Russia and Ukraine War: At a Glance
Russia is amongst the world’s superpowers nations, and they are the 11th largest economy according to the GDP. The nation was the second-greatest producer of gas in the world in 2021, accounting for 17% of global output, and third largest producer of oil, with 12% of global output. In addition to gas and oil, Russia also exports metals, gold, fertilizers, and coal. Russia's president, Vladimir Putin, attributed the invasion of Ukraine to NATO membership. Russia has always been against Ukraine joining the EU and NATO.
The people of Ukraine ousted Viktor Yanukovych as president in 2014 due to his pro-Russian views, which led Russia to occupy Crimea as a show of force. To protect its sovereignty, Ukraine has since sought to join the European Union and NATO. The invasion of Ukraine was finally started by Russian forces on February 24, 2022, despite months of preparation on the part of Russia. The satellite image revealed Russian armed soldiers, tanks, artillery, and other military activity extremely near the Ukrainian border. Western nations threatened Russia with sanctions, including the US, UK, Germany, and European Union.
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| Russian's war in Ukraine |
International response to the invasion
The scale of these sanctions is unparalleled for an economy as substantial and influential as Russia's, and they have been imposed in addition to the current prohibitions.
Financial sanctions
The USA, the EU, and some countries had executed financial sanction on the CBR. These prevent the government from retrieving foreign exchange capitals held by entities located in sanctioned countries or require the utilization of those countries' financial systems for liquidation. As a result, more than half of Russia's foreign exchange reserves are currently blocked. Similar restrictions have been placed on transactions with the Ministry of Finance and the National Wealth Fund of Russia. The second-largest bank in Russia, VTB, was one of the seven institutions barred from the SWIFT financial communications network.
Other well-known institutions, notably Sberbank, the largest bank in Russia, are in straight restrictions that range from limiting access to financial networks to outright prohibiting any transactions with companies in punishing nations. Furthermore, the USA and the UK have broadened their prohibitions on investments in Russia, including its energy sector and a handful of other industries.
Trade sanctions
The USA, the EU, and some countries had executed trading sanctions, for example, export embargoes, import limitations etc. due to the Russia and Ukraine war. Exports to Russia have been particularly targeted, especially for "dual-use" technologies like semiconductors, aviation and aerospace products and services, as well as luxury items in the oil and gas industry. To limit imports from Russia, various measures have been implemented, such as taxes, import bans, and restrictions on a broad range of Russian goods and services. These restrictions also include efforts to curb energy purchases.
Concerning energy, the USA has completely halted importing Russian fossil fuels, and Japan, the European Union, and the United Kingdom are gradually phasing out their purchases. Lithuania has already stopped buying Russian gas, and the European Union is considering imposing sanctions on Russian oil as well. The US, EU, and UK have also prohibited Russian planes from using their airspace. Consequently, Russia has enforced the payment of energy in Rubles and announced new export licensing restrictions, even within the Eurasian Economic Union, to protect the local food supply (World Bank, 2022). Along with the state authorities, several private businesses from across the world have also declared that they will no longer operate in Russia.
Other sanctions
Numerous asset and travel restrictions were executed on individual Russian leaders, parliamentarians, and corporations' personal wealth and conduct. Additionally, around 150 foreign businesses have declared their entire exit from Russia, and another 250 or so have ceased operations or new investments. Belarusian organizations and persons linked to Russia's aggression, with financial institutions, defense and security firms, are subject to export bans, asset freezes, and travel restrictions. The Russian ruble has fallen in value versus the US dollar, while inflation has surged. Currently, the exchange rate is 86 rubles to 1 dollar, compared to 151 on March 7.
In addition to dollars, euros, yuan, and gold, Russia's foreign exchange reserve was estimated at 640 billion. Russia's finance minister said in an interview broadcast on Russian state television on March 13, 2022, that one of the causes of the ruble's depreciation and growing inflation is the freezing of Russia's 300 billion in foreign reserves since the imposition of Western sanctions. To address this, the nation's central bank boosted interest rates to 20%. The cost of unrefined oil has risen to its greatest level in the past 14 years as a result of the conflict in the global market. Gas has also nearly doubled in price at the pump. All global economies, large and small, are feeling the effects of it.
Impact on Ukraine and Russia
Humanitarian crisis in Ukraine
Many cities across the country have suffered serious damage, which has caused major problems with road, rail, and water transportation due to the Russia and Ukraine war. Power plants, data centers, bridges, and ports, all of which are important to the economy and social services of the country, have been destroyed or made inoperable. Nearly 6 million Ukrainians did not have access to clean water as of the end of March. About 12 million people were internally displaced by the middle of April, and a similar number, especially the elderly and sick, need urgent humanitarian help (UNHCR 2022).
