The invasion of Ukraine which has resulted in widespread global condemnation is rapidly descending into a humanitarian crisis. Lives and livelihoods have been decimated and latest estimates suggest more than two million refugees have fled the country. The injustice of the situation has led a large part of the international community to impose harsh sanctions on Russia, the global implications of which will be felt globally and closer to home. What follows is an attempt to make some sense of situation and to assess the economic fallout for the UK.
Just a quiet weekend, buffering the Covid pandemic and the new security crisis erupting in Europe would have been a welcome respite. But it must be acknowledged that the invasion of Ukraine, the human and economic disruption that causes — plus the consequences of the sanctions imposed on Russia — will not only check the recovery from the self-inflicted economic contraction of lockdown, but also pose new economic challenges.
Central banks, which had been eyeing creeping global inflation (where prices had already been rising at their fastest pace in decades) with a tightening of monetary policy, are now likely to continue to hold off rate increases so as not to squeeze growth. Nevertheless, the intensification of war in Ukraine and the tightening of sanctions has driven the price of oil to a 40 year high. Briefly hitting $130 a barrel before falling back, let’s not forget that as lockdown bit in 2020, crude briefly fell as low as £11 a barrel. That’s a massive turnaround and it doesn’t look as if the pressures will subside anytime soon. Saudi Arabia and the UAE, countries with the capability of increasing short-term crude production, have so far declined talks with Joe Biden’s White House instead, maintaining commitments to Russia and China.
High oil prices mean more rising prices and disrupted supply chains. The costs of transportation and production are closely connected to energy and that impacts on raw materials, food and everything else.
Capital Economics has forecast that the war could shave as much as 2 percentage points from Eurozone growth while the CEBR has warned of the crisis costing the British economy some £90bn or £2,550 hit to the average household. Already facing a cost-of-living crisis, ordinary Britons should expect this to intensify as energy prices continue to soar. Just reflect that the 4% anticipated lost output being predicted for the British economy (2 percentage points this year) compares to the cost of Brexit and follows the hardship resulting from the pandemic.
The UK economy, remember, is heavily reliant on consumer spending, representing almost two thirds of output. Any squeeze on households will rapidly be felt throughout the economy. It also represents a real challenge to economic policymakers trying to both stimulate growth and curb inflation.
Sanctions also impact those businesses which export to and import from Russia. Losses for those invested there are likely to be substantial and unrecoverable. That said, it is notable too that so many of the economic links severed with the Russian economy have been in addition to sanctions. There is now a long list of organisations – from PwC to Adidas, from Shell to Estee Lauder — which have announced a halt to activities. Combined, sanctions and moral / reputational strategic decisions of business will have a long-lasting impact on the Russian economy which, while significant is not of the size or strength of the country’s assumed geo-political power. With domestic inflation rocketing (as the Ruble plummets), interest rates already at 20%, resources becoming increasingly scarce, business exiting, investment curtailed, and the arteries of the financial system blocked, the Russian economy is on the brink of collapse. That means defaulting on its debt and domestic living standards comparable to some of the most dysfunctional economies on the planet.
That has drawn some pretty sharp divisions in the world and perhaps put into perspective recent diplomatic spats between allies, not least the ongoing tensions resulting from Brexit. For a fully copy of Stephen’s opinion piece contact the elephant team on