The economic consequences of the war

Published in Insights, The New Zealand Initiative’s newsletter, 11 March 2022

Putin’s war is a tragedy for Ukraine. Yet its economic implications will be felt far beyond Ukraine’s borders for years to come.

Russia’s actions have set in motion a chain of events that could plunge the world into a serious economic crisis.

The war is not only fought in Ukraine but also in the world’s energy markets.

Interdependencies are strong. Parts of Europe rely on Russian oil and gas, just as Russia relies on energy export revenues. The US and UK announced embargoes on Russian goods this week, and the Kremlin threatened to shut off Europe’s gas supply.

Energy prices will rise as the West scrambles to find alternative fuel suppliers, even in countries hostile to the US like Iran and Venezuela. From US$90 a barrel in mid-February, oil has risen to around US$130 today. It could rise even further.

Another concern is food prices. Ukraine and Russia are major exporters of maize and wheat. It is unclear whether there will be a large harvest this year, and no major shipping lines service Black Sea ports.

The price of wheat has skyrocketed as a result. In January, it was about US$7.50. Now it is US$13. It is a catastrophe in many poorer countries where households spend most of their budgets on food. It could trigger famines.

An increase in fertiliser prices – another major export from this region – will exacerbate agricultural crises. The fertiliser price in Britain increased by almost 50% in the past week alone.

Metals and rare earths are also a concern. Nickel, for example: From US$18,400 per tonne in January to US$80,000 today. Best of luck to any industry needing such resources.

The war has business implications everywhere. Airlines must make huge detours to avoid restricted airspace. Car manufacturers are closing factories because some of their parts suppliers are based in Ukraine. McDonald’s lost 9 percent of its global revenue from leaving the Russian market.

This is before we get to the question of how central banks will respond. Will they fight the wave of massive inflation? Or will they support their struggling economies?

And this is also before the small but real possibility that the war could involve other countries or – perish the thought – become nuclear.

New Zealand cannot influence much of this. But at the very least, we must know what is happening out there – and our media and our politicians must tell us.

Not even in New Zealand is this crisis far away. It will affect us all.