A lot of
human capital is also being lost because of the conflict. It is expected to
have a particularly bad effect on children, causing more hunger and stunted growth,
less time in school, and worse job prospects.
Ukraine’s economy is being devastated
To cope with the economic challenges brought on by the Russia and Ukraine war, Ukraine has implemented various emergency financial measures. These include capital controls, limitations on the banking sector, and tax postponements. However, despite these measures, the war has caused significant damage to Ukraine's production infrastructure, forcing the closure of many enterprises and rendering several regions economically unviable. The destruction of transit routes has also made it hard to move goods by land. Not being able to get to the Black Sea has stopped all sea trade, which is half of what Ukraine exports. As a result, trade in goods has come to a complete standstill.
The World Bank predicts that the conflict will reduce Ukraine's output by half by 2022, leading to a decline in GDP of around 45% (World Bank, 2022). To allow a robust transformation and retrieval, ensure fiscal sustainability, and support future debt restructuring, Ukraine will likely need substantial external financial aid.
Financial asset values in Russia have seen significant losses
To respond to the
situation, the Moscow Stock Exchange stopped trading
from February 25 to March 24. During this time, however, the yields on Russian
debts denominated in dollars went up sharply because stock prices were going
down so much. Also, many foreign exchanges have made it harder to buy and sell
Russian assets. However, as pressure on the ruble subsided, the rate was
reduced to 17 percent on April 8th. It is still unknown whether or
how the Russian government would implement its announcement from late March
that all energy purchases from Europe must be billed in rubles.
S&P Global
Ratings to issued selective default
Following the USA’s action block Russian debt payments in dollar
accounts, Russia began considering servicing its international debt in Rubles
in April, raising concerns about a possible sovereign default. This prompted
S&P Global Ratings to issue a "selective default" rating for
Russia, indicating that it was uncertain whether the payments made in Rubles
would be converted to dollars during a 30-day grace period that began on April
4th, 2022 (Govind 2022). First foreign default by a
Russian business since the start of the war, Russian Railways was found to be
in arrears on participation notes in a loan priced in Swiss francs on April 11.
The Russian economy is being tipped into a recession
In March, high-frequency indicators pointed
to a sharp drop in economic activity because domestic demand dropped because of
sanctions. This caused the composite PMI to enter "contractionary
territory," which means that the economy is shrinking. Early on, the ruble
fell in value, and supply problems led to inflation increase. February to
March, the inflation rate went from 9.2% (y/y) to 16.7% (y/y). Russia's GDP is
expected to drop by about 11% this year, instead of growing by 2.4% as was
thought before (World Bank, 2022). With so many foreign companies leaving
Russia and the future looking much worse, investment isn't likely to pick up,
and prices going up quickly and wages going down will put a lot of pressure on
consumption. A small decline in exports is anticipated this year as a result of
recently announced restrictions and cutbacks in purchases of Russian oil and
gas. Software and semiconductor exports to Russia have been prohibited, which
would deprive the nation of essential inputs and worsen supply chain
instabilities there.
Regional and global impact
Europe and Central Asia (ECA) are closely linked to Russia and Ukraine. This has caused a lot of damage. This is especially clear in Eastern Europe, the South Caucasus, and Central Asia, where trade, remittances, goods, and confidence routes create strong ties between countries. The slowdown in Russia and Ukraine will affect trade, money transfers, and financial flows. It will also break supply chains and transit links, affect digital connectivity and related services, and make investors less willing to take risks. Rising energy prices have a big effect on how much power and heat cost and how easy it is to pay for them.
The GDP of countries like Tajikistan and the Kyrgyz Republic depends a lot on the money that Russians send home. Because the economy isn't doing as well and the Ruble is getting weaker, the real value of money sent from Russia is likely to go down a lot. A number of ECA economies also export heavily to Russia, and to a lesser extent, Ukraine, and these nations are a significant source of visitors for certain states in the area. The ECA's overall growth, without Ukraine and Russia, is projected to decline significantly from 7.8% in 2021 to 2.20% in 2022 (World Bank 2022).
In addition to contributing 2.2 percent of the world's GDP, 2.2 percent of its exports, and 1.7 percent of its imports, Russia and Ukraine also make up a tiny portion of the world's foreign direct investment assets, and according to bank estimates, nearly half of Russia's exports are made up of goods related to energy. Although China's ties to Russia have grown, they are still modest compared to the Euro areas, which have shrunk since 2014.
