Worldwide Effects of Russia’s Invasion of Ukraine

Apr 14, 2022, 11:10 AM

Russia’s attack on Ukraine has resulted in strong, international actions aimed at punishing Russia. But restrictions on Russia also put pressure on other countries.

Clay Lowery is an official at the Institute of International Finance, a trade group of banks. “We know there are consequences that we cannot predict," he said.

Most major economies have only limited trade with Russia. For the United States, it is 0.5 percent of total trade. For China, it is around 2.4 percent.

For this reason, Adam Slater, lead economist at Oxford Economics predicts only a 0.2 percent drop in the world’s GDP, or total economic production, this year. He said the effects on the U.S., China and most developing countries should be limited.

However, Russia is a very important supplier of oil, natural gas, and metals. Higher prices on important materials, known as commodities, could cause problems around the world.

The United States and other Western nations have targeted Russia with strong sanctions for a major economy. Some Russian banks have been removed from the SWIFT international payment system. High technology exports to Russia have been limited. And Russia’s ability to use its foreign currency reserves, money it uses to pay for exports, has been strongly restricted.

“The world — or most of it anyway — is laying economic siege to Russia,” wrote Carl Weinberg, chief economist at High Frequency Economics.

As a result, the exchange value of Russia’s money, the ruble, dropped to a record low on Monday. Many Russians lined up at banking machines to withdraw money, hurting Russia’s banking system.

The Institute of International Finance in Washington, D.C., expects the Russian economy to shrink by more than 10 percent this year.

Oxford Economics said, based on evidence from earlier wars, the Ukrainian economy could shrink by 50 to 60 percent.

With its dependence on energy from Russia, Europe’s economy is now at great risk.

Natural gas prices increased 20 percent after the war started, but are six times higher than they were at the start of 2021.

High gas prices are feeding inflation, and Europeans are paying more for heating. The result is that households have less money to spend, and hopes for an economic recovery after the COVID-19 pandemic have decreased.

Industries that use natural gas, like fertilizer makers, have to cut production. Farmers are paying more to run machinery and buy fertilizer. Germany’s economy could be facing a recession by the first three months of 2022.

Companies around the world are trying to find enough goods to meet demand as the COVID-19 pandemic eases. This has meant shortages, shipping delays and higher prices.

Disruptions to Russian and Ukrainian industries could delay any return to normal conditions.

Russia and Ukraine together supply 13 percent of the world’s titanium, which is used to make airplanes. The two provide 30 percent of the world’s palladium, which goes into cars, cellphones and dental fillings, said Mark Zandi. He is chief economist at Moody’s Analytics.

The conflict and sanctions will also hurt Russia’s migrant workers from Uzbekistan and Tajikistan. Those workers’ families depend on money sent home from Russia known as remittances.

In 2020, remittances from Russia to Uzbekistan were $3.9 billion and to Kyrgyzstan $2 billion, says the Russian central bank.

Gavin Helf is an expert on Central Asia for the U.S. Institute of Peace. This week, he wrote that the collapse of the labor market in Russia will have a strong effect on Central Asia.

The Ukraine war takes place as the U.S. Federal Reserve and other central banks are dealing with rising inflation.

In January, U.S. consumer prices rose 7.5 percent from a year earlier, the biggest jump since 1982. In Europe, inflation increased to a record 5.8 percent compared with the same time a year earlier for the 19 countries that use the euro as money.

Now, prices could go even higher. Zandi noted that Russia and Ukraine produce 12 percent of the world’s oil and 17 percent of its natural gas.

To combat inflation, the U.S. central bank, or Fed for short, is expected to raise interest rates it controls when it meets in two weeks. The European Central Bank also is slowly withdrawing its pandemic aid efforts.

However, central bankers must weigh the growing risks of inflation against the Ukraine crisis’s effects on the world’s economies.

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