both the World Bank and the International Monetary Fund have reduced global GDP by practically one percentage point for this year, with forecasts of 3.2% and 3.6%, respectively. But the negative effect will be prolonged. For 2023, growth similar to this year is expected and in the medium term, the IMF forecasts a decrease of around 3.3%.

As in all previous crises, the blow is uneven. International organizations draw the worst scenario on Ukrainian territory: its economy will shrink 45% this year as a result of the reduction in exports, the closure of businesses and the stoppage of production in large areas of the country. Meanwhile, Russia’s GDP will fall by 11% due to the economic and financial sanctions imposed by the United States and Europe on the Putin government.

However, the punishment of Moscow for its military incursion is, in any case, a double-edged sword. Russia supplies large amounts of oil, gas and metals and, along with Ukraine, is also a major exporter of wheat and corn. Consequently, the disturbances in trade will drag all the regions with them, starting with the Old Continent. In mid-May, the European Commission cut its growth forecast for the eurozone from 4.0% to 2.7%.

100 days of war in Ukraine: a devastating economic tsunami

Three months of war have resulted in an abrupt and general increase in prices. The latest IMF projections suggest that inflation for 2022 will be 5.7% in advanced economies and 8.7% in emerging markets. This is 1.8 and 2.8 percentage points more than was projected in January, shortly before the Russian invasion.

In the European case, Brussels predicts that this year the escalation of prices will be close to 6.1%, well above the 2.0% target of the European Central Bank and also far from the forecast prior to the outbreak of the war, which was 3.5%. Although the projection is better for 2023, the Commission does not believe that it will fall below 2.7%. Worse still, in the event of an abrupt cut-off of Russian gas supplies, inflation would rise an additional three points in 2022 and one point next year.

The runaway cost of the shopping basket has led the Federal Reserve (Fed) and other central banks to raise interest rates with the aim of containing inflation. In May, the Fed made the biggest rate hike in more than 20 years (to 0.75%-1%); while Christine Lagarde, president of the ECB, has opened the door for the first rate hike to take place in the euro zone in July, and for negative rates to be left behind in September. Meanwhile, in the heart of the war, the council of the National Bank of Ukraine has decided this Thursday to increase the reference interest rate to 25% per year from the 10% at which the price of money had been anchored since before the start of the Russian invasion.

Except in some countries, employment and output will remain below pre-pandemic trends through 2026, according to IMF forecasts. In the eurozone, projections point to an unemployment rate for this year of 7.3%, one tenth less than in February 2020. In this regard, Ukraine continues to be the most affected. The country has already lost five million jobs because of the war, according to figures from the International Labor Organization (ILO).

The Russian siege has forced the flight of more than six million Ukrainians from the country. The millions of refugees that host neighboring countries such as Hungary, Poland, Moldova or Slovakia also pose a risk to the labor market of these economies. According to the UN body, if they extend their stay, the system will be put under excessive pressure, causing an increase in unemployment also in these territories.

For its part, Central Asia, whose economy depends largely on remittances from Russia, will also feel the economic tsunami. It is quite possible that the sanctions imposed on Russia will lead to the mass dismissal of migrant workers in the country, the vast majority of whom are from Kazakhstan, Kyrgyzstan, Tajikistan and Uzbekistan. Therefore, according to the World Bank, remittance flows will fall drastically.

The institution warns that these decreases, combined with the increase in the prices of food, fertilizers and oil, represent an increase in the risk for food security and an accelerator to exacerbate poverty in many of these countries.

VIDEO: The economic impact of the first 100 days of the Russian invasion of Ukraine.

A new energy model

The war has also triggered volatility in the hydrocarbon markets, forcing Europe to rethink the energy model, whose survival has depended in the last two decades on imports, especially Russian ones.

Eurostat ensures that, in 2021, the EU imported 43.5% of its total gas consumption and 27% of oil. In fact, last year, energy represented 62% of the total imports of the European Union from Russia and cost the community bloc some 99,000 million euros.

Until now, Moscow has been the largest supplier to the EU, but the possibility of a partial or total cut in Russian energy supply triggered fears of facing blackouts in countries like Germany or Austria – those most dependent on Russian gas – and convinced the more conservative that it was time to take action and accelerate the transition to green energy to achieve energy sovereignty.

This idea has been reinforced by the abrupt increase in gas prices and its contagion in the electricity bill. Specifically, the price of gas in the Dutch market, which is the benchmark for the region, jumped to 129.9 euros per megawatt hour (MWh) on the day of the Russian invasion, to finally reach the historical maximum of 210.8 euros per MWh on March 7, amid uncertainty over whether the Kremlin would maintain continuity of energy supply despite sanctions imposed by the West.

