The economic impact of war in Ukraine

A personal view by Dr Stephen Barber, elephant academic consultant
March 30, 2022

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