On February 24 has begun the Russia’s invasion of Ukraine, that has resulted in a war which is likely to have an enormous impact on the economy, although is too early to forecast the repercussion in the long term, the initial consequences are already being felt. As the occupation of Ukraine has been prolonged, is now more plausible that the Russian economy would permanently contract as a consequence of the reckless amount of resources spent on the army and due to the significant economic sanctions put in place by the Western world in order to distance themselves from the atrocity perpetrated by Russia. In fact, the IMF estimates that Russia’s GDP will fall by 7%, or more, during 2022.
Russia has been excluded from the international financial system and subject to a partial embargo of American and European imports ranging from technology to aircraft parts, it is entering a spiral of inflation and depression, indeed the ruble has lost about 40 percent of its value against the U.S. dollar this year. However the currency has now recovered most of its previous losses against the U.S. dollar: on 1 April, the RUB traded at 83.4 per USD, appreciating 12.2% month on month, but the currency was down 10.9% in year-to-date terms and was 9.3% weaker on a year-on-year basis.
The downturn of the Russian economy together with the pessimistic projections on its future trend coming from all over the world, are certainly going to have a dramatic social impact. Supply shortages of supplies of fossil fuels, wheat, potash, nitrogen fertilizers and industrial metals such as nickel and titanium will inevitably reduce activity in the related sectors in the global economy. This type of price increase will have major impacts, particularly on the poorest sections of the European population, for whom food, domestic users and fuel have a major impact on family budgets.
At the same time, rising inflation will reduce the purchasing power of consumers. Those concurrent situations could easily lead to stagflation, resulting in job losses and cuts in corporate profits, leading to reduced investment and overall, a vicious cycle of lack of confidence in an economic recovery. Once again those who will suffer the greatest consequences of the war will be ordinary people.
The cost of this war is clearly humanitarian and economic. In the first three weeks of war alone more than three million people have left Ukraine and at this moment we are surpassing four million. Looking after those refugees is requiring an increasingly
allocation of recourses on social and housing assistance, food provision, medical assistance and childcare and schooling. Some of the countries giving asylum to those people are already paying the price of the rise in price of basic needs such as fuel and spending other funds is not an easy challenge to keep up to. Moreover, other delicate and problematic points are: trying to predict the number of refugees that will seek asylum in the near future and for how long Western countries should take care of them. At this time, the inflow of refugees seen so far could result in a direct first year cost of at least 0.25% of EU GDP5, and much more in the major host economies, this initial costs seem to be manageable for the EU as a whole, but difficult to support by individual countries.
In the Us the situation is slightly more stable, in fact, even if the inflation is hitting 8%, wages have increased by 5%. However, US and Europe are still facing the same dilemma, despite the lightly different circumstances: whether is better to intervene by raising rates to cool the inflationary pressure with the more than likely start of a recessionary process, or to expand the economic growth by leaving the reins free to the increase in prices. Both scenarios sadly involve heavy social consequences.
In the meantime, the economic pressure together with the humanitarian crisis is worsening the relations between the West and Russia, which now seem to be separated by an unbridgeable distance, this is easily understandable by the ban imposed by the European Union, the United States and Japan on their airspace for Russian aircrafts, causing significant changes in routes and hours of flight.
In the end, we are facing a paradox where the only certainty is the absolute absence of certainty, a time where already desperate people, tired by two years of tensions caused by the pandemic, are being further deprived of hopes for their future.
Bibliography
1 https://www.institutmontaigne.org/en/blog/ukraines-war-economic-impacts 2 https://www.focus-economics.com/countries/russia/news/exchange-rate/ruble-recovers-lost-ground-despite- worsening-economic-backdrop 3 https://www.agensir.it/europa/2022/03/12/ucraina-russia-dalla-guerra-di-putin-pesanti-ricadute- sulleconomia-e-il-welfare-europei 4 https://www.institutmontaigne.org/en/blog/ukraines-war-economic-impacts
5 OECD (2022), OECD Economic Outlook, Interim Report March 2022: Economic and Social Impacts and Policy Implications of the War in Ukraine, OECD Publishing, Paris, https://doi.org/10.1787/4181d61b-en. 6_https://www.huffingtonpost.it/blog/2022/04/04/news/le_possibili_conseguenze_economiche_e_geopolitich e_della_guerra-9107072/ 7 https://www.ispionline.it/it/pubblicazione/russia-ucraina-6-grafici-spiegare-le-conseguenze-della-guerra- 33743
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