The United States, the European Union (EU), the United Kingdom (UK), and other allies are using financial sanctions to severely damage Russia’s economy and pressure its leaders to end the conflict in Ukraine. But that effort likely comes at a significant cost to the global economy.
Western nations acted in unprecedented ways to isolate Russia from world trade and the global financial system. SWIFT, an international payments system, has expelled some of Russia’s biggest banks. As a result, Russia’s central bank is unable to prop up the value of its currency, the ruble, with assets in North America and Europe frozen.
Germany shelved plans to open a new pipeline that would have brought natural gas from Russia, and the United States and the United Kingdom have banned imports of Russian oil.2 Hundreds of Western companies have suspended operations or left Russia, the 11th largest economy in the world, either to comply with sanctions or due to public outrage over the war. Some wealthy oligarchs believed to be close to the Kremlin have also had their assets frozen or seized.3
The effects of sanctions have clearly been felt in Russia, where the central bank raised its key interest rate to 20%, and it’s estimated that the Russian economy could contract up to 10%.4–5 Until recently, Russia was a full participant in the global economy, so being cut off from Western supply chains and technologies could be painful for Russian businesses and consumers. China may fill the void left by the West, but that remains to be seen.
Russia is a major producer and exporter of food, energy, metals, and other raw materials that often fluctuate in price based on the balance between supply and demand across global markets.6 Therefore, supply shocks from war and sanctions have led to price spikes for some high-demand items.
Due to concerns about supply constraints, crude oil and natural gas prices in Russia have surged since the conflict began. About 40% of the EU’s gas supply and almost 25% of its oil comes from Russia. Thus, reductions in energy deliveries from Russia would be difficult to replace and could worsen shortages in the global market.7
Russia is also a major producer of metals such as palladium (needed for catalytic converters), platinum, aluminum, copper, and nickel (needed for batteries).8 Furthermore, about half of the world’s supply of neon gas used to make semiconductors comes from Ukrainian companies. Until neon production is ramped up elsewhere, shortages could exacerbate the chip shortage that has been slowing the production of new cars, computers, electronic devices, and other products.9
Nearly 30% of global wheat exports come from Russia and Ukraine, 17% from corn, 32% from barley, and 75% from sunflower seed oil. The sanctions have largely prevented Russia from exporting food, and the conflict has impeded Ukraine’s ability to export food. Russia produces about 15% of the world’s fertilizer supply. Thus, crop yields throughout the world could be hindered by a shortage of fertilizer, which has risen to record prices alongside the natural gas from which it is often made.10
Overall, grocery bills could rise even more for consumers everywhere in the near future. Global food costs, which are already at an all-time high, could soar another 22% due to the war, according to the United Nations. Egypt and other developing nations in North Africa, the Middle East, and Asia are especially dependent on grain imported from Russia and Ukraine. Disrupted food supplies and elevated prices are expected to cause a notable increase in world hunger.11
Russia and Ukraine contribute only about 2% of global GDP, but high energy prices and supply shocks caused by the war could cause long-term damage to a global economy still recovering from the pandemic. The Organization for Economic Cooperation and Development (OECD) estimates that global economic growth in the first year following the war will be 1.1% lower and inflation about 2.5% higher than it would have been without the invasion. The impact will be greatest for countries with closer economic and trade ties to Russia and Ukraine. Throughout the world, people with lower incomes will likely suffer more because food and energy account for a larger share of spending.12
In the OECD report, inflation could rise by an additional 2% in the euro area, and 1.4% in the United States, compared to what it would have been without the war. The OECD expects 2022 economic growth to be reduced by about 1.4% in the euro area and 0.9% in the United States.13
Russia’s aggression in Ukraine has caused a humanitarian disaster and an economic catastrophe that are almost impossible to measure. More than 4 million people have already fled Ukraine, and many more could follow. Without outside help, accommodating the flood of refugees is likely to strain the finances of host governments such as Hungary, Moldova, Poland, Romania, and Slovakia.14
Europe has more exposure to the Russia-Ukraine conflict than the United States, but in both economies, inflation had already climbed to levels that haven’t been seen for decades.15 In the coming months, the world’s key central banks will face the tricky task of raising interest rates enough to control inflation without causing a recession. There could also be longer-term repercussions, such as the reorganization of global supply chains and less integrated financial markets.
Estimates and projections are based on current conditions, are subject to change, and may not come to pass.
1) The Wall Street Journal, March 18, 2022
2) The Wall Street Journal, March 23, 2022
3) The New York Times, March 22, 2022
4, 15) The Wall Street Journal, March 7, 2022
5) The Wall Street Journal, March 16, 2022
6–8, 12–13) OECD, March 2022
9) Reuters, February 25, 2022
10) The New York Times, March 20, 2022
11) Bloomberg, March 13, 2022
14) Associated Press, March 30, 2022
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