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Wider Economic Impacts of a Conflict in Ukraine



The possibility of conflict in Ukraine is creating economic fears around the world. From the risk of Russian retaliation to Western sanctions to the supply of resources being reduced around the world due to the nature of war, the economic costs of what could potentially become the biggest war in Europe since 1945 are very high.


As a result of globalisation, economic links between states have increased and the interdependence between states has often been seen as deterrence for war. Russia holds natural resources that are vital to economies around the world, but critically this gives Russia some power to retaliate to any measures that the West takes as punishment for an incursion in Ukraine. The EU depends on Russia for 40% of its natural gas imports and around a third of its crude oil imports. These resources are vital at this moment in time for the EU due to a shortage of supply of energy sources and it has led to record prices.


Having lowered slightly, energy prices are at risk of shooting up once more, past the highs of December, if Russia were to reduce supply in response to Western sanctions. Experts in the energy sector believe that such a scenario could lead to a recession across the continent. Inflationary pressure has been high in Europe and so further energy price rises will be even more costly. The state-run Russian gas provider Gazprom has been accused of not supplying as much gas in order to weaken European economies. Gas prices were so high partially for this reason. It has shown signs of success already, with energy providers struggling to break even. The UK government decided to allow firms to pass on some of the extra cost to the consumer as well.


European states and the USA’s governments have been negotiating with other countries, such as Qatar and Egypt, for shipments of liquified natural gas in case of blockage of Russian gas exports. The German finance minister has warned, however, that the possibility of Russian gas being withheld will cripple Europe’s largest economy. He stressed the importance of Germany to be able to diversify its energy import sources and so adapt. It is unlikely, however, that Russia will withhold all of its gas supplies as it will convey a negative reputation of them being an unreliable source for energy and so there will be less demand from other countries due to the fear of the resource being ‘weaponized’ as it has to some extent in the EU.


Other than energy, Russia also holds other major natural resources. They hold 40 per cent of the world’s palladium and about 30 percent of titanium. These are vital resources for car making and aeroplane industries. Major aeroplane manufacturers, Airbus and Boeing, import most of these metals from Russia.


The threat of conflict has also brought anxiety to current or potential investors into Russia. There is already $60 billion in money that has been loaned from the EU to Russian entities, therefore there is fear that these stakeholders may be hurt by restricting Russian banks from Western financial markets.


Overall, it can be seen that the economic costs of a conflict will be grave with there even being the possibility of a global recession. However, a firm reaction to Russian aggression from the West will lead to great costs. This is an inevitable result of the interdependence between the two sides. The only way that there will be no costs is through peace.


 

Written by Florian Mihindukulasuriya Thiserage

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