A year of economic crisis for the world
One simple figure can help illustrate the degree of economic loss because of the war — it cost the world economy over $1.6 trillion last year, according to estimates
Exactly a year ago, Russia declared a special military operation in Ukraine in the name of "de-Nazifying" the nation and "freeing the ethnic Russians," living primarily in the Donetsk and Luhansk regions.
In the aftermath of the invasion, and with the Covid-19 pandemic still raging in the background, the global economy went haywire, adversely affecting economies, ranging from tiny Bangladesh to the mighty United States.
One simple figure can help illustrate the degree of economic loss because of the war: According to one report published recently by the German Institute of Economics, the war in Ukraine cost the world economy "far over $1.6 trillion" last year. The report estimates that by 2023, global production losses could reach another $1 trillion or so.
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Trans-Atlantic energy trade to rise substantially
Vladimir Putin's most crucial bargaining chip at the beginning of the war was the over-reliance of Europe, particularly Germany, on Russian natural gas. At the peak of this energy trade in September 2019, Russia supplied 56.1% of all the natural gas to the European Union (EU). Even in February 2022, the month when Russia began its invasion, the Eurasian giant supplied 35.7% of all the natural gas to the EU.
Since the beginning of the war, however, the EU seems to be diversifying its source of natural gas, albeit at a higher price, from alternate sources like the US, Qatar, Nigeria (LNG), Norway, Algeria, etc. Consequently, by November 2022, in a span of only 10 months, EU imports of Russian natural gas fell to only 12.9% of the total supply.
More specifically, EU imports of LNG from the United States, despite costing up to 30-40% more, rose from 2.53 billion cubic metres (bcm) in December 2021 to 5.78 bcm in April 2022, at the peak of the Ukraine war. Although imports have since come down to 4.2 bcm in last November, thanks to a relatively warm winter in Europe, this trend is expected to persist in the coming days.
Nearshoring on the rise
Thanks to immensely cheap labour, most developed countries in the West had begun outsourcing their production to Asian countries over the past three decades. But increasing globalisation and a high degree of offshoring also meant that exogenous supply shocks, like the Covid-19 pandemic or the Russia-Ukraine war, would hurt them even more.
However, it has been reported that European companies are now looking for alternatives closer to home, and Romania, Turkey, and Morocco have come up as the most viable alternatives. This can be particularly concerning for developing and least-developed countries in Asia (Bangladesh, Cambodia, Vietnam etc.) which rely heavily on labour-intensive industries to fuel their economies.
This would also likely increase the importance of regional trading blocs like the RCEP (Regional Comprehensive Economic Partnership) as countries are likely to want to trade with partners they can trust. We may as well see the formation of new trading blocs and the increasing trend of deglobalisation may make the World Trade Organisation even more obsolete.
Protectionism and food security concerns
The Russia-Ukraine war had been a major setback in ensuring global food security. Combined, Russia and Ukraine used to supply more than 30% of the world's wheat, 32% of its barley, 17% of its corn and/or maize, and more than 50% of its oils, seeds, and meals. And many growing or vulnerable economies, especially those in the Middle East and Africa, used to rely on these sources to ensure food security. Fertiliser for food production was also mostly supplied by Russia.
Crop availability issues also lead to higher costs and more competition for alternative sources. Developing nations may find it challenging to compete for supply with wealthy nations in such a challenging market. For instance, in the immediate aftermath of the war, Indonesia prohibited the export of palm oil to stop price hikes and shortages of domestic cooking oil. Consequently, prices of edible oil rose all around the world.
Fertilisers, including nitrogen and potash, are also widely exported from Russia. For their harvests, many emerging economies are dependent on these fertiliser supplies. The production of food for both domestic and international consumption may be impacted by market disruption.
For instance, Benin, Egypt, and Sudan buy almost all of their wheat from Russia and Ukraine. There aren't many options for regional trade to take their place.
A shift away from the dollar?
In response to the Russia-Ukraine war, the US decided to use its hold over the global financial system and freeze Russia's dollar-denominated assets to handicap the financial arms of the war and punish the Russian oligarchs close to Putin. Russia, however, had predicted this and began diversifying its currency basket with yen, euro, pound and other global currencies.
In fact, since the beginning of the war, the conversation regarding the over-reliance on the US dollar as a reserve currency has taken centre stage and many economies are considering trading in their currencies and diversifying their reserves.
Developing nations were the biggest losers
To tackle the cost-push inflation, the US Federal Reserve also decided to raise interest rates, reduce the supply and raise the demand for the US dollar. Consequently, the dollar appreciated and as always, clobbered developing nations.
On one hand, a strong dollar raised the cost of imports and put pressure on the balance of payments of many developing nations. Even Japan, one of the largest economies in the world, experienced a $54 billion drop in its forex reserves because of high import payments. Moreover, most developing countries had to depreciate their currency to remain competitive in the international market. However, since nearly all of their debts are denominated in dollars, it also increased the amount to be paid in local currency.
As a result, least-developed countries like Sri Lanka and Pakistan imploded (albeit they had prior structural problems) while promising economies like Bangladesh had to seek loans from the International Monetary Fund to ease the pressure on their Balance of Payments.
As Russia promises to continue the invasion for at least another year, it is likely that we will observe a more polarised, more protectionist world and as always, developing and least developed economies will have to pay the highest price.
