The War in Ukraine and Its Impact on World Countries

7/14/20236 min read

The Ukraine War and How It Affects Countries Around the World.

Given the current situation in Ukraine and the humanitarian crisis it has caused, the global economy is likely to be significantly affected by the repercussions of this conflict. Its impact will manifest in several aspects and may lead to a slowdown in economic growth and a rise in global inflation rates.

Among the key effects that can occur worldwide, the escalation of prices for primary commodities such as food and energy will contribute to pushing inflation rates higher and undermining the purchasing power of citizens and businesses. Additionally, neighboring economies will face challenges in trade, supplies, and remittances, affecting their stability and ability to cope with the fallout from the conflict.

Furthermore, it is expected that investor confidence and global business will be impacted by this tense political situation, potentially resulting in asset price declines and improvements in financial conditions, which could push investments to withdraw from emerging markets.

It is worth noting that Ukraine and Russia are major producers and exporters of primary commodities globally, and as a result, their crisis will disrupt the global energy and food markets. Crude oil and natural gas prices are expected to experience sharp increases, and the prices of wheat and other agricultural crops may also be affected.

This situation highlights the challenges facing the global economy, and hence, international cooperation and joint efforts will be necessary to address the economic and humanitarian impacts of this global crisis.

When considering the expected global implications, countries with direct trade, tourism, and financial exposures to the affected nations will likely face increased pressures. Economies heavily reliant on oil imports may experience higher financial deficits and mounting inflationary pressures, although some oil-exporting countries in the Middle East and Africa might benefit from rising oil prices.

The escalation of food and fuel prices may increase the likelihood of unrest in different regions, from Sub-Saharan Africa and Latin America to the Caucasus and Central Asia, and there are expectations of increased food insecurity in certain areas of Africa and the Middle East.

Although it is challenging to determine the full extent of these repercussions, there are possibilities of downward adjustments to growth expectations in the near future, especially when considering "Global Economic Prospects" and our regional assessments.

In the long term, this conflict could lead to significant changes in the global economic and geopolitical order, potentially resulting in shifts in energy trade, supply chain alterations, and fragmentation of payment networks, as well as countries reconsidering their reserve currency holdings. Increased geopolitical tensions could pose further economic fragmentation, with noticeable impacts on trade and technology levels.

Europe

Ukraine is currently facing significant losses, and with unprecedented sanctions imposed on Russia, financial and commercial activities are expected to diminish, leading to a deepening recession in the region. The depreciation of the ruble increases inflation rates and affects the living standards of the population.

Energy serves as the main channel for transmitting the repercussions in Europe, where Russia is a major supplier of natural gas. This situation may lead to widespread disruptions in supply chains. These effects contribute to higher inflation and slow down the recovery from the pandemic's aftermath. Eastern Europe is expected to witness increased financial costs and a rise in refugee inflows, as it has already received over 3 million refugees fleeing from Ukraine according to United Nations data.

European governments will also face financial pressures on their public budgets due to increased spending on securing energy sources and defense budgets.

On another note, pressures on emerging markets may increase as investors seek safe havens, and external exposures to Russian assets may lose significance in global standards. However, direct exposures of European banks to Russia are currently being managed and considered controllable.

The Caucasus and Central Asia

Looking at regions outside Europe, these neighboring countries will be more affected by the repercussions of the recession in Russia and the imposed sanctions on it. Their close links with Russia in terms of trade and payment systems will lead to reduced commercial activity, decreased foreign remittances, investments, and tourism, negatively impacting economic growth, raising inflation rates, and affecting external and public financial balances.

Although the rise in global commodity prices may benefit commodity-exporting countries, these nations face risks of declining energy exports if sanctions continue to apply to pipelines passing through Russia. These countries heavily rely on revenues from oil and gas exports; thus, any restrictions on these exports could have adverse effects on their economies and financial stability.

The Middle East and North Africa

The region is expected to face significant repercussions due to rising food and energy prices and global financial constraints. In countries like Egypt, for example, 80% of its wheat imports rely on its suppliers, Russia, and Ukraine. Additionally, Egypt heavily depends on tourism from these two countries, and it is anticipated to experience a contraction in tourist spending.

