Business
Economic Impacts of Russia-Ukraine Conflict
Christie Tsang and Vinuk Ekanayake
12/06/2022
Brief Overview
The Russia-Ukraine conflict began in early 2014, and on February 24 2022, Russia had launched a full-scale military ‘invasion’ into Ukraine. Among the humanitarian crisis from the conflict, the global economy has also been impacted by higher prices for commodities, faster inflation and trade disruptions.
Commodity Prices
As the Russia-Ukraine region accounts for nearly 30% of global grain exports and roughly 15% of global fuel production, the ‘invasion’ had impacted the global commodity market in two distinct ways. Firstly, the introduction of restrictions on global trade sanctions on Russia, as well as the physical blockades to trade, with Russia having deployed military blockades in the Black Sea in attempts to suppress Ukraine’s international grains-trade - which has fallen by 90%..
Further, a significant proportion of global firms had engaged in ‘self-sanctioning’ for morality or reputational purposes by refusing to trade with Russia, hence contributing to the global shortage of products generally sourced from Russia. When factoring this with the already inflated commodity prices due to COVID-19, we are experiencing the world’s largest energy crisis since the 1973 oil crisis [see Figure 1]. Therefore, fertilisers are forecasted to increase by 69%, energy by 51%, and oils by 30% from the end of 2021 to the end of 2022 (World Bank).
Inflation
Following the dramatic increase in commodity and energy prices, cost-push inflation has risen and is projected to continue increasing as global inflation rates soared by 3% since the end of 2021 to 9.2% in March.
“Inflation from agribusiness, energy and supply chains is spinning unchecked - and… are triggering a host of follow up consequences” (Bill Blain) as central banks are reluctant to counter the inflationary spike with an increase in cash rates to preserve the recent stability in consumer expenditure. This however deteriorates the cost of living as prices of common household items are left to soar - thus eroding consumer’s purchasing power. Consequently, workers and unions are predicted to begin demanding wage increases, and as Australia’s unemployment is at a near half-century low, firms are forced to accept these wage demands - theoretically resulting in the amplification of cost-push inflation and the threat of a wage-price spiral.
Trade Disruptions
According to the World Trade Organisation (WTO), “the war in Ukraine is putting the fragile recovery of global trade at risk” as a result of economic sanctions on Russia, rising energy costs and disruptions in transport due to COVID-19. WTO also estimates that global merchandise trade volume growth in 2022 could be as low as 0.5% or as high as 5.5% due to the conflict’s volatile nature [see Figure 2]. However, Australia’s key exports have increased in price resulting in a short-term increase in net trade. This would overall benefit Australia by providing a boost in national income due to higher profits for Australia’s primary industry firms.
