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Impact of war between Russia and Ukraine on the global economy

Impact of the war between Russia and Ukraine on the global economy

The Russian invasion of Ukraine has come at such a critical time for the global economy, and the economy is still staggering from the effects of coronavirus. As global markets fall and the price of oil rises, the war of Russia might have a far-reaching economic impact. According to certain Western reports, now that the capital’s air defences have been withdrawn, the capital might fall at any time. A troubling parallel might be drawn with the 1973 Yom Kippur war in the Middle East, which resulted in an oil crisis and shook the world economy to its bases.

Western governments are making moves to penalize Russia because Ukraine struggles for survival. They understand that they risk exacerbating the conflict’s economic impact by doing so.

Continued supply chain and rising costs of energy disruptions are vital factors in the economy’s deterioration, left by the pandemic, both of which will be exacerbated by the Ukraine situation. Higher energy costs imply higher transportation expenses, which impact the movement of all types of goods. Russia is one of the EU’s largest gas and oil suppliers, and higher energy costs mean more expensive transportation.

The most significant risk to the global economy, though, is that such a prolonged crisis might push the world into stagflation, which is characterized by excessive inflation and slow economic development.

Impact on Stock

Over the last decade, stock markets have stayed extraordinarily healthy, with annual gains of about 10% on average. Stocks had already begun to tumble this year when central banks stated that they would withdraw their assistance, and markets have continued to fall since Ukraine was invaded. Many people who own stocks or other assets have a “wealth effect,” in which they feel more confident about spending money, especially on large purchases. Weaker markets would thus have an impact on economic development as well as the viability of many people’s pension plans.

While the political and personal repercussions of Russia’s attack on Ukraine remain unknown, the world should be prepared for significant economic ramifications.

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Cost of Living

The cost of living will worsen due to high and rising inflation, which is already affecting many consumers. It also poses a problem for central banks, which have been pumping money into the economy for the past two years to combat the pandemic. And now, these banks are planning to withdraw their support. Especially if inflation continues to climb and central banks respond with sharp increases in interest rates, it will further weaken the economy. Now because Russia and Ukraine are among the world’s largest wheat exporters, and many people rely on Russian oil and gas, energy and food costs may continue to climb.

Not only does the number of inflation matter, but also people’s expectations of further increases. This can lead to a “wage-price spiral,” in which individuals demand higher wages to compensate for rising living costs, causing businesses to raise prices even higher.

Inflation also means that government spending may decrease in real terms, decreasing the quality of public services and putting downward pressure on public sector wages. Furthermore, suppose businesses are concerned that they will not be able to raise prices enough to compensate for higher salaries. In that case, they may be tempted to reduce their staff, resulting in increased unemployment.

Oil and Gas

Oil prices fell as a result of the russia-ukraine war, with futures in New York ending below $93 a barrel.

The principal channel through which the Ukraine war has an immediate impact far from the frontlines is energy costs. Because Russia is Europe’s primary oil and gas supplier, the danger is grave.

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Rising energy prices accounted for more than half of the euro area’s record inflation rate in January. On Thursday, European natural-gas futures topped 140 euros per megawatt-hour after surging as much as 62 per cent during the day.

More costly gasoline and moderate financial tightening would stifle growth in the United States. The country may export more natural gas to Europe, rising domestic rates. Headline CPI inflation may exceed 8% in February and end the year close to 5%, opposed to the consensus of 3.3%.

Energy Supply

Some oil tank owners defer taking on Russian petroleum until penalties are clarified. Major gas pipelines pass across Ukraine and could be damaged due to the conflict, and even a minor disruption in supplies could exacerbate the price shock.

Russia may react by cutting off the gas flow to Europe if it faces maximum sanctions from the US and Europe, such as being kicked out of the Swift system of international payments.

Of course, the alternatives aren’t limited to the ones listed above. They’re focusing on the world’s largest sophisticated economies, but commodity price hikes will affect countries all over the world, including basic staples like wheat and energy.

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Some countries like Saudi Arabia and other Gulf oil exporters might benefit. But for most emerging markets that are already suffering slower recoveries, the combination of higher prices and capital outflows could deliver a significant blow and exacerbate the risk of post-Covid debt crises. Turkey, a major energy importer with a depreciating currency and surging inflation before the Ukraine conflict, is a case in point.

Then some threats are difficult to measure, such as Russian cyberattacks. According to the New York Fed, an attack affecting payments systems at the five most active US lenders could affect 38 per cent of all banking assets, leading to liquidity hoarding and insolvencies in the worst-case scenario.

One thing appears to be certain: Russia will be the hardest hit of the major economies. President Vladimir Putin’s expansionist foreign policies will almost certainly cost him a weakening domestic economy. Meanwhile, a worldwide alliance between Russia and China might bolster both economies, negating the impact of sanctions and bolstering both military and economic clout.

Edited by Prakriti Arora

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