Russia-Ukraine War: Interminable battles and depleting economies

Globalization has ensured that any kind of disturbance anywhere in the world, affects nations across the globe. The Russia-Ukraine conflict drags on inconclusively, devastating Ukraine and making Russia battle weary. The constant fear of the conflict going out of control and coercing involvement of other nations, is becoming a major global concern. Escalating the tensions is the recent sabotage of the Nord stream 2, and the incident involving a Russian Su-27 fighter jet fighter plane and a U.S. military MQ-9 drone deepening tensions between Washington and Moscow.

The current Russia-Ukraine war has seen the deployment of Phosphorus bombs, Kinzhal missiles, 9K720 Iskander ballistic missiles, Vacuum bombs or Thermobaric bombs, and Cluster bombs. Ukraine, actively supported by the West has used Javelin missiles, Bayraktar TB 2 drone, Next Generation Light Anti-Tank weapon (NLAW), Stinger Surface to Air missiles, Switchblade ‘Kamikaze’ drones, and S-300 missile defence system. While Ukraine has been severely devastated, Russia has also suffered heavy damage and casualties. As the war drags on, both sides are lining up deadlier weapons. Ukraine has acquired, the Ground Launched Small Diameter Bomb (GLSDB), which will allow its military to hit targets at twice the distance reachable by the rockets it now fires from the US-supplied High Mobility Artillery Rocket System (HIMARS), Patriot missile defence systems, and Abrams tanks. The Ukrainians are focusing on acquiring long range missile systems, from the USA, that could alter the scope of the conflict. The heavy utilisation of ammunition by both the sides, is giving rise to doubts about how long the stockpiles are going to last. Clearly, both sides had never visualized that the war would drag on interminably, and cause great economic stress. Reportedly, Russia spends between 500 million to one billion dollars on this internecine war, still a final resolution for the war is nowhere in sight. Meanwhile the economic consequences of the war are being felt globally.

Russia is the world’s 3rd largest oil producer, the 2nd largest natural gas producer and among the top 5 producers of steel, nickel and aluminium. It is also the largest wheat exporter in the world (almost 20% of global trade). Ukraine is a key producer of corn (6th largest), wheat (7th), sunflower (1st), and is amongst the top ten producers of sugar beet, barley, soya and rapeseed.

The war triggered a massive shock to the European Union as the region is a highly open economy, thereby making it vulnerable to disruptions in global markets and value chains. Europe was heavily dependent on energy imports from Russia, before the war. Russia and Ukraine also played a large role in European area imports of food and fertilisers before the start of the conflict. The immediate impact has been on energy and food markets, squeezing supply and pushing up prices to unprecedented levels. Natural gas prices have risen three-fold. High inflation, on energy and food sectors tend to have a significant negative impact on all areas of the economy. Further, the widespread sanctions imposed by Western nations, especially America, has had a major impact on global supply chains. Russia has been slapped with over 2700 sanctions, resulting in freezing of about $300 billion of its gold and foreign exchange reserves. Despite all this, Headline inflation dropped most recently in many European countries, however, core inflation components have continued to increase.

A year of war has devastated Ukraine, resulting in 30% economic decline, inflation around 28%, up to 8 million refugees, unemployment of about 30%, and hundreds of destroyed or damaged businesses and industries. The humanitarian crisis is also overwhelming, refugee influx into Russia is estimated at (2.9 million), Poland (1.5 million), Germany (1 million) and the Czech Republic (0.4 million).

America also is facing the prospect of confronting a recession, the stock markets had a rough patch in 2022, and the start of 2023 has already seen the collapse of two major American banks. The war has disrupted supply of fertilizers, wheat, barley and cooking oil supplies to Africa, the Middle East and parts of Asia. The IMF has predicted that, “Steeper price increases for food and fuel may spur a greater risk of unrest in some regions, from Sub-Saharan Africa and Latin America to the Caucasus and Central Asia, while food insecurity is likely to further increase in parts of Africa and the Middle East.” Also, the conflict has resulted in shipping being halted from the Black Sea, from where about 90% of Ukraine’s grains are exported.

Heading into the second year of fighting with no clear end in sight, nor a cessation of hostilities, the conflict will continue to impact and define the world economy for the immediate foreseeable future. The only silver lining is the IMF prediction that India will be the fastest growing economy in the world despite global slowdown.

The writer is the former Director General, National Academy of Customs, Indirect Taxes and Narcotics.