Global Economic Impact of Russia-Ukraine War

Just when the world was about to see normalcy restored everywhere after around two troublesome COVID-19 years, the beginning of the Russia-Ukraine war on February 24, 2022, has put a question mark on the performance of several economies.

Since the war began, several fashion and e-commerce brands have temporarily halted their operations in Russia, while the Western world has announced sanctions on Russia and its ally Belarus. The war and the sanctions together have made crude oil prices reach their near-historic highs, while making it difficult for economists to foretell about the performance of textile-apparel exporting countries like Vietnam and India.

Brands Temporarily Exit Russia

 

Citing the unfolding humanitarian crisis due to Russia’s uncalled-for aggression and difficulties in doing business in the country in the current situation as the reasons, several global fashion and footwear brands, retailers and e-commerce giants have announced their decision to temporarily exit Russia. These brands include H&M, Marks & Spencer (M&S), Mango, Inditex, Canada Goose, Ikea, LVMH,Hermes, Kering, Boohoo Group, PVH Corporation, Levi Strauss, Uniqlo, Mothercare, SMCP, ABG and Amazon to name a few. Footwear and sportswear brands like Skechers, Crocs, Nike, Puma, Adidas, Reebok and Under Armour have also jumped on the bandwagon to suspend operations in Russia.

Announcing its halt of sales in Russia, Swedish apparel brand H&M said in a statement that it is “deeply concerned about the tragic developments in Ukraine and stands with all the people who are suffering. H&M Group has decided to temporarily pause all sales in Russia. The stores in Ukraine have already been temporarily closed due to the safety of customers and colleagues.”

M&S suspended shipments to its Turkish franchisee’s Russian business due to the unfolding humanitarian crisis following the invasion of Ukraine, while PVH Corporation went one step ahead to temporarily close its stores and pause all commercial activities in Belarus along with Russia.

Despite wishing to continue its business in Russia, Japan-headquartered Uniqlo had to pause its operations due to the difficulties the company faced in the wake of the war. “Uniqlo has made everyday clothing available to the general public in Russia too, as part of our mission. However, we have recently faced a number of difficulties, including operational challenges and the worsening of the conflict situation. For this reason, we will temporarily suspend our operations,” Uniqlo, a wholly owned subsidiary of Fast Retailing, said in a statement.

Luxury fashion brands like Louis Vuitton,Hermes, Chanel, Gucci, Burberry and Prada too announced their plans to pause operations in Russia. “Deeply concerned by the situation in Europe at this time, it’s with regret that we have taken the decision to temporarily close our stores in Russia and pause all our commercial activities. We will continue to stand by our local teams,”Hermessaid in a post on its LinkedIn account.

“Due to growing concerns regarding the current situation in Europe, Kering is temporarily closing its stores in Russia for its Houses that the Group operates directly in the country,” Kering said in a tweet.

“Given our increasing concerns about the current situation, the growing uncertainty and the complexity to operate, Chanel decided to temporarily pause its business in Russia,” Chanel said on LinkedIn. The brand has stopped delivering into Russia, closed its boutiques and suspended its e-commerce.

Likewise, Swiss luxury holding company Richemont said in a LinkedIn post, “Given the current global context, it is with regret that we stopped our operations in Ukraine on February 24 and suspended our commercial activities in Russia on March 3. We will continue to monitor developments and adapt our measures accordingly.”

Global Sanctions on Russia

Russian forces attacked its neighbouring Western-leaning Ukraine to discourage it from joining the intergovernmental military alliance North Atlantic Treaty Organization (NATO), and to “demilitarise and de-Nazify Ukraine”. In response, the European Union, the US, UK, Canada, Australia, Japan, Switzerland and various other countries have announced several sanctions against Russia. The international sanctions aim to stop Russia from pursuing the war, cause maximum harm to the Russian war machine and discourage President Vladimir Putin’s loyalists and oligarchs to support him.

United States:

The US along with its G7 allies stripped Russia of normal trade relations. It also imposed sanctions on Russian banks like VEB, VTB Bank, Sberbank and Promsvyazbank and removed some of the banks from the SWIFT financial messaging system; banned some Russian companies from the Western financial markets; and imposed curbs on the country’s sovereign debt to cut it off from Western financing. Additionally, in a bid to break the back of the Russian economy, the US banned the importation of Russian natural gas, oil and coal into the US.

