The Economic Effect of the Russian and Ukrainian Conflict

Russian and Ukrainian Conflict

Our emotions have been tense for several days as a result of Russian and Ukrainian conflict. It’s tough for me to discuss the economic consequences of this. Simply thinking about the lives and human losses that are currently occurring causes my stomach to tighten. However, because the blog’s theme is economics and finance, I’ll try to explain how this can affect the economy.

Before I begin, I’d like to point out that many of the current events began many years before. Since the disintegration of the former Soviet Union, Russia’s hegemony in world affairs has waned significantly. Some of the people involved in this dispute are Russians who are concerned about NATO’s enlargement and the chance that Ukraine would join it as well. After all, there are so many intricacies that forecasting the real impact is difficult, especially given how quickly things change. According to recent reporting, some Russian banks have been excluded from the worldwide SWIFT system in order to prevent transactions.

Concerning Russia’s Economy

As a result of the hostilities in Russia and Ukraine, gas and oil prices may rise. The Russian economy is extremely open. Contrary to popular belief, this is not the case. In reality, exports account for 46 percent of GDP. It is a major oil and gas exporter, ranking fourth and first, respectively, in the world. Russia sells 43% of the world’s gas, with Europe accounting for over 70% of the total.

What are the Ramifications of Gas?

Despite the fact that Europe receives a huge amount of gas from Russia, it only accounts for 37% of overall imports. Nonetheless, gas from Russia is necessary to maintain the pace of life and the economy in most Eastern European nations, particularly Germany. A reduced gas supply would immediately boost prices, raising costs for both families and companies, reducing the competitiveness of many businesses, some of which would be unprofitable. Due to the energy crisis, we have already been able to do this phenomenon in several areas during the last year.

And What About Oils ?

Russia is one of the world’s top oil producers, with Saudi Arabia and the United States. It generates 10 million barrels of oil every day, in reality. The globe consumes about 5 million barrels of oil each day, which implies Russia produces all of it.
The price of oil may rise as a result of Russian sanctions.
Oil prices would skyrocket if there was a global shortfall of 2%, 3%, or 4%. As in 2008, when oil prices reached $ 150 a barrel, up from $ 70 a year before. If the deficit had been larger, the price increase may have been much higher.

The Sanctions on Russia are Having a Boomerang Effect

One of the purposes of the sanctions against Russia is to put it in a worse economic situation as a result of its attacks on Ukraine. However, the relationship between European and Russian exports and imports is so strong that its impacts have faded, making the Western economy even more vulnerable. There are also ramifications for the US economy.

Anticipating such a scenario, Moscow began selling 15% of its gas production to China, where President Xi Jinping, who is maintaining his profile in the face of the crisis in Ukraine, recently committed to boost Russian gas imports. These greater purchases would be accomplished by constructing a new subterranean pipeline. As a result, It would guarantee the supply of strategic items including industrial and technology goods.

Other Basic Commodities, Outside Gas and Oil

The focus has switched to the rise of gas and oil, maybe as a result of rising energy prices in Europe. In addition to being one of the top manufacturers and exporters, Russia is also one of the most populous countries in the world. But it doesn’t end there; conflict can drive up the price of a variety of metals. Both iron, aluminum, nickel, and palladium, the latter of which Russia is the world’s largest producer and which is required for automobile production, would see considerable price increases.

Wheat Prices May be Harmed as a Result of the Hostilities in Russia and Ukraine

Wheat, corn, and sunflower oil are used in this recipe. Russia and Ukraine are both world powerhouses. The prices of these raw resources and the food produced from them would rise as a result of a fight with sanctions and lower non-commercial production capacities. Because we all need to eat, this is something that affects practically everyone. Russia is the world’s fourth largest wheat producer, and Ukraine is the world’s seventh largest wheat producer. They account for over 20 percent of global wheat production when combined.

In a market like the food market, a 3% or 5% reduction in production can result in a price increase of up to 100%. Nobody stops eating, and output shortfalls can cause havoc in these markets. This is why the commodity market has seen such huge rises, with prices reaching double-digit heights in a single day as recently as February 24.

The fertilizer market is another key market. Russia is one of the world’s top producers of potassium, and the price of potassium fertilizers has been rising for months. This dispute, in conjunction with Ukraine, will only increase fertilizer prices, which will be passed on to the agriculture sector, raising production costs and, inevitably, affecting consumers.

What are the Views of Central Banks on Interest Rates?

It has no intention of boosting interest rates due to the situation between Ukraine and Russia.
In the face of an inevitable rise in interest inflation, we have been anticipating interest rate hikes for several months. However, they recently stated that raising rates in the face of a sudden change in the current scenario would be premature and could further stifle the economy. So that rises could be delayed a little longer.

The spirits of stagflation are once again being fueled by this condition of little recovery from the recession with a final inflation stagnation. In the next days, the scenario may possibly shift. Markets surged on Friday’s final day, as negotiations over a conflict appeared to be on the cards.
What appears to be unavoidable is that European countries’ GDP will not expand at all in tandem with inflation, resulting in a loss of buying power. We’ll see whether there are any additional economic consequences, or if some of them don’t take themselves so seriously, once the problem has been addressed, or at least that’s what we all hope for. 

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