As Russiaʼs unprovoked war against Ukraine moves through its eighth week, a variety of reports from multilateral organizations explain the severe global fallout from the war as well as the crippling effects on the Ukrainian economy.
On April 13, 2022, the World Bank, IMF, the UN World Food Program and WTO issued a joint statement which is copied below.
“WASHINGTON, 13 April 2022— The Heads of the World Bank Group (WBG), International Monetary Fund (IMF), United Nations World Food Program (WFP), and World Trade Organization (WTO) today called for urgent action on food security. World Bank Group President David Malpass, IMF Managing Director Kristalina Georgieva, WFP Executive Director David Beasley and WTO Director General Ngozi Okonjo- Iweala issued the following joint statement ahead of the Spring Meetings of the IMF and World Bank Group next week:
“ʻThe world is shaken by compounding crises. The fallout of the war in Ukraine is adding to the ongoing COVID-19 pandemic that now enters its third year, while climate change and increased fragility and conflict pose persistent harm to people around the globe. Sharply higher prices for staples and supply shortages are increasing pressure on households worldwide and pushing millions more into poverty. The threat is highest for the poorest countries with a large share of consumption from food imports, but vulnerability is increasing rapidly in middle-income countries, which host the majority of the worldʼs poor. World Bank estimates warn that for each one percentage point increase in food prices, 10 million people are thrown into extreme poverty worldwide.ʼ
“ʻThe rise in food prices is exacerbated by a dramatic increase in the cost of natural gas, a key ingredient of nitrogenous fertilizer. Surging fertilizer prices along with significant cuts in global supplies have important implications for food production in most countries, including major producers and exporters, who rely heavily on fertilizer imports. The increase in food prices and supply shocks can fuel social tensions in many of the affected countries, especially those that are already fragile or affected by conflict.ʼ
“ʻWe call on the international community to urgently support vulnerable countries through coordinated actions ranging from provision of emergency food supplies, financial support, increased agricultural production, and open trade. We are committed to combining our expertise and financing to quickly step up our policy and financial support to help vulnerable countries and households as well as to increase domestic agricultural production in, and supply to, impacted countries. We can mitigate balance of payments pressures and work with all countries to keep trade flows open. In addition, we will further reinforce our monitoring of food vulnerabilities and are quickly expanding our multi-faceted policy advice to affected countries guided by the comparative advantages of our respective institutions.ʼ
“ʻWe also urge the international community to help support urgent financing needs, including through grants. This should include financing of immediate food supplies, safety nets to address the needs of the poor, and for small farmers facing higher input prices. We also urge all countries to keep trade open and avoid restrictive measures such as export bans on food or fertilizer that further exacerbate the suffering of the most vulnerable people. It is especially important not to impose export restrictions on humanitarian food purchases by the UNʼs World Food Program.ʼ
“ʻIt is critical to quickly provide support for food insecure countries in a coordinated manner. We stand ready to work together with our multilateral and bilateral partners to help countries address this urgent crisis.ʼ”
The World Bank has estimated that the Ukrainian economy will decline by 45% or more because of the war. Effects in other countries are a combination of the warʼs effects on prices of a number of agricultural and non-agricultural goods where Russia, Ukraine and/or Belarus are important global suppliers, supply chain disruptions that have continued from the pandemic and other inflationary pressures. So for example, the OECD has estimated the first year effects of the war and other challenges will reduce global GDP and will add to global inflation though the effects will vary by geographic area.
Figure 5 from page 7 of the OECD paper provides estimates of the impact on GDP and on inflation for the Euro area, OECD countries in total, United States, World and World excluding Russia.
Similarly, Figure 3 from page 5 of the report shows the price increases for products where Russia and Ukraine are important sources of global trade.
The World Bank looks at various regions of the world in their Spring reports which show varying effects from the war.
The World Trade Organization recently released a paper looking at the implications of the war in Ukraine on global trade and development. The Executive Summary from the WTO paper is copied below.
