Impacts will flow through three main channels. One, higher prices for commodities like food and energy will push up inflation further, in turn eroding the value of incomes and weighing on demand. Two, neighboring economies in particular will grapple with disrupted trade, supply chains, and remittances as well as an historic surge in refugee flows. And three, reduced business confidence and higher investor uncertainty will weigh on asset prices, tightening financial conditions and potentially spurring capital outflows from emerging markets.
Russia and Ukraine are major commodities producers, and disruptions have caused global prices to soar, especially for oil and natural gas. Food costs have jumped, with wheat, for which Ukraine and Russia make up 30 percent of global exports, reaching a record.
Beyond global spillovers, countries with direct trade, tourism, and financial exposures will feel additional pressures. Economies reliant on oil imports will see wider fiscal and trade deficits and more inflation pressure, though some exporters such as those in the Middle East and Africa may benefit from higher prices.
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.
Gauging these reverberations is hard, but we already see our growth forecasts as likely to be revised down next month when we will offer a fuller picture in our World Economic Outlook and regional assessments.
Longer term, the war may fundamentally alter the global economic and geopolitical order should energy trade shift, supply chains reconfigure, payment networks fragment, and countries rethink reserve currency holdings. Increased geopolitical tension further raises risks of economic fragmentation, especially for trade and technology.
Unprecedented sanctions on Russia will impair financial intermediation and trade, inevitably causing a deep recession there. The ruble’s depreciation is fueling inflation, further diminishing living standards for the population.
Energy is the main spillover channel for Europe as Russia is a critical source of natural gas imports. Wider supply-chain disruptions may also be consequential. These effects will fuel inflation and slow the recovery from the pandemic. Eastern Europe will see rising financing costs and a refugee surge. It has absorbed most of the 3 million people who recently fled Ukraine, United Nations data show.
European governments also may confront fiscal pressures from additional spending on energy security and defense budgets.
While foreign exposures to plunging Russian assets are modest by global standards, pressures on emerging markets may grow should investors seek safer havens. Similarly, most European banks have modest and manageable direct exposures to Russia.
Beyond Europe, these neighboring nations will feel greater consequences from Russia’s recession and the sanctions. Close trade and payment-system links will curb trade, remittances, investment, and tourism, adversely affecting economic growth, inflation, and external and fiscal accounts.
While commodity exporters should benefit from higher international prices, they face the risk of reduced energy exports if sanctions extend to pipelines through Russia.
Major ripple effects from higher food and energy prices and tighter global financial conditions are likely. Egypt, for example, imports about 80 percent of its wheat from Russia and Ukraine. And, as a popular tourist destination for both, it will also see visitor spending shrink.
Policies to contain inflation, such as raising government subsidies, could pressure already weak fiscal accounts. In addition, worsening external financing conditions may spur capital outflows and add to growth headwinds for countries with elevated debt levels and large financing needs.
Rising prices may raise social tensions in some countries, such as those with weak social safety nets, few job opportunities, limited fiscal space, and unpopular government's.
Just as the continent was gradually recovering from the pandemic, this crisis threatens that progress. Many countries in the region are particularly vulnerable to the war’s effects, specifically because of higher energy and food prices, reduced tourism, and potential difficulty accessing international capital markets.
The conflict comes when most countries have minimal policy space to counter the effects of the shock. This is likely to intensify socio-economic pressures, public debt vulnerability, and scarring from the pandemic that was already confronting millions of households and businesses.
Record wheat prices are particularly concerning for a region that imports around 85 percent of its supplies, one-third of which comes from Russia or Ukraine.
A Guest Editorial