Report Overview: Economic and social impacts, policy implications of the war in Ukraine

ByIon Ilasco

Report Overview: Economic and social impacts, policy implications of the war in Ukraine

Early morning on February 24th, the Russian President, Vladimir Putin, ordered the country’s troops to invade neighboring Ukraine. The fully-fledged attack from multiple directions targeted military and civil infrastructures in Ukraine, resulting in thousands of casualties among the military and civilians and the destruction of cities and villages leading to millions of people fleeing the largest European country. In a global response, Russia is now subject to multiple sanctions that target individuals, banks, and companies with its assets abroad being frozen and withheld. Hundreds of international businesses have announced a full or partial halt to their activities in Russia.

Aside from the local and regional consequences, the war may lead to transnational or even global economic shocks, specifically affecting the energy and food supply sectors. Several model simulations suggest a decline of about 1% in global economic growth and an increase in global inflation rates.

This article provides an overview of the socio-economic impacts and the related policy implications of the war in Ukraine as highlighted in the OECD Economic Outlook Report published in March 2022.

Humanitarian crisis

Since Russia’s invasion one month ago, about 3.6 million people have fled Ukraine with the majority settling in Poland, Romania, and the Republic of Moldova. The crisis has already displaced around 6.5 million people inside the country and this number is expected to increase rapidly if the war continues (to 6.7 million people relatively soon). In these circumstances, the humanitarian needs inside and outside Ukraine are multiplying by the hour. While the humanitarian costs are manageable by the EU, certain individual countries, such as Romania and Moldova, require rapid tranches of financial and material assistance to be able to process the refugees and deliver aid more effectively.

“The inflow of 3 million refugees seen so far could result in a direct first-year cost of at least 0.25% of EU GDP, and much more in the major host economies,” OECD Economic Outlook, Interim Report, March 2022.

Fig.1. Destination countries for Ukrainian refugees

Source: UNHCR – Ukraine Refugee Situation.

Socio-economic shocks

At the beginning of 2022, the global economic recovery was underway. Most OECD economies had started to remove the emergency monetary measures applied at the beginning of the pandemic crisis and were on course to reaching full employment levels and balancing their inflation indices.

The outbreak of war in Ukraine has created several economic shocks for the world, including new supply chain disruptions. Many companies with manufacturing facilities in China were using the Russian railway to move these items to Eastern and Western Europe but now have to find different, more expensive solutions. The blockade of the Ukrainian ports by the Russian navy makes it more difficult for local exporters of grains such as corn, barley, and wheat as well as fertilizer, to ensure they meet their contractual obligations.

See also: Is the world economic recovery under threat because of the Russian invasion in Ukraine? | Experts’ Opinions

The OECD’s latest economic outlook report suggests that the effects of the war will spread across many different channels and economic dimensions and are likely to evolve if the conflict deepens further.

While Ukraine and Russia’s economies represent a relatively small share of the global economy accounting for only about 2% of global GDP, their roles as major suppliers in several commodity markets will inevitably send economic shocks across supply chains. Together, both countries are responsible for about 30% of the global exports of wheat, 20% of corn, and 11% of crude oil. Moreover, taking into consideration the fact that the EU meets about 45% of its natural gas needs from Russia, its energy security may now be at risk.

“A complete cessation of wheat exports from Ukraine and Russia would result in serious shortages in many emerging-market and developing economies – there would be an acute risk […] for a sharp increase in poverty and hunger” (OECD Economic Outlook, Interim Report, March 2022)

War impact in numbers. Model simulations

The middle- and long-term consequences of the ongoing war in Ukraine are highly uncertain and depend on the duration of the conflict and the related policy responses.

Several model simulations undertaken by the OECD suggest that global economic growth might suffer a setback of about 1% or a growth forecast of 3.2% instead of the initially estimated growth of 4.2%. In this context, global inflation rates may show an increase of about 2.5% and record a range between 4.6% – 5%. Considering the rising prices of energy in Europe, inflation is expected to average 5% in 2022 in the Eurozone area.

Some of the expected economic developments based on the OECD model simulations include:

  • The economic impacts of the war will differ across regions with European economies being particularly affected. Countries that have a common border with either Russia or Ukraine will be the hardest hit.
  • Gas prices are projected to grow by 85% in Europe, 10% in North America, and 20% in the rest of the world. During the last month (28.02.22 to 28.03.22), the price for natural gas increased by 22.06% reaching US$5,604 per mmbtu.
  • Global food prices could register an increase of about 6% in 2022. On a month-to-month basis, global food prices grew by 4%. The prices for wheat and corn could show the most significant increase of about 90% and 40% respectively.
  • There is a potential risk that energy exports from Russia to the EU could cease completely. Reportedly, some of the buyers of Russian fossil fuels from Europe have ceased imports.

“An illustrative decline of 20% in imported energy inputs (from direct and indirect imports of fossil fuels, refined fuel products and electricity and gas supply) would reduce gross output in the European economies by over 1 percentage point” (OECD Economic Outlook, Interim Report, March 2022)

Policy implications

Policy-makers across the world, and specifically in Europe, have to respond to the acute challenges that have arisen as a consequence of the military conflict in Ukraine. As a first step, the OECD suggests that state officials continue to focus on monetary policies that will ensure well-anchored inflation expectations and the smooth functioning of financial markets.

Some short-term and well-targeted fiscal measures could be introduced to cushion the immediate impact of the crisis on consumers and businesses. Moreover, the initial measures to combat energy poverty could be further extended to offset the effects of high energy prices. In the context of the ongoing energy crisis, energy security could be improved by diversifying energy sources. However, this is a somewhat long-term perspective.

Russia’s invasion of Ukraine has led to significant socio-economic turbulence rippling across regional and global systems. The first month of the war has already seen over 10 million people displaced with 6.5 million Ukrainians being internally displaced and another 3.5 million fleeing to neighboring countries, causing serious humanitarian pressure. Considering that Ukraine and Russia are major suppliers of wheat, corn and crude oil on the global market, there is a severe risk of shortages and price increases. Based on model simulations, the OECD expects the global economic growth rates to decline by 1% and global food prices to increase by 6%.

In response to these economic shocks and risks, the European Union has introduced a set of policy measures at the supranational level that involve short- and medium-term actions to enhance global food security and maintain regional energy security. The EU aims to provide support to European farmers, increase regional level food production and move toward joint natural gas purchasing.

DevelopmentAid is the leading provider of business intelligence and recruitment tools designed to assist those active in the development sector. Join today and gain access to exclusive information on upcoming funding opportunities (tenders and grants) from the largest international donors.