“The crisis in Ukraine has created a humanitarian crisis of immense proportions and has also dealt a severe blow to the global economy. The brunt of the suffering and destruction are being felt by the people of Ukraine themselves but the costs in terms of reduced trade and output are likely to be felt by people around the world through higher food and energy prices and reduced availability of goods exported by Russia and Ukraine. Poorer countries are at high risk from the war, since they tend to spend a larger fraction of their incomes on food compared to richer countries. This could impact political stability.
“From a macroeconomic perspective, higher prices for food and energy will reduce real incomes and depress global import demand. Sanctions will impose economic costs on not only Russia directly but also on its trading partners. Besides Russia and Ukraine, depressed gross domestic product (GDP) will probably be seen mostly in Europe given the regionʼs geographic proximity and its dependence on Russian energy. Trade costs will rise in the near term due to sanctions, export restrictions, higher energy costs and transport disruptions. As a result, the impact the war will have on world trade in 2022 could be greater than the impact on global GDP.
“While shares of Russia and Ukraine in world trade and output are relatively small, they are important suppliers of essential products, notably food and energy. Both countries accounted for 2.5 per cent in world merchandise trade and 1.9 per cent in world GDP in 2021. Yet they supplied around 25 per cent of wheat, 15 per cent of barley and 45 per cent of sunflower products exports in 2019.1 Russia alone accounted for 9.4 per cent of world trade in fuels, including a 20 per cent share in natural gas exports. Many countries are highly dependent on food imports from Russia and Ukraine. For example, more than half of wheat imports in Egypt, the Lebanese Republic and Tunisia come from Russia and Ukraine. Other countries are more dependent on imports of fuels from Russia, such as Finland (63 per cent) and Turkey (35 per cent).
“Russia and Ukraine are also key providers of inputs into industrial value chains. Russia is one of the main suppliers globally of palladium and rhodium, key inputs in the production of catalytic converters in the automotive sector and the manufacture of semiconductors. Semiconductor production also depends to a substantial extent on neon supplied by Ukraine, which further provides a number of low-tech products to the European automobile value chain, such as wire harnesses. Prolonged disruptions in the supply of these goods could harm the recovery of automobile manufacturing.
“Sanctions are already having a strong impact on Russiaʼs economy, with possible medium to long- term consequences. Disconnecting Russian banks from the SWIFT settlement system and blocking Russiaʼs use of foreign exchange reserves have triggered a sharp depreciation of the rouble, reducing real incomes in the country. Many international firms are also abandoning the Russian market. Oil and gas exports have yet to be strongly affected by the sanctions, but the crisis could accelerate the global transition towards greener energy sources.
“Longstanding economic relationships have been disrupted by the war and by the sanctions imposed in its wake. WTO economists have simulated various scenarios to illustrate the channels through which trade could be affected and to explore possible short-run and long-run effects. Global trade growth is projected to slow by up to 2.2 percentage points in 2022. Longer term impacts could also be large and consequential. There is a risk that trade could become more fragmented in terms of blocs based on geopolitics. Even if no formal blocs emerge, private actors might choose to minimize risk by reorienting
supply chains. This could reduce global GDP in the long run by about 5 per cent, notably by restricting competition and stifling innovation.
“The WTO has an important role to play in mitigating the negative effects of the crisis and in rebuilding a post-war global economy. Keeping markets open will be critical to ensure that economic opportunities remain open to all countries. This will be especially true in the post-war period, when businesses and families will need to repair their balance sheets and rebuild their lives. Through its importance for international trade and its monitoring, convening and other functions, the WTO is central to ensuring that international trade continues to serve billions of people across the world.”