European Union:

The European Union (EU) started by imposing economic sanctions on individuals and entities, freezing their assets, and slapping them with travel bans; and preventing Russian state and regional governments and banks to access the EU financial markets. The bloc also banned all transactions with the Russian central bank and excluded multiple Russian and Belarusian banks from SWIFT.

United Kingdom:

The UK sanctioned Russian banks, companies and entities and banned its financial institutions to conduct business with them. It also announced that it will phase out Russian oil imports by the end of this year. UK also denied Russia and Belarus access to Most Favoured Nation (MFN) tariff for hundreds of their exports, depriving both nations key benefits of WTO membership.

Canada:

Canada started by sanctioning financial dealings with Donetsk and Luhansk and banning Canadians from buying Russian sovereign debt and soon sanctioned various Russian banks, entities, and individuals. It stopped granting export permits to Russia and banned Canadian financial institutions from carrying out transactions with Russian central bank.

Australia:

Australia joined the western part of the world in imposing sanctions on various Russian banks. It also restricted trade in sectors like oil, gas, and transport, and prohibited imports of coal, natural gas, and oil from Russia.

Japan:

A day before the war started, Japan prohibited Russia from issuing new sovereign bonds in Japan. Subsequently, it limited transactions with Russian central bank and stripped Russia of normal trade relations.

Switzerland:

Switzerland, known for its neutrality, also picked Ukraine’s side in the war and cut Russia from the SWIFT payment system, banned transactions with Russia’s central bank and restricted exports of certain goods.

Other Countries:

Some of the other nations like South Korea, Singapore and Taiwan have also announced economic sanctions on Russian banks, banned financial transactions and prohibited exports of certain materials to the country.

Oil Prices in Disarray

One of the major collateral damages of the war is the soaring prices of oil around the globe. The sanctions and bans on Russia, the third-largest oil producing nation and second-largest oil exporter in the world, caused crude oil prices to skyrocket.

The invasion combined with a lack of fresh supplies of brent crude oil and rising demand caused its prices to cross the $130 per barrel mark for the first time after 2008 in the first week of March. The brent crude oil breached the $140 per barrel mark when the US and allies mulled over banning the import of Russian oil, liquefied natural gas and coal.

Cambodian Prime Minister Hun Sen had recently expressed his concern over the possibility of his country’s economy getting affected by rising global oil prices and increased inflation caused by the Russia-Ukraine conflict as well as the continuing COVID-19 pandemic. The rise in global oil prices added to the post-pandemic economic burden, he said.

The rising prices of oil due to the war are a cause of concern for the world, especially oil-importing nations such as India and China and European nations that depend on Russia to fulfil their energy and oil demands. In addition, it will also result in increase in prices of petrochemical raw materials used in the textile industry, such as purified terephthalic acid (PTA) and monoethylene glycol (MEG).

Impact on World Economy

Russia’s invasion of Ukraine has changed the economic landscape, posing downside risks to economic growth—notably in Europe—and driving inflationary pressures higher via higher energy and other commodity prices, whilst also disrupting supply chains, according to London-based IHS Markit.

UNCTAD’s rapid assessment of the Russia-Ukraine war’s impact on trade and development shows a rapidly worsening outlook for the world economy, with the situation especially alarming for African and least developed countries. The report shows heightened financial volatility, sustainable development divestment, complex global supply chain reconfigurations and mounting trade costs.

The war is causing freight rate hikes as restrictive measures on airspace, contractor uncertainty and security concerns are complicating all trade routes going through Russia and Ukraine, the report said. The two countries are a key geographical component of the Eurasian Land Bridge.

“The war in Ukraine has a huge cost in human suffering and is sending shocks through the world economy,” UNCTAD secretary-general Rebeca Grynspan said in a statement. “All these shocks threaten the gains made towards recovery from the COVID-19 pandemic and block the path towards sustainable development.”

The risk of civil unrest, food shortages and inflation-induced recessions also cannot be discounted, the UNCTAD report said, particularly given the fragile state of the global economy and the developing world due to the COVID-19 pandemic.

In an update to its Trade and Development report published on March 24, the UNCTAD downgraded its global economic growth projection for 2022 to 2.6 per cent from 3.6 per cent due to the Ukraine war and changes in macroeconomic policies by countries. While Russia will witness a deep recession this year, significant slowdowns in growth are expected in parts of Western Europe and Central, South and South-East Asia.

