How Will the War in Ukraine Impact Global Economy?
The war in Ukraine started when the global economy was already hurting and trying to recover from the impact of the COVID-19 pandemic, surging inflation rates, and high-interest rates. The war has made these uncertainties worse in a way that will be felt across the globe.
It is too early — barely two weeks in — to tell the overall impact that the war will have on the global economic outlook. Like COVID-19, the current conflict was unexpected, in both location and severity. Besides the increase in food prices, the impact of the war will likely be felt in vectors such as stock market trade shocks, decrease in remittances, and surge in oil prices.
Countries neighboring Ukraine will most likely suffer the most significant impact, but the effects will be felt far beyond.
Rising Food Costs
Both Ukraine and Russia are major food exporters, with some countries in Europe, the Middle East, and Africa importing over 75% of their wheat from Ukraine and Russia. These countries will most likely experience food shortages due to the disruption in the production and transportation of seeds and grains in Ukraine and Russia. Disruption in the food supply chain will translate to higher prices and a compromise in food security to the importing countries.
Stock and Bonds
The war in Ukraine has already prompted mega movements in the financial markets, leading to sell-offs of bonds and stocks by investors. More investors are now showing signs of risk aversion, which could cause capital outflows from developing countries, rapid depreciation of major currencies, decline in stock prices, and eventually culminating in high-risk premiums on bonds. The scenario would lead to acute financial stress in low and middle-income countries, which in most cases have heavy debt burdens.
Decrease in Remittances
The economic pain of the war could be felt by economies that rely on remittances from Ukraine and Russia. For instance, in some countries in Central Asia, remittances from Russia account for 10% of their GDP; a case in point is the Kyrgyz Republic, where over 80% of total remittances in 2021 were from Russia. The decrease in remittances will derail the economic growth in such countries.
Unlike the areas discussed above, the prices of cryptocurrency, including Bitcoin and Ethereum, have increased following the phenomenal decline in the value of Russia’s currency. The move could have resulted from Russian investors moving their wealth from rubles to the crypto haven as economic sanctions against Russia take effect.
Just a few days after the start of the war, the price of Bitcoin rose to over $40,000. Overall, the price movements of cryptocurrencies seem normal and not negatively affected by the war.
Additionally, the continuing economic sanctions against Russia due to its invasion of Ukraine have increased the uneasiness between governments and young investors, with the latter being wary of government actions and their impact on currency prices. This could be another reason why crypto prices continue to rise amid the war.
In the words of Michael Oliver, an analyst with Momentum Structural Analysis, the Russian-Ukraine war has gotten most people thinking, “Is my money safe in that bank account?”. This explains the intense search for alternatives, where people can safely invest their money in cryptocurrency.
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