Rising energy prices and reduced volumes of some basic agricultural products are receiving a lot of attention because of the increasing hunger, malnutrition, number of people suffering extreme poverty that flow from the challenges being experienced at the moment. For example, the FAO paper on April 8, 2022 (CL 169/3) reviews in detail the challenges for food security from the disruption in exports from Russia and Ukraine of many food products, spiking prices for fertilizers from Russia as well as rising energy costs. The Executive Summary to the report is copied below.
“The war that began on 24 February 2022 has caused extensive damage and loss of life in key population centres, spread across rural areas, and sparked massive displacement. More than 3.6 million people had been forced to abandon their homes and flee across borders to safety. Millions more are internally displaced. It is clear that the war has resulted in a massive, and deteriorating, food security challenge and disrupted livelihoods during the agricultural growing season in Ukraine and has also affected global food security.
“Already prior to the war in Ukraine, international food prices had reached an all-time high. This was mostly due to market conditions, but also high prices of energy, fertilizers and all other agricultural services. In February 2022, the FAO Food Price Index reached a new historical record, 21 percent above its level a year earlier, and 2.2 percent higher than its previous peak in February 2011.
“The Russian Federation and Ukraine are prominent players in global trade of food and agricultural products. In 2021, wheat exports by the Russian Federation and Ukraine accounted for about 30 percent of the global market. Russiaʼs global maize export market share is comparatively limited, standing at 3 percent between 2016/17 and 2020/21. Ukraineʼs maize export share over the same period was more significant, averaging 15 percent and conferring it the spot of the worldʼs 4th largest maize exporter. Combined, sunflower oil exports from both countries represented 55 percent of global supply. The Russian Federation is also a key exporter of fertilizers. In 2020, it ranked as the top exporter of nitrogen fertilizers, the second leading supplier of potassium, and the third largest exporter of phosphorous fertilizer.
“Nearly 50 countries depend on the Russian Federation and Ukraine for at least 30 percent of their wheat import needs. Of these, 26 countries source over 50 percent of their wheat imports from these two countries. In that context, this war will have multiple implications for global markets and food security, representing a challenge for food security for many countries, and especially for low-income food import dependent countries and vulnerable population groups.
“Joint, coordinated actions and policy responses are needed to address the current challenges for the people most in need and to mitigate the impact on food insecurity at global level.”
The heads of the International Monetary Fund and the World Bank, in statements on April 14 and 12 respectively provide sobering summaries of the challenges facing the world, including the war in Ukraine, and the implications for food security, global growth (or contraction), and a range of critical issues needing global cooperation such as climate change. Some excerpts are provided below.
IMF Managing Director Georgieva:
“To put it simply: we are facing a crisis on top of a crisis.
“First, the pandemic: it turned our lives and economies upside down—and it is not over. The continued spread of the virus could give rise to even more contagious or worse, more lethal variants, prompting further disruptions—and further divergence between rich and poor countries.
ʻSecond, the war: Russiaʼs invasion of Ukraine, devastating for the Ukrainian economy, is sending shockwaves throughout the globe.
“Above all is the human tragedy—the suffering of ordinary men, women, and children in Ukraine, among them over 11 million displaced people. Our hearts go out to them.
“The economic consequences from the war spread fast and far, to neighbors and beyond, hitting hardest the worldʼs most vulnerable people. Hundreds of millions of families were already struggling with lower incomes and higher energy and food prices. The war has made this much worse, and threatens to further increase inequality.
“And for the first time in many years, inflation has become a clear and present danger for many countries around the world.
“This is a massive setback for the global recovery.
“In economic terms, growth is down and inflation is up. In human terms, peopleʼs incomes are down and hardship is up.
“These double crises—pandemic and war—and our ability to deal with them, are further complicated by another growing risk: fragmentation of the world economy into geopolitical blocs—with different trade and technology standards, payment systems, and reserve currencies.
“Such a tectonic shift would incur painful adjustment costs. Supply chains, R&D, and production networks would be broken and need to be rebuilt.
“Poor countries and poor people will bear the brunt of these dislocations.
