Russia's invasion of Ukraine sent tremors across the global economy.
It brought home to a lot of policymakers and business
leaders that geostrategic risk is here to stay.
It left countries wondering how to power homes and industries.
We were very afraid that we won't be able to meet our energy demands.
And made feeding the world harder.
We were in an extended period of food price
inflation and the war really exacerbated a lot of that.
It highlighted gaps in essential sectors.
From full-fledged systems to ammunition, that capacity is actually not there right now.
It created new alliances and galvanized existing ones - while entrenching differences.
If we think about a multi-year
war, it's going to be interesting to think about the sort of new economic ties that
Russia builds to certain key countries in Asia, in Latin America and Africa.
We will look at what one year of war in Ukraine has done to the global economy so far - and
how a rude awakening to geopolitical risk is remaking trade relationships around the world.
That’s all coming up on Business Beyond.
First things first. The human cost and the scale of suffering that Russia wrought when it attacked
Ukraine a year ago cannot be framed in purely economic terms. But financial considerations
did figure heavily in how the community of nations responded to Russian aggression.
Their balancing act was to advance sanctions on Russia while protecting their own economies from
the consequences of punishing a key trading partner and a major food and energy supplier.
Fast forward to today and Ukraine’s Western allies say that has been working - to a
degree anyway. The International Monetary Fund said global conditions are improving
as inflation starts to slow - a far cry from initial fears that
the war in Europe would plunge the world into a prolonged recession.
In 2022, the world got a little bit lucky. There was a comparatively mild winter, which
meant that the energy demands weren't as high as they could have been. The world dodged a bullet to
some extent in that some of the most negative effects that could have transpired didn't.
But the war is ongoing. And that the world economy isn’t struggling as much as it could
have - doesn’t say that much about the level of struggle still to come. While some of it can be
addressed through policymaking - not everything can. But let’s look at what HAS been done.
Following the invasion - the United States released two million barrels of
oil from its strategic petroleum reserve. Europe’s biggest Russian energy client,
Germany, rushed to build out liquified natural gas infrastructure in a bid to
wean itself off the now problematic supply - albeit slowly. Since December 2022, seaborne
crude oil imports from Russia to the EU have been prohibited. For Western
shippers still trading Russian oil, the EU and the G7 have now instituted a price cap.
Some analyses point to these sanctions and measures and say they’ve acted as
a drag on Russia's tax revenues from oil and gas - even as Europe continued
to import Russian energy in the months following the invasion.
But Russian aggression also established the need to find additional energy sources - and
is therefore helping to ramp up renewables use around the world.
The fear of not being able to meet our energy demands has really implied an enormous effort
both to diversify, so find providers elsewhere and speed up the energy transition. Now,
the first is not necessarily part of the green transition because we're still consuming fuels
that are not renewable. But the second is and you really see that the investments that
are made in the European Union but also worldwide are really being accelerated.
The war also forced compromises in European efforts to achieve key climate goals. Like
Germany’s rush to forge ahead with new LNG import infrastructure, and the EU deciding to recognize
natural gas as a form of green energy - even if it’s technically a fossil fuel.
Would Europe have put natural gas in the green taxonomy in
the absence of this war? I do think that particularly when it comes to natural gas,
I think that there had been a lot of debate in the west when we thought about our climate goals,
whether natural gas played a role in the transition. And I think this is now settled.
But not everything is. Remember when we said earlier that some things might be
beyond policymakers’ control? If a mild winter in 2022 helped keep energy demand
in check and reserves full, more severe weather ahead could revive
fears over energy supply and security….also depending on where that severe weather is.
I think it's going to be very challenging. With China reopening in particular. One of
the things that Europe benefited from was also you had warmer winters in Asia. There were
volumes not needed in Asia. If we do see, for example, more Chinese demand for gas,
what does that do in terms of supply into Europe? If you do get a colder winter, I think it's going
to be much more challenging. And all the conversations that we were having
about potential deindustrialization of Europe because of an energy crisis,
those type of concerns may materialize again if these factors come to play.
Some say those supply concerns could even herald the comeback of Russian
hydrocarbons to Europe. Speaking at the Atlantic Council’s Global Energy Forum,
Qatar’s minister of State for Energy Affairs expressed difficulty imagining a world without it.
