The economic impact of the Ukraine crisis.

8 min readMar 13, 2022

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How is the Ukraine crisis affecting the global economy? From oil prices to sunflower oil, this article covers it all.

“Anyone who has ever looked into the glazed eyes of a soldier dying on the battlefield will think hard before starting a war.”

This was a famous quote made by late 19th century German Chancellor Otto Von Bismarck. This quote couldn’t be more apt in the given context.

The invasion of Ukraine by Russia has culminated due to geopolitical tensions between Russia and the West over the years. Ukraine is an unfortunate victim of a war between greater powers.

While I will not speculate much behind the geopolitics behind the invasion, I decided to look into some data on the economic impact of this war.

Ukraine: Europe’s breadbasket

Ukraine is the second largest country in Europe and is popularly known as the region’s breadbasket thanks to its black “Chernozem” soil.

This soil is so fertile that there is even a black market for Ukrainian “Chernozem”!

Ukraine’s proximity to large markets, namely the Russian Federation and the European Union and access to deep sea ports at the Black Sea, provide direct access to world markets, especially large grain importers in the MENA (Middle East and North Africa) region.

Now, consider these facts:

Ukraine is the 8th largest producer of wheat and 5th largest producer of maize/corn. (as per FAOSTAT for 2020)
Ukraine is the 4th largest producer of potatoes in the world. (as of 2019)

The export data is even more astounding:

Ukraine is a leading exporter of sunflower oil (Rank 1), barley (Rank 2), maize (Rank 5) and wheat (Rank 5).

Ukraine is a leading exporter of several agricultural products — Data source FAOSTAT.

Global fallout on food-grains:

It is only natural that with demand remaining more or less the same in the short-term, any disruptions in food supplies from Ukraine or the Russian Federation would raise prices of these essentials and this is exactly what has happened.

As of March 4, 2022, corn is trading close to its 52 week high and wheat contracts are trading at record prices.

Sunflower oil — From the frying pan into the fire

Ukraine is the largest exporter of sunflower oil in the world! Russia comes in a distant second. Together, the two countries contribute to more than 75% of the world’s sunflower oil exports.

Prices of popular edible oils (palm, soybean, sunflower, rapeseed) have risen at alarming rates due to sub-par harvests from major suppliers like Indonesia, Malaysia, Brazil and Argentina. This problem has been further compounded by the closure of Ukraine’s ports.

This has significantly raised the cost of cooking oil— a worrisome matter for consumers the world over.

Tale of two cities — Kyiv and Moscow.

While Ukraine clearly has a lot to lose, the recent international backlash to the invasion also threatens to isolate the Russian Federation from the global economy.

Ukraine’s Hryvnia has depreciated by nearly 10% relative to the greenback since the beginning of 2022.
As per UNHCR, the crisis has already led to a mass exodus of 2.5 million refugees to neighboring countries. The economic impact of refugee crises is huge — an employable workforce leaving in such large numbers can have a devastating impact on any economy and it’s prospects of recovery.
Ukraine’s ports and airspace have been closed due to the war. This will have widespread impact on the the Ukrainian economy and cause a breakdown in the global supply chain especially for essential commodities.
The US, EU and the UK have imposed sanctions on the Russian Federation threatening to cripple the Russian economy.
These sanctions have been imposed on Russian individuals, including the Russian President, Vladimir Putin and Russian Foreign Minister Sergey Lavrov.
That’s not all many countries have also banned Russian airlines from using their airspace in retaliation to the invasion.
The Russian Ruble has depreciated massively relative to the US $ from 84.25 (Feb 24, 2022, the date of the invasion) to 137.25 (March 9, 2022).
Russian stock markets haven’t had it worse. The Russian stock markets have been closed since February 25 and haven’t been opened yet to prevent panic selling.

Effects of the SWIFT reaction to the invasion:

Before the invasion, Russia was touted to have a strong balance sheet. As at the end of January 2022, Russia had a massive $630 billion in forex reserves!

This is excluding their enormous 2,300 tonnes of gold reserves. (Source: FT) This is a sizeable war chest by any counts, (sadly it really is a “war chest” in the current context.)

However, sanctions by the US targeting the Central Bank of Russia have rendered a large portion of these reserves useless.

Add to that, the removal of Russian banks from the SWIFT system, and widespread panic has been created around financial institutions the world over.

