One year on from the start of Russia’s invasion of Ukraine, James Burgess, Head of Commercial at Atradius, assesses the economic fallout.
On 24 February 2022 Russian forces invaded Ukraine and began a war many assumed would be over in days. But one year later, and there’s no end to the suffering in sight. The conflict is a human tragedy first, but also an economic calamity. The economic life of both nations has been severely restricted and the reverberations are being felt across the region and the world. In a globalised economy, everyone is connected and everyone is affected.
Economic shock
The economic disruption caused by the Russian invasion of Ukraine could hardly have come at a worse time. Many countries had only recently emerged from the Covid pandemic, and the global economy was already braced for a difficult recovery period. It’s hard to pinpoint the precise contribution of the war to the global slowdown, but we know that it’s significant: local crises always have global effects.
On the surface, Russia and Ukraine don’t appear to be major players internationally: together, their economies represent less than 2% of global GDP. But the devil is in the detail and the two countries’ economic contributions are essential to the smooth running of global commerce. For example, in January 2022 we expected global trade to grow by about 5.5% in 2022 and 3.5% in 2023, figures that reflected post-lockdown, pre-war optimism. In January 2023, the estimated figure for global trade in 2022 was about 3% and the forecast for 2023 just 1.5%.
Similarly, global GDP was forecast to grow by 3.6% in 2023 in pre-war calculations, but this forecast had been revised down to 1.5% when the same calculations were made earlier this month.
In other words, the war is having a significant global impact, and exacerbating some of the negative effects of the Covid pandemic.
Direct impacts
Needless to say, Russia and Ukraine have taken the biggest economic hit from the war. Russia´s economy is estimated by Oxford Economics to have contracted 2.3% in 2022, while Ukraine’s shrank a whopping 30.1%. In addition, Ukrainian exports slumped by 32.5% last year. Russian exports held firm but are expected to fall by 10.4% in 2023. As of January 2023, this year’s GDP growth forecasts for Russia and Ukraine are -2.0% and -4.6% respectively.
The energy crisis
Most importantly, Russia is a major supplier of oil and gas, especially to Europe. That supply has fallen by 80% since the start of the war. The result is a European energy price crisis and rising costs elsewhere. While European gas prices have fallen back from their 2022 peak, they remain four times higher than the pre-war figure. And we expect the significant supply disruption of gas from Russia to continue in 2023.
Beyond that, the picture is cloudy. Europe is expected to increase Liquefied natural gas (LNG) imports by 60% in 2023 to replace shrinking supplies from Russia, if it can source that capacity. Member states are investing in infrastructure, including new terminals, but filling gas tanks ahead for next winter will certainly be challenging. Meanwhile, the EU has banned Russian oil and coal imports, and is phasing out gas. Russia will divert as much production as possible to China and India. But this new pattern of global trade is unlikely to be as efficient as previous arrangements, creating a drag on global growth for the foreseeable future.
Higher food prices
Energy price hikes also raise food production costs, exacerbating a shortage of supply. Together, pre-war Russia and Ukraine accounted for about 30% of global exports of wheat, 20% of corn and barley and 13% of fertiliser. Food prices were rising before the war, but the conflict supercharged that trend. Wheat prices were 30% higher in June 2022 than six months previously. An UN-brokered deal led to the resumption of grain exports from Ukraine, but prices remain 20% higher than a year ago.
Fertiliser prices rose as a direct result of the fighting and an indirect result of rising energy costs. Fertiliser shortages are expected to be a significant constraint on global food supply in 2023. The impact on harvests is likely to be most severely felt in Europe and Africa.
Crucial commodities
As if that wasn’t enough, both countries supply important commodities. For example, Russia is a major supplier of nickel, used in battery production. Pre-war, Ukraine produced 50% of the world’s refined neon, used in the manufacture of semiconductors. Inevitably, prices have risen, but the global slowdown has reduced demand and kept those rises in check, at least for now. Chipmakers have managed to meet demand using existing neon inventories and local suppliers. Additionally, the demand for semiconductors has slowed since the third quarter of 2022, due to falling orders from traditional electronic goods manufacturers and tumbling cryptocurrency prices.
One other impact of the war is increased bottlenecks in the global supply chain: parts of the Black Sea and Sea of Azov are not passable and maritime companies have closed routes to avoid Russian airspace and ports.
Economic aftershocks
If the war drags on, the global economy will continue to be buffeted by its direct and indirect consequences. Due to its proximity to the war zone and previous reliance on Russian gas, the impact on Europe is particularly strong. But nowhere is immune from the war’s economic aftershocks. As new trade patterns settle in and a new normal emerges, some of the war’s sharpest impacts may blunt a little. But the new ways are likely to be less efficient than the old. An upheaval in global oil and gas supply is never going to be easy.
For so many reasons – humanitarian and economic – the best hope for 2023 is a quick end to hostilities.
For more information on Atradius and its insurance options for businesses, please visit https://group.atradius.com/
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