[One Year Since Ukraine Invasion]② 'Global Economy' Deeply Wounded by Prolonged Conflict

Global Economy Severely Wounded
Shaken by Uncertainty
Rocked by Economic Sanctions

[Asia Economy Reporter Yujin Cho] The Ukraine war dealt a fatal blow to the global economy, which had not yet fully recovered from the economic crisis caused by the COVID-19 pandemic. From the outbreak of the war, both the real economy and international financial markets were shaken by heightened uncertainty, and economic sanctions such as Western financial sanctions and export controls against Russia indirectly and directly disrupted the global economy.

In particular, this war exacerbated supply chain disruptions caused by slowed trade between countries and difficulties in procuring key components. It triggered multiple crises including unprecedented inflation, energy and food crises, and supply chain chaos, acting as a massive adverse factor for the global economy last year. The fact that both Russia and Ukraine are major natural resource countries holding a very high share in the global oil and grain markets further amplified the damage.

European Union Hit Hardest

[Image source=Yonhap News]

The European Union (EU), whose economy is most closely linked with Russia, experienced the greatest shock. According to the EU Commission, last year the consumer price inflation rate within the EU was around 10%, and it is expected to stabilize at the 3% level only by 2024 after maintaining about 7% this year. The economic growth rate for this year is projected to be only 0.3%.

As the ‘new Cold War’ structure between China and Russia on one side and the US and the West on the other intensified due to this war, the crisis in Asian economies highly dependent on trade with China also became prominent. Sanctions on Russia increased policy uncertainty surrounding trade, reducing economic growth rates. The International Monetary Fund (IMF), considering the impact of the Russia-Ukraine war on trade in Asian countries, lowered the growth forecast for the entire Asian region from 5.1% to 4.3%. This is far below last year’s 6.5%, when the pandemic was at its peak. China’s economic growth forecast was also lowered to 4.4%, below 5%. South Korea’s growth is expected to remain at 2.0%. According to the Organisation for Economic Co-operation and Development (OECD), the prolonged war, combined with the worst inflation in 40 years and monetary tightening by various countries, is expected to pull down global economic growth to 2.2% this year.

The Global Economy Adapting to War

On the other hand, as the war enters its second year, there is cautious optimism that the global economy is gradually adapting. Foreign Policy analyzed that "the prolonged war has permanently diminished Russia’s economic dominance in the global market." As the war drags on for over a year, Vladimir Putin’s disruption strategy is losing its power to impact the global economy. The energy weaponization strategy Putin aimed for was thwarted by unusually warm winters in Europe, and falling energy prices have helped ease inflation.

Since the EU and the Group of Seven (G7) expanded the price cap on Russian crude oil on the 5th of this month, international oil prices have fluctuated around the $75 mark without significant reaction. This is a stark reversal from last year, when Putin’s use of oil supply cuts as a political weapon caused international oil prices to surge nearly 40% within two weeks. Foreign Policy stated, "The biggest victim of Putin’s ‘energy gamble’ will ultimately be Russia," adding, "Europe no longer needs Russian crude oil."

In the commodities market, items with high Russian dependency such as nickel, palladium, and titanium are also escaping the ‘Putin risk.’ The steel and battery (nickel), aircraft manufacturing (titanium), and automotive catalytic converter (palladium) sectors faced severe supply disruptions immediately after the outbreak. However, governments and private companies worldwide are turning their attention to developing mines in North America, South America, and Africa to build independent supply chains. Foreign Policy reported, "Production from newly opened mines of cobalt and nickel is expected to replace Russian supply."