The impact of the Russia-Ukraine war on world’s economy

When the Russian forces invaded Ukraine on 24 February 2022 nobody had thought that the war would last for such a long time and would have such a devastating impact not just on the region, but also the world. According to the IMF, the Russia-Ukraine war is the “single most important negative factor” for the world economy for 2022-2023 (source).

At the outset of the conflagration, the world was already reeling under the after-effects of the pandemic and everyone was hoping for a faster economic recovery. Escalating geopolitical tensions have brought an energy crunch upon Europe. There is a global food shortage. Europe is hurtling into an energy crisis.

Up till now the war has wiped $2.8 trillion off the global economy, which is equivalent to the annual GDP of France. Food and energy inflation have wreaked havoc in multiple countries, including Europe and America.

Before the invasion, Russia supplied around 40% of Europe’s natural gas. Sanctions on both sides have constricted the supply, painting a bleak picture for the European winter. There is already power rationing. Households, and business establishments are being advised to keep their heating below the recommended level. Less gas from Russia means a higher demand for the remaining gas in the European Union, which will further lead to rise in costs.

Central banks in many countries are raising interest rates to combat inflation but this may stall many development projects and clog up economies further.

This may plunge many European countries into recession.

The world trade is likely to drop by 1%, lowering the global GDP by just under 1%. The overall growth in Europe and Central Asia is projected to be a minimal 0.3% for 2023. The global economy needs to grow by about 4% to keep up with the rising population.

The biggest impact is being borne by Europe that is directly affected by the war. The OECD (Organisation for Economic Co-Operation and Development) has dropped its prediction for the euro zone to 0.3% from 3.1% for 2023 (source). Germany heavily depends on Russian gas and in the wake of sanctions from both sides, its economy may shrink by 0.7% next year. The Russian economy is projected to shrink by at least 5.5% in 2022 and by 4.5% in 2023.

Prices of wheat and other grains are rising at an alarming rate. The war has had an outsized impact on the global supply chain. There have-been impediments in the flow of goods. There are all around product shortages. Sanctions on Russia and recalibration of global investments vis-à-vis Ukraine have had further negative impact on the global economy.

International tourism, especially in Europe, has been affected significantly because fewer Russian tourists are flocking their favourite destinations. The war and subsequent sanctions are responsible for that. Many Russian tourists are going to Turkey instead of conventional European destinations. Russian tourists were spending $36 billion annually on tourism. The European Union has suspended the EU-Russia visa facilitation agreement which made it easier for Russians to travel across Europe.

How is the Russia-Ukraine war affecting the Indian economy?

So far, the Indian government hasn’t given in to the pressure being put by Europe and America to openly criticise Russia and impose sanctions on Russian oil imports, but the Indian economy hasn’t been left untouched by the fast unfolding international events.

The stock market has been jittery with both Nifty 50 and Sensex falling by 5% (source) on the day Russia attacked Ukraine. The rupee has plunged in comparison to the US dollar because of the uncertainty in the domestic equity markets. In the wake of the Russia-Ukraine war, foreign investors are seeking safer terrains, such as the US. The Indian government, anticipating worsening inflation, has banned wheat exports. Due to the ban, wheat prices have increased in many countries. The second major wheat supplier is Ukraine.

Despite the ongoing chaos, the IMF has made some good predictions on the Indian economy. Recently India became the fifth largest economy of the world, displacing the UK from the coveted position. Despite the IMF revising India’s projection to a growth rate of 6.8% in 2022 from 8.7%, the country is far better than other countries. Compared to India, China is projected to grow at 3.2% (its lowest since the 1970s), Saudi Arabia at 3.7%, and Nigeria at 3%. The prospect of US growth is 1% according to the IMF, and Russia, Italy and Germany are looking at a negative growth.

The end of the war doesn’t seem to be in sight right now. It may extend into 2023 and can go on affecting the global economy. It is also making many countries rethink the concept of the “global village”. Many economies, including India, have begun to think inwards. Bigger countries like India, China, many African countries as well as South American countries can be self-sufficient in terms of production and consumption. This may change the dynamics of global economics in the coming years.