The direct effect of the physical war, although huge in Ukraine itself, is relatively modest in terms of economic size of the conflict. Russia and Ukraine account for only a small proportion of the world economy (around 2%). However, the composition of their exports (foremost natural commodities ranging from natural gas to wheat) makes their position quite vital in the global economy, as is shown by Europe’s dependency on Russian oil and natural gas and other countries’, such as Egypt, dependency on Russian and Ukrainian wheat. In our newly published Q2 Advanced Economies and Emerging Markets Outlooks we explore the effects of this.
Broken trade relations and sanctions
The direct effects of the war for the rest of the world are broken trade relations amplified by sanctions. The latter include a ban on commercial activities with selected Russian companies and an export ban on an array of goods and technologies and import bans on various goods and services, and the exclusion from SWIFT, the global financial messaging system, of several large Russian financial institutions and several Belarussian banks. The sanctions need to be severe to harm Russian interests, making it inevitable that those who impose them will also feel the pain.
And there is also an invisible war going on. The cyberattacks in Ukraine by the Russian cyber army are well known, as well as the counterattacks by Ukraine and a foreign legion of hackers. The direct effects on the world economy are limited up till now, but we can expect more to come.
Global impact
What the impact of all this is on ordinary people around the world, is not easy to explain, as the effects will vary in character and intensity from country to country. There are some commonalities, however. First and foremost, war affects trust in the functioning of society in general. And the closer to the war area and the more (indirectly) involved, the bigger the impact on a society will be. Hence, the economic impact for an ordinary person in Germany of this direct effect is larger than for a person in India (who might just interpret it as a war somewhere in the world).
Another directly felt consequence of the war are the price increases all around the world and increases in economic volatility. Energy and food materials, and as a consequence also many basic commodities, have become way more expensive overnight. Spending on average 40% of their income on food, price increases may therefore hurt Indians more than Germans. In addition to that, higher prices and disruption of supply chains lead to more economic uncertainty, which translates into lower consumer confidence. In that way it becomes, as always, a self-fulfilling prophecy: when consumers do not spend their money because they are afraid of more difficult economic times, the result is that an economy will always slow down. All elements of this multifaceted war, from cyberattacks to economic sanctions, have the same effect on the economic process: more uncertainty, less confidence, and less willingness to consume or invest.
With the war still going on, we cannot know what the longer-run consequences for the world order will be. But given its size, it is likely that it will change geopolitical relations, and hence the world economy, for decades.
As always with wars, whatever the outcome and whatever the long-term effects, they are detrimental to the ordinary man. And this time also to oligarchs.
This article was originally written and published by Triodos Investment Management.
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