The economic threat from the war in Ukraine is rising quickly as the terrible conflict continues. Part of this is due to the economic sanctions, but the larger part relates to the indirect impact on energy prices and the cost of other exports from the region – such as wheat, fertilizer, aluminium and some other key industrial inputs.
Some of this is a cost that the West has decided to take as part of the sanctions process which, while principally hurting Russia, also has an impact on its trading partners and the wider world economy. Meanwhile, the rise in energy prices is largely the inevitable consequence of a major oil and gas producer being involved in a conflict and the disruption and uncertainty this causes. Energy prices have hit new highs and by historic standards gas prices are particularly affected.
There are, of course, much more important things at stake than the economic impact – and predicting how events will play out is impossible. But already a significant economic shock to the oil-importing West, in particular the EU, looks inevitable. Governments, including Ireland’s, are accepting that something will need to be done to limit the impact on consumers and businesses. Cuts in excise duties on fuel have been floated as a possibility. More direct help to poorer households will also be needed. The planned reduction of budget deficits after Covid-19 will probably have to be put on hold. Despite higher inflation, central bank interest rate increases may also come more slowly.
The economic sanctions package – targeting the wealth of members of the Russian elite close to President Vladimir Putin and the ability of Russia to trade and invest normally – is significant. That it has been followed by a wholesale withdrawal of foreign companies is striking.
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The damage caused is deep and long-lasting and there are now big longer-term uncertainties about Russia’s place in the global economy. If the war continues much longer, the EU will come under increasing pressure to move away from buying Russian gas, the revenues from which support Moscow’s coffers. The economic damage would be substantial, leading to supply disruption in addition to higher prices. But reducing reliance on Russian gas is now a key strategic goal.
Recent years have seen an increase in global economic tensions and trade disputes. But a real war is a completely different matter to a trade war and so we are now looking at what may be a long-term sea-change in the world economy, based on how the politics of all this play out. Covid-19 taught us how global supply chains are vulnerable to disruption. Now we are seeing another lesson, this time centred on energy dependence.
These are the longer-term issues. But for now the key question is whether economic weapons can have a role in stopping the conflict.