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ECONOMIC IMPLICATIONS OF WAR (Ukraine and Russia) - Coggle Diagram
ECONOMIC IMPLICATIONS OF WAR
(Ukraine and Russia)
The Russia-Ukraine conflict has triggered turmoil in the financial markets, and drastically increased uncertainty about the recovery of the global economy.
Higher commodity prices intensify the threat of long-lasting high inflation which increases the risks of stagflation and social unrest.
Certain sectors such as automotive, transport or chemicals are more likely to suffer.
Coface forecasts a deep recession of 7.5% for the Russian economy in 2022
Global economy is facing a large-scale supply shock on multiple fronts:
supplies of fossil fuels
wheat
Global prices for some grains have spiked since the Russia-Ukraine war started, with both countries contributing a significant percentage of the world's supply for some of those commodities such as wheat.
nitrogen fertilizers and industrial metals such as nickel and titanium, which together make up the bulk of Russia’s (and Ukraine’s) exports, have been severely reduced.
The result is an increase in world prices for all these commodities, as we have seen in a particularly volatile manner with nickel.
"Russia is a major supplier of oil, gas, and metals, and, together with Ukraine, of wheat and corn. Reduced supplies of these commodities have driven their prices up sharply. "
When Russia invaded Ukraine no one knew how long the ensuing conflict would last, or how deep the shockwaves sent through Europe or the rest of the world would be.
As the war approaches its third month, however, the economic fallout from the conflict is becoming clearer and the outlook does not look good.
Markets tense
:Investors are rattled by rampant inflation and its dampening effect on global growth — the international Monetary Fund predicts the U.S. inflation rate will reach 7.7% this year and 5.3% in the euro zone.
Inflation from agribusinesses, energy and supply chains is spinning unchecked – and, like a nuclear reaction, they are triggering a host of follow up consequences.
Global financial markets continue to focus on the war as it enters a second phase in which fierce fighting has begun in the east of the country
Investors expect that central banks will introduce more aggressive interest rate hikes in order to control price rises
Global growth hit
Russia is a major supplier of oil, gas, and metals, and, together with Ukraine, of wheat and corn. Reduced supplies of these commodities have driven their prices up sharply
European sanctions on Russia have prompted an increase in the prices of the most basic food such as oil and cereals.
Both institutions said the downgrades to their forecasts had been made as they expected supply shocks to intensify
For commodity prices of which Russia and Ukraine are major suppliers to rise dramatically.
Food price increases
With the war converging with other disruptions supply-chain strains, inflation and the pandemic it is now posing ,a looming threat to our global food supply.
The depth of the impact on the global economy of course depends on how long the war lasts, and the scale of the devastation and disruption that it causes.
Ukraine's economy shrank 16 percent in the first quarter of 2022 compared to last year's first quarter, and it could be down by 40 percent by the end of the year.
The nvasion, financial conditions tightened for emerging markets and developing countries
This repricing has been mostly orderly. Yet, several financial fragility risks remain, raising the prospect of a sharp tightening of global financial conditions as well as capital outflows
Against an already turbulent backdrop of global inflationary pressures amid rising food and energy prices and disrupted supply chains following the coronavirus pandemic,
:War and National debt
During war we often see a rapid rise in public sector debt.
:The government is willing to borrow a lot more than usual because – there is patriotic support for the war effort.
debt continued to rise due to reconstruction and the creation of the welfare state.
The Ukraine–Russia region is seen as one of a small handful of global "breadbaskets" (or major food producers) and plays a vital role not only as an exporter of primary staples like wheat, but also as one of the major suppliers of fertilizer worldwide.
There are six breadbaskets that together supply roughly 60 to 70% of global agricultural commodities.
The Ukraine–Russia region is responsible for roughly 30% of global exports of wheat and 65% of sunflower
those markets are increasingly tight and interconnected—so a slight disruption in supply creates some impact on price
the war between Russia and Ukraine is exacerbating supply and demand tensions, damaging consumer sentiment and is threatening global economic growth.
The global food system, previous supply demand scenarios were mostly encoded around weather and other supply-related events .
But now, we are in an unimaginable situation, a war of this scale in Europe, in such a critical food supply hub especially when it comes to wheat and to fertilizers
The war between Russia and Ukraine is exacerbating supply and demand tensions, damaging consumer sentiment and is threatening global economic growth.
Putting aside the very real human cost, war has also serious economic costs – damage to infrastructure, a decline in the working population, inflation, shortages, uncertainty, a rise in debt and disruption to normal economic activity.
war can lead to inflation – which leads to loss of people’s savings, rise in uncertainty and loss of confidence in the financial system.
:War can often lead to higher prices of oil because major conflict can threaten supplies.
The 2022 Russian invasion of Ukraine led to a rise in the price of oil and gas, and this will lead to higher global prices for fuel.
:As Russia is a major supplier of oil and gas, economic sanctions on Russia in response to the invasion will reduce supply and put upward pressure on gas prices.
The financial cost of war
the opportunity cost of military spending, the human cost of lost lives, the cost of rebuilding after the devastation of war
Countries experiencing war will see a collapse in tourism, foreign investment and domestic investment. It can lead to shorter life-expectancy and lost GDP:
to estimate the psychological costs of war – the pain of death, suffering, fear and disability.
Psychological costs
A conflict can leave soldiers and civilians traumatised for the rest of their lives. In recent years, post-traumatic stress syndrome is more widely accepted, but putting a cost on how war negatively affects those involved, is difficult to do.
Services and travel
the global impact on services trade as outbound travel was disrupted with airspace closures, travel restrictions, sanctions and increased fuel prices. Russia and Ukraine are among the top 10 countries for total global departures and a key source of revenue for tourism-reliant countries in the Europe, East Asia and the Pacific, Middle East, North Africa and South Asia.
Financial spill-overs are most likely to be felt in advanced economies with exposure to Russian financial assets, including some Italian, French and Austrian banks, according to World Bank.
:As a result, European bank stocks lost more than a fifth of their value since the onset of the war, but high capital adequacy and liquidity ratios have cushioned the impact