Some countries and corporations due to uncertainty and as a mark of solidarity with Ukraine are “self-sanctioning” their associations with Russia.

Conglomerates like Unilever, BP, Shell, the Big 4 accounting firms — Deloitte, EY, PwC, KPMG, McDonald’s and Heineken have decided to shut shop permanently or temporarily.

While currency trading in the Ruble continue, traders are finding it increasingly difficult to trade in the currency because of two reasons:

Russia’s central bank has imposed controls on outflow of money to prevent a mass exodus of funds from the country.
Western banks, due to sanctions are unwilling to settle transactions in the Ruble.

Will the Russian isolation be successful?

Many countries have experienced American wrath (read as “sanctions”), like Iran, North Korea and Venezuela earlier. Such instances of isolation of the target country did not affect the global economy too much. However, Russia’s case is quite different. Why so?

Russia is a heavyweight in the commodities market.

Fossil Fuels

Oil: Russia is one of the largest exporters of oil in the world. It is a member of OPEC+ and it is responsible for producing nearly 12% of the world’s oil. It exports a significant chunk of its sales abroad to Europe and China.

Natural Gas: Again Europe heavily depends upon Russia for its gas supplies, in fact a whopping 40% of its gas consumption.

Although, Europe is exploring ways of reducing dependency on Russian gas, the number is just too large to alter in the near future.

Coal: Russia is the world’s third-largest coal producer. Again, China and Europe depend heavily on Russian coal exports.

Metals

Gold: Prices have spiked by more than 9% YTD (as of March 7, 2022.) It is worth noting that Russia is the third-largest producer of gold in the world!

However, volatility in global equities is a better reason to explain why gold has again come into the spotlight as gold is normally considered as a safe haven for investors in tumultuous times.

Copper and Aluminum: Russia is the 2nd largest producer of aluminum and also contributes to around 3.5% of the world’s copper.

Nickel: Russia is the third-largest producer of nickel in the world. Nickel is used in the production of stainless steel and EV batteries.

Palladium: COVID-19 dealt a major blow to the global auto industry and the troubles don’t seem to be ending anytime soon.

Why do I say that?

Russia contributes to nearly 38% of the world’s palladium production! Little wonder that experts predict a possible supply shortage of palladium. This is bound to be a pain point for the auto industry which makes use of this metal for fuel cells.

An attempt to disconnect the Russia from the world economy as punishment for its actions in Ukraine maybe well intentioned, however the same sanctions have sent commodity prices spiraling out of control.

What lies ahead?

Despite the immense damage and loss of lives on both sides, there seems to be no end in sight to the war.

Most recently, the United States and the UK have banned imports of Russian oil, further clamping down on a major source of finance for Russia. With stringent sanctions in place, Russia is staring at a bleak economic future, in fact a bad recession.

Additionally, this puts pressure on Europe to ban Russian energy imports as well. However, this is a decision fraught with risks, especially when around 40% of Europe’s gas requirements are met by imports from Russia. For Germany, the largest economy in the EU, this figure is even higher.

Retaliatory bans will harm Europe as well. This is not to mention the domino effect such oil embargoes will have on global inflation. Many Asian economies including economic heavyweights like China and India largely depend on imports to meet their energy demands.

It’s not unreasonable to assume that the global economy will suffer due to high commodity prices in the time to come.

Corporations exercising “self-sanctioning” as discussed above, threaten to tear through the Russian economy. If this continues unabated, it can have severe and unwanted repercussions, not just on Russia, but also on the world economy in ways that we can’t even imagine.

One possible impact could be the exploration for alternatives to the US Dollar as the dominant international currency. Unthinkable as it may be at this juncture, the intensity with which US sanctions have affected Russia may lead countries to believe that such a “weaponization of the Dollar” could harm their interests as well.

Obviously, Russia will try to reduce its dependence on the US Dollar. However, the world might witness a more concerted push from other countries as well, for instance China, which has been engaged in a massive trade war with the US since 2018. This could lead to a shift away from the US Dollar in the long-term towards other currencies like the Renminbi.

Some other countries, like India, are exploring the feasibility of setting up alternative mechanisms like using rupee-ruble transactions in the case of key import items.

One thing is for sure. The war may end in a few days(and I sincerely hope it does) or it could drag on, but the effects of this crisis will be felt for a long time to come.

Sources:

The economic impact of the Ukraine crisis.

Written by Nachiket Hattangadi

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