As the war in Ukraine approaches its fourth month, its economic consequences are becoming more apparent and are beginning to feature prominently on global political agendas. And just as Russia’s aggression has had political ramifications far beyond Ukraine, so have economic repercussions. This is not to downplay Ukraine’s infrastructural and economic devastation, which will require a massive reconstruction effort, but to highlight the far-reaching impact of the war and how it is amplified by the global economic dynamics associated with it.
Some predictions anticipate that Ukraine’s GDP in 2022 will shrink by 30% to 45%. While the end of the war would reverse this negative trend, the extensive damage to Ukraine’s infrastructure, estimated at close to US$80 billion in early May, will delay the country’s recovery, regardless of how well and who finances it. .
Similarly, a ceasefire or a peace agreement can stop the exodus of Ukrainians from their homeland, but it will take time for a rapid return of the more than 6 million refugees and around 8 million internally displaced people that currently exist. Among those who return, many of them will not find their homes, jobs or public services operational. Add to this Ukraine’s high casualty rates in the war and the trauma inflicted on the general population, and it becomes clear that the country will also be deprived of the significant human capacity necessary for economic recovery.
Beyond Ukraine, the war has already led to dire predictions about a global economic slowdown and possibly a recession. This is mainly due to the increase in the price of oil and gas and the instability in international markets since the beginning of the war, as well as the lack of certainty about how and when it will end.
Wide-ranging food crisis
The other global economic consequence of the war in Ukraine is a major food crisis affecting many of the world’s most vulnerable populations. Ukraine is a major exporter of agricultural products, especially sunflower oil and wheat, but key export routes, through the country’s Black Sea ports, are now blocked due to a de facto Russian naval blockade.
Additionally, there have been reports that Russia, a major wheat exporter, has stolen approximately 400,000 tons of grain from storage facilities in Ukraine. But it is not simply the current lack of Ukrainian agricultural products that is contributing to the looming global food crisis, it is also a market expectation that this will continue, with the next harvest in Ukraine greatly reduced. This is driving up the prices of grain and cooking oil, making imports less affordable in poorer countries and contributing, along with rising energy prices, to a cost of living crisis even in the poorest countries. rich economies, further increasing the likelihood of a global recession.
The possibility of a protracted global recession rather than the expected rapid post-pandemic recovery will have additional implications for global political stability. This, of course, is not entirely due to the war in Ukraine, but the consequences of the war have a potentially catalytic and exacerbating effect on already existing economic and political problems.
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Among them, Western economic sanctions on Russia and secondary sanctions on companies and countries that circumvent these sanctions will go some way towards decoupling major economies and reducing the current level of globalization, leading to a degree of long-term structural change. term in the world. economy.
This is evident in the EU’s impending ban on oil imports from Russia and efforts to stop using Russian natural gas. At the same time, a large and growing number of Western companies are leaving the Russian market.
Future relations between the United States and China
Equally, if not more importantly, the war in Ukraine is also likely to accelerate the decoupling of the Chinese and US economies. One of the lessons China is learning from the Western response to the war in Ukraine is the relative ease with which almost half of Russia’s US$630 billion (£500 billion) in foreign exchange and gold reserves have been been frozen by the sanctions of the US and its allies. In the future, China will be more cautious about having dollar reserves abroad that could be seized in this type of maneuver.
This changing relationship would have an even more significant impact, further augmenting an existing trend where geoeconomic and geopolitical developments are increasingly aligned and pit the US and China against each other in a new global struggle for supremacy.
How quickly this trend of decoupling between the US and China will continue, and whether it can be reversed, will depend, among other things, on how, and how quickly, the war in Ukraine ends. The longer the war drags on and the less likely a negotiated outcome, the more economic divisions will align with political ones, and the more deeply divided the new European and world security order will eventually emerge.
It will be critical in this context how China will act and whether it will prioritize its economic interests (continuing trade with Europe and the US) or current ideological preferences (an alliance with Russia that makes the world safe for autocracies). If China succeeds in forging a solid alliance with Brazil, Russia, India and South Africa, known as the Brics countries, as Chinese Foreign Minister Wang Yi envisions, a new world order will have emerged.