The price of war

Russia’s invasion of Ukraine on Thursday has plunged Europe into its worst security crisis since World War II and this military action is expected to have far-reaching implications for the global economy. It may be noted that Russia is the second-largest producer of natural gas and a major oil-producing country. Natural gas is vital for heating homes, powering planes and filling cars with fuel.

With the US and its allies deciding to block assets of four large Russian banks, impose export controls and sanction oligarchs close to Putin, it is feared that the gas and oil supply to Europe will take a hit and plunge the continent into an energy crisis.

As far as the European Union is concerned, Russia accounts for more than one-third of the gas supply, and its dominance is entrenched in the Baltic states, Germany, Italy and parts of southeastern Europe. With Russian bombers pounding Ukraine, energy analysts are deeply concerned about the risk of a full supply disruption to the EU, as several of these gas pipelines run through Ukraine.

This could lead to profound economic and public health consequences as Europe is facing winter and in some parts, the coronavirus pandemic is still prevalent. It will have to hurriedly put in place contingency plans such as rationing gas usage or getting gas shipped from the United States, Qatar, Algeria and elsewhere.

But this will come at a very high cost and result in the shooting up of commodity prices, forcing closure of industries with inflation likely to spiral out of control. The European energy crisis could even trigger a global recession.

The fallout of this war will also be felt on the food front. Russia and Ukraine export about a quarter of the world’s wheat and half of its sunflower products, like seeds and oil. Analysts fear the current military standoff could impact the production of grains and even double global wheat prices.

As far as India is concerned, there won’t be much impact on overall exports as Russia accounts for only 0.8% share of India’s exports, and 1.5% of its imports. However, certain sectors like the tea industry are expected to feel the pinch.

Shipments to Russia account for 18% of India’s tea exports. Exporters are worried that Western sanctions, uncertainty over the payment in dollars, and supply disruptions could affect the industry.

The rise in global crude and commodity prices is bound to affect Indian industry across the board. This will raise input costs and stoke inflationary pressures as manufacturers will pass on rising costs to customers. The war is sure to extract a heavy economic price.