I don’t think some of the countries that were depending on 100 percent or, you know,
a very large percentage on Russia will not go back to 100 percent or 80 percent
or maybe 50 percent. They will diversify and they’ll learn from that situation,
and probably have a much bigger diversity. But the Russian gas is going to come back,
in my view, to Europe. Is it next year? Is it in five years? I don’t know.
A colder winter - an increase in energy demand around the world - could threaten to take the
discussion back to where it was a year ago, when the war started. And the longer the conflict
persists, the more people’s willingness to live with high energy costs will be tried.
To me this is a question about how do you manage the energy trilemma,
which is sustainability, affordability and access.
And I don't think we've really had a test yet. Like, if we do face significant energy
shortages next year, I think you can see European consumers saying, well, the most important thing
for me is access and price. And so, I think that's always going to be the challenge for governments,
is how can you deliver reliable, affordable energy at the price that consumers are willing to pay?
The war’s impact on the affordability of energy has fed into another,
already complicated access issue - the cost of food.
Russia’s invasion of Ukraine - known as the bread basket of the world - made
already-high food prices around the world climb even higher - as grain sat stuck in
Ukrainian ports….sparking fears of food shortages.
Early hopes that India would step in and fill the export gap with its own
wheat failed to materialize. That’s after a record-breaking heat wave made for a smaller
crop than expected - and the Indian government instituted an export ban. Triggering even more
price spikes. But a measure of relief came when the so-called Black Sea Grain Initiative
brokered by Turkey between Russia and Ukraine helped restart the stalled Ukrainian exports.
But that’s had a limited effect on food costs worldwide.
We're in a particularly in wheat particularly
tight period and we sort of measure that as your ending stocks divided by your total use,
particularly among major exporters. So that's at the tightest period it's been since 2008,
I believe. So, you have this as a backdrop. That's why prices are elevated. So, if you have a weather
problem, on top of that, you'll see, you know, anywhere from 20% to 40% increases in price.
The Food and Agriculture Organization’s cereal price index shows a decline from
post-invasion heights. But there’s even more reason to assume these levels will not hold.
The other big impact of the war that hasn't even been fully realized is the impact on fertilizers.
So, you both had a lack of exports from Russia and Belarus as well as the impact
on natural gas supplies to Europe causing a big spike in the cost of producing fertilizers. So,
there were those stories that nearly 70% of fertilizer production in Europe
at one point was shut down. But the main point is that you had this huge spike in
fertilizer prices globally and that's going to impact fertilizer usage for this season.
As with energy - the war has led to alternative trade corridors and supply-diversifying measures
in agriculture. And as with energy, Russia’s status as a supplier for
fertilizer and agricultural products has become a liability in a changed geopolitical landscape.
Brazil, for example, wants to institute a policy of being much more self-sufficient in fertilizer
production. They were exposed and very concerned about their ability to import from Russia. Another
example of a change in policy was China importing corn from Brazil. They hadn't ever previously
imported corn from Brazil. They had imported from the Ukraine and the US. And when the Ukraine was
cut off from them, they panicked, and they've become a structural, very large importer of corn.
But amid all the shifting of grain supply - it’s
important to remember the global food system was already broken.
The impact of the war in Ukraine is an additional layer to existing long
standing failures in the global food system. / /The rise in food prices
has hit several poorer countries harder than the global average.
For example, in Ethiopia, food prices have increased by 44% and our colleagues in Syria
are telling us that food prices have increased by 92% over the last year in the country.
Before the Ukraine war started, almost a 10th of the global population did not have enough
food to eat. A hunger situation in places like the horn of Africa already made dire by climate
change - has been compounded by a war that’s made food more expensive on global markets.
Having looked at how food and energy resources around the world have been changed by the war,
there’s one resource whose use is actually necessitated by it - military equipment. Per
one estimate, Ukraine is firing more than 5000 artillery rounds every day. And the war has
highlighted vulnerabilities in the capabilities of weapons-producing countries in the west.
The ability for the United States as well as European allies to really ramp up production
of defense materials from full-fledged systems to ammunition, that capacity is actually not there
right now. And what we're seeing is considerable strain in the US defense industrial base
in terms of being able to really produce the kinds of systems and materials that
the US. Military would need in a conflict of its own, for example.
