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The Economic Impact of the Russia-Ukraine War

Created 138 days ago
by SuperUser Account

Views: 144

The conflict between Russia and Ukraine has resulted in shocks to the global economic system. The International Monetary Fund[1] anticipates the impact from the crisis will be most severe through three main channels, commodity markets, trade and financial linkages. First, higher prices for commodities like food and energy will trigger higher inflation, erode the value of incomes, and weaken demand in an environment of higher uncertainty. Secondly, economies will have to grapple with disruptions to supply chains, trade, and remittance flows. Finally, reduced business confidence and higher investor uncertainty will weigh on asset prices as financial conditions tighten. This could spur capital outflows from emerging markets.

Of these shocks, the most notable is the upsurge in international commodity prices. The conflict between the two major commodity producers has sent tremors throughout the global supply chain. Prices for energy, grains and metals have soared since the onset of the conflict. Crude oil prices are now 12 percent above pre-war levels, but at their peak they rose by 33 percent. This increase, which took prices above a hundred dollars per barrel, the highest since July, 2008, was driven by speculation surrounding possible supply shortages and the economic sanctions against Russia, which accounts for approximately 12 percent of global oil production.

The cost of wheat, of which Ukraine and Russia supply around 30 percent of global exports, jumped by 19.7 percent in March. Other food price increases have been relatively broad-based, impacting meats, dairies, cereal and vegetable oils. Ukraine and Russia also account for a disproportionately large share of world exports of iron and steel, uranium ores, nickel, and several other commodities. These increases have coincided with already elevated freight costs, a remnant of the supply challenges linked to the COVID-19 pandemic.

Major economies such as the United States and the United Kingdom are already recording elevated levels of inflation. Their monetary authorities have responded to the unfavourable conditions by increasing interest rates, thereby depressing asset prices and by extension global economic growth prospects. To the extent that the high interest rate environment will persist, it is possible that countries with large trade and financial exposures may be acutely impacted by the global spillovers from the crisis.

Energy producing countries may benefit with improved fiscal positions from higher energy prices. However, tourism-based Caribbean economies, as net-importers of fossil fuel, are more likely to experience a deterioration of external current account balances. Rising domestic price levels may place pressure on governments to increase subsidies at a time when their fiscal positions have been compromised by the effects of COVID-19.



[1] Kammer, Alfred, Jihad Azour, Adebe Aemro Selassie, IIan Goldfajn, and Changyong Rhee. 2022. “IMF Blog - How War in Ukraine is Reverberating Across World's Regions.” International Monetary Fund. 15 March. Accessed March 28, 2022. https://blogs.imf.org/2022/03/15/how-war-in-ukraine-is-reverberating-across-worlds-regions/#. 





Date: 5/20/2022
Author(s): Central Bank Of Barbados

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