In terms of tourism expenditures, Russia ranked sixth globally in
2019, and a substantial decrease in the visitors will make a significant effect
on the world economy. The conflict is a major reason of refugee crisis in the
Europe since World War II, led to higher products prices, disrupted
international trade, and caused financial market instability.
Refugees and Remittances
The war has led to a large refugee crisis
Above 7 million citizens were forced to leave Ukraine, and as of April
15, the UNHCR estimated that 4.7 million people had gone to neighbor states for safety
(IOM 2022; UNHCR Data Portal 2022). About 4.3 million (57%) of Ukraine's around
7.5 million children were forced to move. About 2.5 million citizens, or 33% of
the population were internally displaced, and 1.8 million people, or 24% of the
total, are thought to be refugees in neighbor countries (IOM 2022; UNHCR 2022).
The impact of the Ukrainian refugee surge on the Central European economy
The capacity of host nations to provide urgent assistance will be
challenged, as they will need to address the pressing needs of the refugee
population. In some host countries, providing access to basic services such as
healthcare, education, and social protection has already been a challenge,
particularly in remote areas and for marginalized populations. The delivery of
essential services to both refugees and host communities may be affected,
and additional support will be needed.
A recession in Russia will affect Central Asian economies
Reports suggest that thousands of Russians have left their country, and
it is likely that many migrant workers in Russia may face reduced salaries or
returned to their home countries. Households may face
financial troubles as a result, and certain Central Asian nations that depend
largely on remittances will also suffer significantly from this. The likelihood
of substantial debt distress in the Kyrgyz Republic and Tajikistan is being
amplified by the war together with other vulnerabilities. This year, production
contraction, larger deficits, and a significant depreciation of the currency
are anticipated in both nations.
Global commodity markets
Russia and Ukraine are major exporters of several products
Accordingly, caused several effects on trading those products around the world.
- Russia is world’s largest exporter of wheat, total 18% its total exports; Ukraine exports 7%. Along with natural gases, palladiums, nickels, and fertilizers, Russia is the world's top exporter of all four of those commodities (14 percent). Additionally, it accounts for coal (18%), platinum (14%), crude oil (11%), and refined aluminum (10%).
- Ukraine accounts for two-fifths of the world's output of oils. They export 13% worlds total maize’s being the fourth-largest exporting country of maize. In addition, Ukraine generates up to 50% of the world's supply of neon gas, a crucial component in the production of semiconductors.
The rise in commodity prices comes on top of sharp increases since January 2022
Energy prices have gone up because of a recent rise in global demand for commodities because the economy is getting better and because OPEC and other countries aren't making as much as they thought they would. Because of this, the prices of things that use a lot of energy, like aluminum and fertilizers, have gone up. Stockpiles of industrial goods, especially crude oil and tin have dropped by a lot.
In the euro area, gas prices have gone up 400% since January 2021, and oil prices have gone up by 100%. The region's production costs and buying power have gone up because of the rise in energy prices. As a result, annual inflation will go up by 7.5% in March 2022. If Russia stops sending crude oil and natural gases in Europe, prices will go up even more in that part of the world. Bachmann et al. (2022) say that more than 35% natural gas, 20% oil, and 40% coal of the EU are from Russia. This makes Russia a major supplier. In the same way, Russia depends on imports. More than 40% of Russia's exports of crude oil and natural gas are exported in European Union.
Some EMDEs rely heavily on Russia and Ukraine for food and fertilizer: Many countries in ECA, MNA, and SSA import a lot of wheat from Russia and Ukraine. Over 75% of the wheat that these countries import comes from these two countries. Ukraine is also a big part of how some countries get seed oils and grains. But the ongoing conflict in Ukraine has made it harder to move crops, and important crops like corn, barley, and sunflowers are likely to be hard to plant this spring. The problem is made worse by the fact that 90% of Ukraine's grain trade goes through ports on the Black Sea which are closed.
Also, Russia, which exports 13% of the world's fertilizer and is the world's largest exporter of fertilizer, has told fertilizer makers to stop exporting their products because it could hurt food production in some parts of the world.
Global trade flows
Trade,
especially global transportation networks, have been interrupted by the war,
adding pressure to already-existing supply problems: The restrictions on flights between Russian and European airspace
could cause problems with international air cargo and make transportation more
expensive around the world, especially amongst Europe and East Asia. The
airspace restrictions affect 20% of all the cargo that travels by air around
the world. 50% of the world's container shipping company stated that they will
no longer trade in Russia. The number of dry bulk vessels arriving at Ukrainian
ports on March 1 was 82% lower than it was at the beginning of February, and
the number of Russian ships calling at Ukrainian ports dropped by more than
20%.