It is heartbreaking to see millions suffer just because few individuals can’t come to a peaceful conclusion. Situations like these usually escalate and the repercussions of these events are far worse than the event itself. The war is between Russia and Ukraine, but since we are in a globalized world; it will impact the production, trade, and consumption of everyone in the world.
According to OEC, In 2019, Russia was the biggest exporter of Wheat, Palladium, and Fertilizers. It also exports a lot of crude oil and refined petroleum and its primary markets are China, the United States, Brazil, Belarus, Finland, and Estonia.
According to OEC, In 2019, Ukraine was the biggest exporter of seed oil and it exported a lot of corn, wheat, iron ore, and major exports go to Russia, China, Germany, and Italy.
Because of war, there will be disruptions in world trade, and the supply of all these goods can be affected. It is still very early to say the magnitude of the whole situation but if the situation escalates, it will be very bad for world trade and this could lead to hyperinflation in many regions of the world and goods become very expensive.
Below I briefly analyze the potential impact of war on the global economy.
First of all, nobody can say with certainty what is going to happen. A lot of times, wars do not have a severe global economic impact since not every country is involved in it. If some nations are involved, they often find alternatives (for a higher price) if they get affected. Ex – internal conflicts in Kazakhstan, Afghanistan (Taliban), Syria, Iran did not have a noticeable impact on the global economy.
However, this time situation might be different. In his video to the world, Putin explained his reasoning for invasion and claimed that Ukraine was a part of long lost Russian history, but so were many other countries. He said that he would stop in Ukraine but will he? Nobody knows. He announced that any action by NATO or US would be catastrophic.
Looking at the facts presented at the beginning, Ukraine and Russia contribute almost ⅓ of wheat to the world. War would definitely affect the production and thus the export. They are also a major source of Natural Gas in Europe and provide most of the sunflower oil in the world.
US imported $300M worth of phosphate fertilizer from Russia in 2019. Natural Gas and Potash are the primary raw materials required to manufacture nitrogen fertilizer. Shortage of these two inputs on top of a shortage of wheat and phosphate fertilizer would affect the US food market. Most farmers in the US don’t grow wheat because the return on investment is not great. In the current supply shock situation, bread and cereal will become more expensive and raise the CPI. Shortage of fertilizers will impact all the farmers and all food production in the US.
Swift is the primary financial communication channel. The move to cut off Swift is considered the worst you can do in a country financially. On top of that, Central Bank sanctions are issued so that Russia cannot buy back rubles to prevent its fall and to prevent rich oligarchs from accessing overseas funds.
This would prevent Russian banks and producers to communicate financially with the rest of the world. So even if two parties want to trade, they can’t do so. Since this would be bad for global resources trade, the EU and Biden administration is trying to exempt energy trades from Swift cutoff.
The most severe impact of this war would obviously fall on both innocent Russian and Ukrainian citizens. Their livelihood would go down as the imports will become difficult, causing disruptions in production, leading to unemployment, loss of income. Moreover, the value of their currency would go down, leading to inflation.
Europe can face a severe shortage of natural gas and oil, increasing its prices and in turn leading to inflation. The potential impact of this is hard to say since many countries like Qatar is willing to help them in tough times.