February 10, 2023
Eyes4Research
When Russia invaded Ukraine on February 24, 2022, it was impossible to know how long the conflict would last, what form it would eventually take, and how it would affect Europe and the rest of the world. But now, edging closer to one year later, the economic toll it is having on the global economy is more clear. The war began against a backdrop of global inflation, rising food and energy prices, and supply chains that remained disrupted because of the pandemic. As it continues, it is exacerbating supply and demand tensions, damaging consumer sentiment, and threatening economic growth around the world.
The War’s Effect on Global Trade and Investment
The war in Ukraine has caused worldwide disruptions to trade and investments, affecting auto companies in Europe, and the global hospitality industry, and impacting consumers of food and fuel the world over. The world’s poorest people spend a larger percentage of their earnings on the necessities of life, but every country, region, and industry is being affected by these disruptions in trade.
A recent report by World Bank revealed that world trade will drop by 1 percent in 2023, lowering the global GDP by 1 percent. The report points out that manufacturing exporters like Mexico, Vietnam, and Thailand will see a sharp decline, while Net exporters of crops, including Turkey, Brazil, and India, and of fossil fuels, such as Nigeria and countries in the Middle East, will see a surge in their exports. Disruptions in world trade and investment will slow growth in developing countries and add to the price pressures that still exist, due to persistent inflation.
The Problems with Food and Energy Supply
Out of all of the negative effects of the war in Ukraine, the potential for a food shortage crisis remains the most alarming concern to be considered. Prices of wheat and other grains have already skyrocketed as a result of the war. The looming crisis is a result of both Russia and Ukraine accounting for 25 percent of the world’s wheat exports and 14 percent of corn shipments. There are many countries that are dependent on this flow of wheat and corn, such as The Republic of Congo, which relies on imports from the Black Sea region for 67 percent of the wheat it consumes. The Russia-Ukraine region is seen as one of the six global “breadbaskets”– parts of the world that are considered major food producers for the rest of the world.
In addition to food prices, energy prices are also greatly affected, as Russia is one of the world’s biggest energy suppliers, most specifically crude oil and natural gas. Natural gas is a key ingredient in ammonia fertilizer, which pushes up costs for farmers and reduces their crop yields, further exacerbating food shortages.
The Long-Term Effects of the War in Ukraine
Some economic analysts fear the ongoing war will lead to a slow reversal of globalization, which has been a major driver of the world economy over the past 30 years. Their fear lies in the belief that companies will re-assess geo-political risks and move production away from countries and regions that they view as risky. But because of the capital that companies have already invested and the difference in wages across regions, it is believed that if this shift happens, the change will be gradual, rather than sudden. And this type of reversal would most likely not occur without the foundation of intentional government intervention.
Another possible long-term effect of rising food and fuel prices and resulting food shortages is the threat of social unrest in poorer countries. The financial conditions for these countries and other developing economies started to deteriorate immediately following the invasion, meaning that the longer the war drags on, the more dire the situation can get for the most vulnerable countries.
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