Ukraine war hurting all

Subir Roy

Senior Economic Analyst

THE war in Ukraine is set to complete one year, with no sign as to when it could come to an end. It has caused a severe setback to the global pursuit of economic growth and uninterrupted development vital for less-developed countries to address their need to alleviate poverty. The economic consequences of the war are being considered the biggest test for the global economy since World War II. Almost immediately after the war began, there was a tumult in global commodity markets. The shipment of foodgrains from Ukraine, which is a major global supplier, was disrupted, causing global prices to shoot up.

The long-term economic damage Russia has done to itself is worse than in the case of most other nations.

Global energy markets were similarly plunged into turmoil as Russia is a major supplier of oil and gas to the rest of the world. Energy prices shot up and have remained high, compared to the pre-war period, while fluctuating within a range in response to day-to-day developments.

The disruption in Russian supplies has caused the world’s major oil exporting countries to manipulate their output so that energy prices remained high and they could reap the bonanza offered by the high prices. High and tumultuous energy and commodity prices have wrought havoc on global growth prospects, belying the hope that economic activity and growth would return to normal with a decline in the Covid pandemic. This has caused a setback to the efforts to make up for the lost years (2020 and 2021) in terms of growth.

According to the IMF, the growth rate of global output is estimated to fall by almost half in 2022 to 3.4% (the year of the war) from the previous year’s (2021) rate of 6.2%. (The high growth rate of 2021 was of course the result of the low base effect, growth in 2020 being severely affected by the pandemic.) In the current year, when the end of the war is not foreseen, growth is projected to fall further to 2.9 %.

What this has done to developing countries can be gauged by the economic plight of India’s neighbours. Sri Lanka and Pakistan have been plunged into economic chaos from which they are yet to recover. The economic turmoil that the war caused in Sri Lanka drowned it into political chaos leading to a constitutional crisis and the exit of its the then rulers.

Pakistan is in economic doldrums. Both Sri Lanka and Pakistan are waiting at the door of the IMF for a bailout package, which for Pakistan is proving difficult to conclude successfully. Bangladesh also faced economic disruptions, but has managed to recover while being able to successfully negotiate a $4.7 billion package with the IMF.

In the case of India, the Ukraine developments have posed severe challenges for its economic managers, but through a combination of good luck (natural resources endowment), agricultural stability and successful diplomacy, it has been able to keep its head above water. Its coal reserves are a fallback if it must, and raise electricity generation in particular. But what has really helped is to be able to negotiate with Russia the import of oil at competitive prices. As for foodgrains, India has both self-sufficiency and adequate buffer stocks.

According to the Economic Survey, from a pre-Covid growth rate of 3.7% in 2019-20, the Indian economy contracted by 6.6% in the Covid year of 2020-21. With a successful vaccination programme and decline in the pandemic, it was able to bounce back to a growth of 8.7% in 2021-22. As a result of its ability to counter the adverse effects of the war, it is expected to clock a highly satisfactory growth of 7% in 2022-23.

Within the broad framework of suffering nations — both rich and poor — there are variations. As is to be expected, the rich have greater resilience and so have been able to weather the storm better than the poor, who, in many cases, have been pushed to the edge of destitution. Consumer prices in poor countries jumped by a massive 9.9% last year whereas the richer countries were a bit better off with an overall inflation of 7.3%. The surge in consumer prices, right after the war began, has thereafter eased.

Among the developing countries which have been severely hit, other than the subcontinental ones, are Egypt and Nigeria. Against this, countries in the developed world have proved to be quite resilient, thereby avoiding a recession. The US, in particular, is witnessing a historic rise in jobs and the key overall concern is when the Federal Reserve will ease money rates (raised to fight inflation) so that life for business becomes more bearable.

While the global media has been full of reports as to how the war has hit countries not directly involved in it, the economic consequences of the war on Russia itself have gone largely unreported. Since the war began, over a thousand western headquartered multinational companies like Volkswagen and Volvo have stopped their Russian operations and quit as part of the sanctions imposed by western countries on Russia. This has brought joblessness to hundreds of thousands of workers.

The sanctions have dealt a blow to post-Cold War Russia’s efforts to modernise its economy and catch up with the West in terms of living standards. The whole official effort is now focused on preventing things from getting worse. Key drivers of growth, like technology transfer and foreign investment, have gone missing. This has put paid to Putin’s efforts to make Russia a modern manufacturing economy.

What has really made things worse for Russia is the absence of key imported components without which an industry such as automobiles fails to come up with the finished product. In the year since the war began, auto industry sales have fallen 77% and car sales 60%. According to the IMF, in the current year, the Russian economy will contract by 3.5% against the global economy as a whole growing by 2.9%. So, while Russia has made all suffer economically, the long-term economic damage it has done to itself is worse than in the case of most other nations.

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