The Stockholm International Peace Research Institute has highlighted this point as
well - giving the example of 8, 500 Javelin anti-tank missiles the US has sent Ukraine.
That’s equivalent to at least four years of production - and ramping that up takes
time - with supply issues - especially in raw materials - slowing down the process.
Suffice to say, the Russian invasion has made especially the US and Europe think about not
just their ability to support a war effort like Ukraine’s - but also their capacity
to adjust to a situation where they might themselves embroiled in conflict elsewhere.
I think what that would mean then, of course, is that the United States would redirect its
production of defense goods for the war that the United States would ultimately be fighting. So
that would have significant implications for Ukraine's ability to defend itself,
particularly given the state of Europe's defense industrial base,
which is probably in an even more precarious position than that of the United States.
Beyond the West, however - the war is being closely watched by clients of
Russia’s defense industry. Who are deriving conclusions of their own.
If you think about a country like India, for example, which has been a very key
defense partner with Russia, I think Indian defense planners are probably very concerned
about what their military kit is actually capable of. Ultimately, there's a lot of
countries around the world that were buying Russian military equipment. I think they'll
be looking to other sources because so far, the performance of the Russian
military and its military equipment has not been particularly impressive.
Let’s take stock. In determining how the war has changed the global economy,
we’ve looked at energy, food and defense - and we’ve seen a few commonalities. But
perhaps the one that’s most striking of all, is that it forced a rethink
of previous arrangements through the lens of geostrategic risk.
If before, you could generally go where economics said is the most profitable place to be and let
the politics be the politics. Now, firms have seen just how quickly traditional trade flows
can be disrupted by geostrategic risks and suddenly they are thinking about//
What are governments going to do to protect and insure themselves against future tensions
with their rivals? And all of that is coming together to make investment more cautious,
more local, less willing to roll the dice on a far flung and perhaps fragile supply
chain. And all of that has implications, of course, for real people and real jobs.
That said - the established chains of global commerce can’t and won’t be easily undone.
And this newly urgent sense of caution is more likely to apply to some sectors more than others.
You probably won't necessarily see mass movements of existing production, but you
might see diversion of where new factories were going to get built or expansions are
going to go. Just because the cost involved in moving some of this stuff is staggeringly high.
It depends on the types of production you're looking at. So already several industries have
been identified as particularly strategically important. So semiconductors it is very clear
that the US and the EU are going to throw considerable resources and regulatory muscle
behind trying to make sure that they have localized strength in semiconductor manufacturing.
The lesson that closer trade and economic relations might not ultimately lead to
more peace - and that those ties can in fact be weaponized - was
a hard one to learn - but the war might ensure it is one that sticks.
There used to be an aphorism in international trade that no two countries in the world with
a McDonald's have ever gone to war with each other// This was like one
of these cliches in international relations. Well, I've eaten at the McDonald's in Kiev,
and I've eaten at the one in Moscow, so we can park that one now.
A world at war is a world divided into camps. And fragmentation brings with it
difficulties in terms of solving global problems.
Especially if there is a disappearing baseline for what counts as acceptable behavior between
sovereign nations - and disagreement as to how transgressions should be addressed.
The number of countries that is actually not necessarily against Russia when it comes to the
war. Ratio is actually quite big in population terms. It is only 35% of world population that
is actually sanctioning Russia. The rest is either neutral or is even with Russia. Now,
this is important as far as the effectiveness of sanction is concerned because the potential for
sanctions leakage, namely trying to help Russia to bypass the sanction, is actually quite big.
But if the war in Ukraine has put paid to the notion that mutual economic dependency
unites countries and forces them to abide by the same set of rules - which guiding
idea would then take its place? The longer the war goes on, the bigger this question becomes.
First, the war needs to come to an end. Everybody will see the benefits of that
war coming to the end. And then maybe we can take it. We can take it from there. Small wins,
small gains, small successes is what I would go for. Try and solve small
problems one at a time and solve them with as many countries around the table as possible.
And that’s it for this edition of Business Beyond. If you want to see more of what we do,
our recent video on whether China is ever going to be the world’s
biggest economy is a good place to start. Thanks for watching and see you later.