How one year of the Russia-Ukraine war has impacted the global economy

Russia began its invasion of Ukraine a year ago on February 24, 2022

A year after Russia invaded Ukraine, the global economy is still enduring its fallout, facing consequences such as energy insecurity, inflation, and food scarcity.

The war, which began when the world was still reeling from the economic impact of the Covid-19 pandemic, has also set back the recovery process.

One of the most visible signs of the war was its effect on food grain prices. Before the war, Ukraine was the fourth-largest exporter of corn and wheat, accounting for 8.9 percent of global wheat exports. The country was also the largest exporter of sunflower oil, which accounts for 9 percent of vegetable oils.

Together, Ukraine and Russia exported as much as 23 percent of the world's wheat. They were also responsible for 63.6 percent of the world's sunflowers and seeds.

After the invasion in February, the FAO Food Price Index jumped from 141.2 to 159.7 in March, the highest level ever recorded. For as much as four months after that, it remained above 150. However, the index has eased since then.

The supply crunch of grains and the surge in their prices in a world that was facing an increasing number of climate shocks and recovering from the pandemic triggered a food crisis in many countries, especially those in the global south.

Increased food insecurity

According to the World Food Programme, the number of people who lived under acute food insecurity soared to a record of 349 million across 79 countries in 2022, driven by the ripple effects of the conflict. This was as much as 287 million more people than the 2021 figure.

According to the International Monetary Fund, in as many as 48 countries that were highly dependent on imports from Russia and Ukraine, the increased import costs for food and fertiliser is estimated to have added $9 billion to their balance of payments pressure in 2022 and 2023. About half of these countries are especially vulnerable due to their already weak economic position.

Volatile oil prices

A surge in prices and disruption in oil and gas supplies, especially in Europe, were the other casualties. Oil prices were already inflated before the invasion, driven by the recovery of demand after pandemic restrictions were lifted across the globe. The Russia-Ukraine war worsened this situation.

Russia is one of the largest producers of oil and natural gas, accounting for as much 10 percent of the global market. It produced 10.5 million barrels of liquid fuel products per day in 2020. And European countries were highly dependent on Russian oil and gas to meet their energy requirements.

After Russia invaded Ukraine, the US and the UK announced a ban on importing oil and gas from the country. The European Union said it would cut oil imports from Russia by two-thirds. This triggered a further increase in oil prices, which climbed to a 14-year high of $140 per barrel in March 2022.

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However, due to global inflation, recession fears, and weak demand amid the extended Covid-19 lockdown in China, the prices have eased and Brent crude is currently trading at about $80 per barrel.

Changing oil baskets

Meanwhile, Russia has been able to largely offset its diminishing prospects in Europe due to the sanctions by ramping up oil trade with friendly emerging economies. According to S&P Global, India and China have increased their oil purchases from Russia, offered at a discounted price, and are now the biggest importers of the product from the country.

The share of Russia in the Indian crude basket was only 2.2 percent in 2021. By November 2022, Russia had become India's top crude supplier, with the country receiving about 1 million barrels per day, according to S&P Global Commodity Insights. This was estimated to be even higher in December at 1.24 million barrels per day, due to competitive landed costs.

China’s import of crude oil from Russia went up 10.2 percent year-on-year to 1.75 million barrels a day, during January-November, official customs data showed.

Disrupted supply chains

The war also disrupted supply chains across the world. The Baltic Exchange Dry Index, which measures the cost of shipping goods worldwide, surged to above 3,000 by May from 1,418 at the end of January.

However, a year on, global supply chains seem to have acclimated to the situation as the index has gone down to 674 as of February 22.

Risk of geo-economic fragmentation

According to the IMF, another risk from the change in world order due to the invasion is increased geo-economic fragmentation.

Also Read: A year of war: Ukraine's economy devastated, Russia stares at a bleak future

“Trade tensions between the world’s two largest economies have been rising amid a global surge in new trade restrictions. Meanwhile, Russia’s invasion of Ukraine has caused not only human suffering, but also massive disruptions of financial, food, and energy flows across the globe,” the IMF said in a report published last month.

While there aren’t many signs of such fragmentation in the trade data available, there is a clear indication that the number of protectionist measures are rising. These include measures taken across the globe such as the Inflation Reduction Act in the US, the European “Chips Act” in the EU, and China’s ‘Made in China 2025’ programme.

The most number of interventions harmful to open trade by governments across the world was in the pandemic year, with 5,344 such interventions recorded, according to the Global Trade Alert Database. However, due to the war, the number of such interventions remained elevated even after the easing of pandemic restrictions, as the chart shows.

Rising debt

Supply chain disruptions and increased commodity prices caused by the war have led to a bleak outlook for emerging markets and developing economies that were already reeling under high debt since the pandemic.

“The Ukraine war immediately darkened the outlook for many developing countries that are major commodity importers or highly dependent on tourism or remittances,” the World Bank said in a commentary published in March.

Late March estimates published by the World Bank show that bond spreads across Africa went up 20 basis points, indicating increasing external borrowing costs. Moreover, as much as half of the low and lower-middle income countries that are eligible for financing from the International Development Association, the World Bank’s fund for the poorest economies, are now at high risk of debt distress or already in debt distress.