The Russia-Ukraine war drags on the global economy
Since the war between Russia and Ukraine broke out on February 24, there is still no sign of a truce in sight. According to reports, as the war in Kyiv subsided, Russia and Ukraine recently sent reinforcements to the eastern region of Ukraine, and the two sides may face the largest military conflict since the outbreak of the Ukrainian war. At the same time, the United States and EU countries not only expressed their desire to strengthen their military support to Ukraine but also threatened to impose further economic sanctions on Russia.
The Russian-Ukrainian war is the epitome of an international geopolitical conflict. After the disintegration of the Soviet Union in 1991, the original 15 republics declared their independence and restored their status as sovereign states.
The eastward expansion of the North Atlantic Treaty Organization led by the United States and the European Union has attracted many republics to join the military alliance, causing Russia to worry about its own security. Russian President Vladimir Putin demanded NATO assurances that Ukraine, which borders Russia, would remain neutral.
This caused a great rebound in the United States and European Union countries. The Russian-Ukrainian war united the cooperative relationship between Europe and the United States. However, since Ukraine has not yet become a member of NATO, the European and American countries only provided armaments to Ukraine and did not directly participate in the war. However, the economic sanctions imposed by Europe and the United States on Russia mean that the military conflict between Russia and Ukraine has expanded into an economic war.
Although the battlefield of Russia and Ukraine is in Europe, it is difficult for China to stay out of the situation when China-US relations are deteriorating and China-Russian relations are “uncapped”. The United States has repeatedly warned China not to provide arms to Russia, nor to open the door for Russia to bypass economic sanctions. China opposes economic sanctions and advocates “promoting peace and talks”.
However, China and the United States still have their own opinions on the Russia-Ukraine issue. U.S. President Joe Biden described the Russia-Ukraine war as a war of democracy and totalitarianism, deepening the ideological color of the geopolitical conflict.
The stakeholders of this war each have their own plans, but so far there is no specific plan to clean up the mess. The war between Russia and Ukraine and economic sanctions may also intensify.
The Russian-Ukrainian war cannot see the dawn of peace, leading to a humanitarian crisis of a large number of refugees fleeing. The escalation of economic sanctions against Russia will further disrupt global supply chains and push up oil, gas, and food prices. This war and economic sanctions will not only bring down the economies of Russia and Ukraine but also affect the world.
Russia is a major producer and exporter of oil and natural gas, with crude oil production accounting for about 11 percent of the world’s total. 40% of the EU’s natural gas supply comes from Russia. Therefore, in the first round of economic sanctions, the oil and gas industry was excluded.
But as the fighting escalated, especially after news broke that Russian troops massacred Ukrainian civilians, the United States has banned Russian oil and gas imports, and the European Union is planning to follow. The United States announced that it will release 1 million barrels of oil per day from the Strategic Petroleum Reserve for the next six months to cover the supply gap. Members of the International Energy Agency agreed last week to release a total of 120 million barrels of oil from reserves.
However, the Organization of the Petroleum Exporting Countries noted that the loss of oil supply from current and future sanctions or other spontaneous boycotts could reach more than 7 million barrels per day, making it nearly impossible to make up for a shortfall of this magnitude.
In addition to oil and gas, Russia and Ukraine produce minerals needed for industrial raw materials, and they are also major global granaries. The war and economic sanctions in Russia and Ukraine have pushed up oil prices; concerns about supply have pushed up the prices of raw materials such as nickel, copper, aluminum, zinc, and tin; the shortage of fertilizers and the ban on grain exports by Russia and Ukraine have comprehensively driven up the prices of agricultural products. Supply and logistics bottlenecks have also pushed up freight rates.
These superimposed factors have led to an increase in global business operating costs and living expenses. At present, inflation is a common challenge faced by the world, and if wars and economic sanctions continue to intensify, the world will face a stagflation problem that is even more terrible than inflation.
Soaring oil and food prices are already hitting developing countries. Sri Lanka’s inflation rate is as high as 20%, of which food prices have risen by 30%. Fuel shortages led to power outages and public outrage that culminated in anti-government demonstrations. It declared a sovereign default yesterday and is seeking assistance from the International Monetary Fund.
The World Trade Organization predicts that the Russian-Ukrainian war may halve global trade growth this year compared with earlier forecasts, and global economic growth will drop by 0.7 to 1.3 percentage points.
It pointed out that the Russian-Ukrainian war poses long-term risks that could lead to the fragmentation of the global economy into several sectors and an end to the more efficient economic globalization pattern. The revenue losses from this development are severe, especially for emerging and developing economies.
In fact, there are no winners in the Russian-Ukrainian war and the economic war. Both advanced and emerging economies have been hit by high inflation and slowing economies. Stakeholders in the Russian-Ukrainian war, especially major powers, should take concrete actions to achieve peace as soon as possible and repair the damaged global supply chain.