One of the most controversial issues for almost a month has been the armed conflict that is taking place between Russia and Ukraine; in this article we will focus on the economic impacts that are being foreseen in the short and medium term, and on this occasion we will leave out the political causes that triggered the conflict.
In order to do so, it is first necessary to contextualize the importance of both nations for world merchandise trade.
RUSSIA
It is the 9th largest economy in the world in terms of GDP (current US $), equivalent to $1,483 billion in 2020. With a total population for the same year of 144,104,080 inhabitants.
Rank no. 13 in total exports
Russia’s main exports are crude petroleum or bituminous mineral oils, petroleum oils, petroleum gas, coal and coal products, and wheat and meslin (Tranquillon). The main export destinations are China, the Netherlands, Belarus, Germany and Italy.
In 2019, Russia was the world’s largest exporter of wheat and meslin, intermediate iron products, oils and other products of the distillation of high-temperature coal tars; analogous products in which aromatic constituents predominate by weight over non-aromatic constituents, crude nickel, and mineral or nitrogenous chemical fertilizers.
Rank no. 21 in total imports
Russia’s main imports are automobiles, medicines consisting of mixed or unmixed products, parts and accessories of motor vehicles, radio or television broadcasting apparatus and aircraft. The main origin of its imports comes from China, Germany, Belarus, the United States and Italy.
In 2019, Russia was the world’s largest importer of cements, mortars, concretes and, refractories, stained glass paper, copper mattes, turbines, hydraulic wheels and regulators, original handmade plans and drawings, handwritten texts; photographic reproductions on sensitized paper and carbon copies.
Economy number 65 in terms of GDP per capita (current US$) Rank 45 in most complex economies according to the Economic Complexity Index (ECI).
UKRAINE
Economy number 56 in the world, in terms of GDP (US $ current prices), equivalent to $155,499 billion, in 2020. With a total population of 44,134,693 inhabitants by 2020.
Ranked 51st in total exports
Ukraine’s main exports are corn, sunflower, safflower or cottonseed oils, iron ores and their concentrates, wheat and meslin, and intermediate products of iron or non-alloy steel. The main destinations of its goods are Russia, China, Germany, Poland and Italy.
In 2019, Ukraine was the world’s largest exporter of sunflower, safflower or cottonseed oils.
Position no. 48 in total imports
Ukraine’s main imports are petroleum oils, automobiles, medicines, coal, and petroleum gas. The main origins of its imports come from China, Russia, Germany, Poland, and Belarus.
In 2019, Ukraine was the world’s largest importer of garment articles and yarns made of wool or fine or coarse hair.
43rd most complex economy according to the Economic Complexity Index (ECI).
ECONOMIC SANCTIONS IMPOSED ON RUSSIA
As almost everything in life, wars also evolve, and it is very true that the experience lived in the First and Second World Wars left a mark in the memory of all subsequent generations, which is why, although other armed conflicts have been generated in the following years, the use of weapons of mass destruction (atomic bombs) has not been used again. The simple fact of knowing that there are several countries that have developed, improved and perfected these weapons has been enough to prevent them from being used again. Because of the above, wars have changed; now, economic warfare has proven to be a weapon to be feared. The effects of the economic blockades on North Korea, Venezuela and Cuba are remarkable, and we can attest to the terrible impact they have had on their inhabitants.
In the context of the conflict between the two nations, several countries have imposed a series of economic sanctions that seek to limit Russia’s financing and thus try to dissuade it and put an end to it as soon as possible; however, in the short term the effects are not so strong and the sanctions would need to be maintained in the medium and long term, and even so, it is not certain that Russia will not be able to withstand the restrictions for a considerably longer period.
The main sanctions imposed include the following:
- Closure of the Western financial system. It is prohibited to make or receive international transfers through the SWIFT global payment system.
- Limitation of Russian banks’ access to international credits. This results in the increase in the cost of already contracted debt and Russian sovereign debt.
- Pressure on Russian companies in the international stock markets. This measure has led to a fall in the stock market value of Russian banks and companies.
- Freezing of the assets of the Bank of Russia and of public and private banks. Sanctions have also been imposed against political leaders and a significant number of Russian oligarchs. The action affects the assets of the Russian political and economic elite.
- Mobility ban on Russian airlines. Restrictions on the use of European Union airspace by Russian commercial aircraft, as well as private aircraft of Russia’s political and economic leadership.
Sanctions by country:
United States: imposes sanctions on Russia’s main development bank VEB and the military bank Promsvyazbank , on the natural gas pipeline Nord Stream 2, expulsion from financial markets of two banks SberBank and VTB Bank, restrictions on technology imports, penalties on Putin and Sergey V. Lavrov.
European Union: Approves the first round of sanctions against 27 individuals and entities (organizations, political, military, business and financial) including asset freezes, travel bans to the EU, blocking access to financial and capital markets, as well as the Russian president and his foreign minister. The export of aircraft and spare parts for the maintenance of military fleets, as well as semiconductor and specialized technology for oil refining is prohibited.
United Kingdom: Ban on civilian and business dealings with Russia, restrictions on five banks and three Russian billionaires with close ties to Putin, who had assets frozen and are denied entry to the country.
Australia: Entry ban and economic sanctions against eight members of Russia’s National Security Council, 25 military personnel and four Russian military technology companies, trade ban in oil and gas transport sectors including Donetsk and Luhansk, citizens are prohibited from making transactions with five Russian banks.
Canada: banned from buying Russian sovereign debt, as well as entering into financial agreements with Donetsk and Luhansk, financial sanctions on members of the Russian parliament who voted in favor of recognizing the separatist regions. Financial sanctions on 58 individuals and entity members of the Russian elite and banks.
Japan: Prohibits any kind of trade with Donetsk and Luhansk, and bans the issuance of sovereign bonds to the Japanese market. It also chose to freeze assets of representatives and to make it impossible to obtain visas.
GLOBAL IMPACT
- Increase in the cost of fossil fuels
An increase in the cost of gas is expected for Europe and for the countries that consume this product from Russia. The inflation that comes with the increase in fossil fuels, especially gas and gasoline, impacts a very long value chain.
- Commercial communications affected
Commercialization by land, sea and air are affected by the war as they begin to be restricted. So flights that can be merchant flights by Russia will no longer be impacting these value chains, the same goes for shipping, maritime routes give priority to warships.
- Humanitarian crisis
The long-term consequences are economic and of course in human losses in a conflict that no one wants, but which is already beginning to leave a humanitarian crisis in Ukraine.
- A failed state
Degradation of Ukraine, which will become a failed state after this conflict, and which will have significant social movements.
- Rise in the price of some grains and metals
According to the Middle East Institute, the Middle East and North Africa (Egypt, Lebanon, Yemen and Tunisia) will be the countries most affected by the increase in wheat prices.
- Shortage of goods and supplies
Following the cascades of Western sanctions, Russia’s Ministry of Trade and Industry on Friday, March 4, recommended that the country’s fertilizer producers temporarily suspend exports.
Undoubtedly the effects will be known in depth as this conflict lasts, being much greater if it is prolonged, having significant impacts on the GDP of several nations, as well as on the problem that has remained since the beginning of the economic recovery Post COVID-19, the “INFLATION”, therefore, the best thing for all the economies of the world is to end this conflict as soon as possible.
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