“The ongoing war in Ukraine is likely to reinforce the monetary tightening trend in advanced countries following similar moves that began in late 2021 in several developing countries due to inflationary pressures, with expenditure cuts also anticipated in upcoming budgets,” the organisation said in a release.

UNCTAD is worried that a combination of weakening global demand, insufficient policy coordination at the international level and elevated debt levels from the pandemic, will generate financial shockwaves that can push some developing countries into a downward spiral of insolvency, recession, and arrested development.

Impact on IndiaandVietnam

India:

“The global economic fallout of the war is expected to negatively impact India's economy through a number of channels, which differ from those impacting the Indian economy during COVID-19,” IMF director of the communications department Gerry Rice recently said. The sharp rise in global oil prices represents an important trade shock with macro-economic implications. It will lead to higher inflation and current account deficit.

Rice said that the negative impact of the war in Ukraine on the US, the EU and Chinese economies could dampen external demand for India’s exports, while supply chain disruptions could negatively impact India’s import volumes and prices. There’s also the question of tightening financial conditions and heightened uncertainty, which can affect domestic demand and the fiscal position through higher borrowing costs and reduced confidence.

“Despite India’s limited direct exposure, the combination of supply disruptions and the ongoing terms of trade shock will likely weigh on growth, result in a sharper rise in inflation, and (lead to) a wider current account deficit,” said Sonal Varma, chief economist at Nomura Holdings, in a report.

Vietnam:

Both Russia and Ukraine are traditional and important trading partners of Vietnam in the Eurasian region, according to the European-American market department of Vietnam’s ministry of industry and trade. Russia ranks first and Ukraine sixth in terms of trade turnover. Textiles account for 10.5 per cent of Vietnamese exports to Russia. Sanctions imposed by Western nations targeting the banking and financial system of Russia will affect the settlement of many contracts using the US dollar as payment currency.

Additionally, some shipping lines have refused to accept orders to transport goods from Vietnam to Russia. Freight rates will continue to soar along with shipping delays that will severely affect trade in goods. And due to an air embargo, airlines will have to choose longer routes, causing increased costs and pressure on the global logistics transport system and the price of goods.

In addition, domestic firms with joint projects with partners in Russia, Ukraine and Belarus will also be affected. Some areas that would see direct impact include prices of commodities, circulation of goods and commercial contract payments.

Hindering Growth and Aggravating Inflationary Pressures

Russia’s invasion of Ukraine has significantly altered the global economic backdrop through three main channels: high input costs and consumer inflation over an extended period due to spike in commodities prices; risks due to financial and business disruption; and the economic costs associated with heightened security and geopolitical risks, according to Moody’s Investor Service that has lowered its baseline growth forecasts to capture these shifts in the global economic environment.

However, Moody’s views the global expansion as dented, but not derailed. “We now expect the G-20 economies to expand 3.6 per cent collectively in 2022, compared with 4.3 per cent growth envisioned in our February outlook. Growth will further slow to 3 per cent in 2023. Russia is the only G-20 economy that we forecast will contract this year. We forecast that its economy will shrink 7 per cent this year and 3 per cent in 2023, down from projected growth of 2 per cent and 1.5 per cent, respectively, before the invasion of Ukraine,” Moody’s said in its Global Macro Outlook 2022-23 (March 2022 Update).

The war has created a new negative supply shock for the world economy, just when some of the pandemic-induced supply-chain challenges appeared to be starting to fade, said the latest economic outlook released by the Organisation for Economic Cooperation and Development (OECD). The effects of the war will operate through many different channels and are likely to evolve if the conflict deepens further.

“There are also some possible longer-term consequences from the war, including pressures for higher spending on defence, the structure of energy markets, potential fragmentation of payment systems and changes in the currency composition of foreign exchange reserves. A re-division of the world into blocs separated by barriers would sacrifice some of the gains from specialisation, economies of scale and the diffusion of information and know-how,” OECD said in its Economic Outlook, Interim Report.

The exclusion from the SWIFT message system could accelerate efforts to develop alternatives. This would diminish the efficiency gains from having a single global system, and potentially reduce the dominant role of the US dollar in financial markets and cross-border payments, the OECD report added.