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Economic Impact of War on Ukraine’s Economy

Economic Impact of War on Ukraine’s Economy

The world was already seeing a severe onslaught of commodity supply-driven inflationary pressures in the wake of the pandemic, and the war in Ukraine by Russia will likely to exacerbate it. The price of oil has already increased to hover around $130 a barrel mark, and there is also talk that it may hit $200 a barrel mark. Add to this the gas prices, already high, are likely to rise further, not to mention the upward impact on prices of oil and gas by a reported decision by the US and UK to ban import of these commodities from Russia.   A Financial Times (FT) article ‘US and UK ban Russian oil and gas imports in drive to punish Putin’ pointed out in this regard: ‘President Joe Biden has banned imports of Russian oil and gas into the US as Washington steps up economic sanctions on Moscow over the invasion of Ukraine in an attempt to deprive it of revenue. The move was matched by a UK phase-out of Russian oil imports, but the EU did not follow it and instead unveiled a plan to cut Russian gas imports by two-thirds within a year.’ Here, these steps in addition to negatively affecting Russian oil revenues, will also add to upward push of already high prices of oil.   According to a recent Bloomberg article ‘Oil traders bet prices will pass $200 a barrel this month’, which came a little earlier than the reported decision of the US and UK on the Russian oil, indicated the following in anticipation of such a decision: ‘Traders piled into options that oil could surge even further after rising to the highest since 2008, with some even placing low-cost bets that futures surpass $200 before the end of March. Prices to buy call options at higher prices surged Monday as the market assessed the possibility of a supply cut-off from Russia, one of the world’s biggest exporters. More than 1,200 contracts for the option to buy May Brent futures at $200 a barrel traded on Monday, according to ICE Futures Europe data.’   If this materializes, such an increase in oil prices will not only have serious macroeconomic consequences for developing countries, but will likely require much more subsidy to be provided in keeping the prices low. In turn, higher prices and subsidy levels will not only take away from development expenditures/stimulus spending, which are much needed during the pandemic, and will also affect overall economic growth prospects, and with it those for unemployment, inequality, and poverty, but on the other may cause political instability in countries, especially the developing one, many of which have weak democratic roots to start with. Already in developing countries like Pakistan, subsidy and overall macroeconomic pressures are causing political instability. While the developed countries are feeling the heat in terms of inflationary, balance of payments, and debt pressures, it is the developing countries, many of which are also net importers of oil, like Pakistan, that are really facing the brunt of the supply shock, both during the pandemic, and now as a likely consequence of the war. Here, it needs to be pointed out that the policy component by OPEC+ group of countries overall to keep the supply of oil low to artificial keep prices much higher than they could and should have been is indeed undesirable.   A recent FT article ‘IEA ready to release more oil to ease soaring energy prices, says chief’ highlighted the displeasure of the head of International Energy Agency (IEA). It has also indicated the Agency’s intention to release oil to bring some stability to oil prices. According to it, ‘The head of the International Energy Agency said the group’s members were ready to release more oil from emergency stockpiles to ease soaring energy prices, as he criticised Saudi Arabia and the United Arab Emirates for refusing to pump more crude. Fatih Birol said the co-ordinated release last week by the US and other big energy-consuming nations of 60mn barrels was an “initial response” and that the IEA was ready to do “everything” to reduce the volatility in energy markets driven by Russia’s invasion of Ukraine.’   Moreover, for countries like Pakistan, which are also large importers of wheat, the war has also spelled bad news in terms of likely supply shortages and price hikes of wheat. A recent FT article ‘Food crisis looms as Ukrainian wheat shipments grind to halt’ pointed out in this regard: ‘Russia and Ukraine supply almost a third of the world’s wheat exports and since the Russian assault on its neighbour, ports on the Black   Sea have come to a virtual standstill. As a result, wheat prices have soared to record highs, overtaking levels seen during the food crisis of 2007-08. …The surge in prices will fuel soaring food inflation – already at a seven-year high of 7.8 per cent in January – and the biggest impact will be on the food security of poorer grain importers, warned analysts and food aid organisations.’ As per the same article, wheat supply shortage will be felt most by countries, that are highly dependent on wheat imports from Russia and Ukraine. The article pointed out in this regard that Pakistan met between 40 to 50 per cent of its total wheat import needs in 2020, worth $287 million from Russia. From Ukraine in 2020, it imported a similar amount of what (40 to 50% of wheat total import needs) worth $307 million. Hence, between 80 and 90 per cent of Pakistan’s wheat import needs were met through these two countries. The subsequent supply shock that is quickly unfolding due to war, would mean that the country would be facing longer time lags in arranging imports, and a lot of higher prices due to overall supply shortages globally.   Although a joint statement by the International Monetary Fund (IMF) and World Bank on March 1 raised grave concerns over serious negative consequences of war in Ukraine, which is indeed a correct observation, yet the Bretton Woods institutions will be required to do lot more, especially in terms of releasing much enhanced levels of financial support, greater debt restructuring/relief, and suspending surcharges on loans by IMF, at least during the pandemic.   Much greater support by the US Congress is essential in this regard, especially with regard to suspending surcharges by the IMF, and enhanced allocation of special drawing rights (SDRs).   (The writer holds PhD in Economics degree from the University of Barcelona, and previously worked at International Monetary Fund.  

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