Policies aimed at combating inflation, such as increasing government subsidies, may exert additional pressures on already weak public finances. Moreover, the escalation of external financial conditions may lead to capital outflows and exacerbate adverse effects on the growth of countries with high debt levels and significant financing needs.

The price hike may also lead to increased social tensions in some countries that suffer from weak social safety nets, limited job opportunities, and restricted public spending, contributing to unpopular governments.

Sub-Saharan Africa

While the continent has been gradually recovering from the economic impacts of the pandemic, the current crisis threatens this achieved progress. Many countries in the region are vulnerable to significant risks due to the repercussions of conflict, rising energy and food prices, as well as the decline in the tourism sector and challenges accessing international capital markets.

This conflict comes at a time when most countries in the region are facing financial constraints in dealing with the fallout of the crisis. Social and economic pressures are expected to increase, and countries are facing growing risks of public debt and worsening economic effects of the pandemic, which already affected millions of households and businesses.

The increase in wheat prices raises significant concerns in the region, which relies on importing about 85% of its supplies of this crop, with one-third coming from either Russia or Ukraine. Economies heavily dependent on this commodity are facing significant challenges due to its prices reaching record levels.

Food and energy prices represent the main channels for transmitting the repercussions, and their impacts are expected to be significant in some cases. The rise in commodity prices could accelerate inflation in Latin America and the Caribbean, where some of the largest economies in the region are experiencing annual rates averaging up to 8%. Central banks in these countries may need to defend their credibility in combating inflation.

The effects of the increase in commodity prices on growth have varied. Some Central American and Caribbean countries that import oil have been negatively affected, while oil, copper, iron ore, corn, wheat, and mineral-exporting countries may impose higher prices on their products, mitigating the impact on growth.

Currently, the financial conditions are relatively favorable, but intensifying conflict may lead to a global financial squeeze, requiring tighter local monetary policies, which will affect growth.

Although the United States has limited relations with Ukraine and Russia, inflation had already risen to its highest levels in four decades before the conflict caused a surge in commodity prices, meaning that prices may continue to rise while the Federal Reserve starts raising interest rates.

Global Shocks

The impact of the fallout from Russia to Asia and the Pacific is expected to be limited due to the absence of strong economic ties between them, but the slow growth in Europe will have significant repercussions on major exporting countries.

The largest effects on current accounts will be seen in the economies of the Association of Southeast Asian Nations (ASEAN), India, and some promising economies in the Pacific islands that import oil. These effects may be exacerbated by a decline in tourism in countries heavily reliant on Russian visitors.

As for China, the direct impacts are expected to be lesser due to the financial stimulus measures that will support the growth target for this year at 5.5%. Although Russia's purchases of Chinese exports are relatively small, the rise in commodity prices and weak demand in major export markets add to the challenges they face.

Japan and Korea will also face similar repercussions, and providing new support for oil in both countries may mitigate these effects. With the increase in energy prices, inflation in India, which has already reached the upper end of the central bank's target range, will rise.

Pressure on food prices in Asia is expected to decrease thanks to local production and a higher reliance on rice than wheat. However, imports of costly food and energy may raise consumer prices, but support and capped prices for fuel, food, and fertilizers may lessen their direct impact, although the cost will be borne by public finances.

The war launched by Russia on Ukraine has left its impact not only on the region but also on the entire world. Its consequences were not limited to the situations in these two countries but affected the global economies as a whole. Such shocks underscore the importance of having a global safety net and regional arrangements to safeguard economies from the negative effects of such crises.

The Managing Director of the International Monetary Fund stated during a press briefing in Washington, "We live in a world that is more exposed to shocks." She further added, "We need to come together to address the challenges ahead."

The full extent of the economic repercussions of these events may not be entirely clear at the moment, but there are already clear indications that the war and the sudden surge in essential commodity costs will increase the challenges faced by policymakers in some countries to maintain economic balance and support the process of recovery from the economic impacts of the COVID-19 pandemic.

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