Another of the maximum peaks was reached on March 31, with 125.3 euros per MWh, after the imposition by the Government of Vladimir Putin of the payment model in rubles; a measure that has been refused by countries such as the Netherlands, Bulgaria, Poland and Finland, which have already suffered from the cut off of Russian gas supply. Germany has also been affected: the Russian state company Gazprom has stopped supplying natural gas to Ørsted, Denmark’s main energy group, and to the British-Dutch Shell for shipments to the German country on Wednesday for refusing to pay in rubles.

Since March, the price of gas has been gradually falling and now ranges between 80 and 100 euros/MWh. The replenishment of European fuel reserves, which are already at normal levels compared to previous years, have contributed to the collapse of prices, although fears of facing a Russian supply cut persist.

As for oil, whose price was around $90 a barrel before the war, it reached over $120 on March 8, and since then it has fluctuated in tandem with geopolitical events, beyond Russian borders. The fact that its market is globally integrated makes its price depend on many more factors apart from the Kremlin’s decisions, such as the drop in Chinese demand due to health restrictions or the US veto of Russian oil last March.

In this context, on March 8, the Commission published its energy transition plan REPowerEU valued at €210 billionoutlining measures to slash Russian gas imports from their 2021 level (155 bcm) before the end of this year, and “achieve full independence from Russian fossil fuels well before the end of the decade” .

The key elements of this plan are diversifying supply, reducing demand and increasing green energy production in the EU. Regarding the diversification of supplies, the already established EU energy platform will allow common purchases of gas, liquefied natural gas and hydrogen and, as a next step, the Commission intends to develop a “joint purchasing mechanism” to negotiate gas purchases on behalf of member states

The war has also forced countries like Germany to relax their position with regard to polluting energy sources in order to avoid energy collapse. In recent months, coal has had a so-called “renaissance” period to address reduced gas availability. The European Commission has assured that coal burning could increase 5% above previous expectations within the next five to 10 years.

world food crisis

Ukraine, the granary of Europe and the fifth largest grain exporter in the world, has seen its cereal exports limited by the Russian blockade to strategic port cities such as Mariupol, on the shores of the Sea of ​​Azov, from where 5% of exports are controlled from the country.

The suffocation of its economic lung will have catastrophic consequences for Ukraine: in 2019, 10% of its GDP came from agriculture, according to ICEX data. In fact, it has the capacity to feed some 600 million people from its agricultural area, which occupies 70% of the total country, now besieged by Kremlin troops.

Therefore, the devastation extends beyond the impact on the public accounts of the Ukrainian government. The United Nations World Food Program (WFP) warns that up to 323 million people will suffer from hunger in 2022 as a consequence of the fact that the war in Ukraine has dragged on beyond April.

Wheat production is one of the most worrying on a world scale. Ukraine exports 20 million tons a year of this cereal alone, and the fear of suffering a shortage has also triggered its prices. Since the outbreak of the war on February 24, the price of wheat on the Euronext market has risen 42.8%, reaching a maximum on May 16, rising 62.8%.

In fact, some countries have radically changed their strategies to protect local production of this cereal and guarantee supply. Egypt, the world’s largest importer of wheat, now relies on the local harvest of the cereal in the province of Qaliubiya, located in the Nile delta, as a way to reduce its external dependence in the coming years on this vital food in the country. most populous in the Arab world.

A wheat farmer, in the province of Qaliubiya (Egypt).

A wheat farmer, in the province of Qaliubiya (Egypt).

For its part, the European Union, in an attempt to avoid a European food crisis, has revealed its intention to mobilize all possible resources to facilitate the removal of grain accumulated in Ukrainian silos and ports, through a naval operation to achieve that the grain leaves directly from Odessa, which channeled almost 80% of the export until the beginning of the war. In fact, before the Russian invasion, Ukraine exported five million tons of agricultural products every month through the ports of this city and Nikolaiv, also besieged by the Russians.

The war has stalled and become more ferocious, leaving in its wake a devastating economic and humanitarian tsunami, with no foreseeable date for a truce. And although some leaders and media insinuate that Ukraine should seek a peace that accepts the loss of Donbas – the eastern Ukrainian area that Putin has used to justify his invasion of the neighboring country – the Ukrainian president, Volodymyr Zelensky, refuses to negotiate sovereignty from the country.

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