“This fragmentation of global governance is perhaps the most serious challenge to the rules-based framework that has governed international and economic relations for more than 75 years, and helped deliver significant improvements in living standards across the globe.
“It is already impairing our capacity to work together on the two crises we face. And it could leave us wholly unable to meet other global challenges—such as the existential threat of climate change.
“It is a consequential moment for the international community.
“The actions we take now, together, will determine our future in fundamental ways. It reminds me of Bretton Woods in 1944 when, in the dark shadow of war, leaders came together to envision a brighter world. It was a moment of unprecedented courage and cooperation.
“We need that spirit today, as we face bigger challenges and more difficult choices.”
World Bank President Malpas:
“We are again living through a dangerous period of overlapping crises and conflicts with Poland near the center. I have been deeply shocked and horrified at Russiaʼs invasion of Ukraine, the atrocities committed against the civilian population, and the loss of life and livelihoods for millions of Ukrainians. The attacks on people and infrastructure are causing tremendous suffering, threatening international peace and security, and endangering the basic social and economic needs of people around the world.”
“Overlapping Global Crises
“The violence is unfortunately not confined to Ukraine. Just over the last year, we have witnessed serious setbacks for development and security, including Afghanistanʼs collapse, Lebanonʼs crisis, and coups and violence across the Sahel, Ethiopia, Somalia, and Yemen. Millions of Syrians are living in refugee camps in Jordan, Lebanon, and Turkey. Inter-ethnic and inter-religious strife plagues Myanmar and other parts of Asia. And in Latin America and the Caribbean, levels of crime and violence are alarmingly high, with some urban and rural areas controlled by criminal gangs or drug cartels.
“The trend toward insecurity is deeply concerning. This year, 39 of the 189 member countries of the World Bank Group – 39 of 189 – are experiencing open conflict situations or remain worryingly fragile. The number of people living in conflict areas nearly doubled between 2007 and 2020. Today, in the Middle East and North Africa, one in every five people lives in an area affected by conflict. This unraveling of security has brought a surge in the number of refugees, which more than doubled over the last decade to exceed 30 million refugees in 2020. The war in Ukraine has already displaced an additional 10 million people from their homes, pushing more than 4 million people – primarily women and children – into neighboring countries, most of them to Poland and Romania.
“We recognize that each of the ongoing crises hits the vulnerable the hardest, often women and girls. And all the while, we are still suffering the health, economic, and social setbacks of a global pandemic and economic shutdowns. Millions of lives have been lost and millions more are suffering amid the massive reversals in development that hit the poor particularly hard.
“Since the outbreak of COVID-19, violence against women and girls has intensified. Global indicators on food, nutrition, and health have worsened. And children lost more than a year of education due to school closures, with 1.6 billion children out of school globally at the peak of lockdowns, reversing a full decade of gains in human capital.
“Never have so many countries experienced a recession at once, suffering lost capital, jobs, and livelihoods. At the same time, inflation continues to accelerate, reducing the real incomes of households around the world, especially the poor. The extraordinary monetary and fiscal policies that advanced economies have been implementing to boost their demand, combined with supply constraints and disruptions, have fueled price increases and have worsened inequality around the globe. One measure that captures the growing concern of inflation and inequality is the stagnation in real median income across much of the world. Another measure is the likelihood that poverty increases will continue in 2022 as inflation, currency depreciation, and high food prices hit home.
“The war in Ukraine and its consequences are also creating sudden shortages of energy, fertilizer, and food, pitting people against each other and their governments. Even people who are physically distant from this conflict are feeling its impacts.
“Food price spikes hit everyone and are devastating for the poorest and most vulnerable. For every one percentage point increase in food prices, 10 million people are expected to fall into extreme poverty. The rich can afford suddenly expensive staples, but the poor cannot. Malnutrition is expected to grow, and its effects will be the hardest to reverse in children.
“Trade disruptions have already sent grain and commodity prices soaring. Wheat exports from Black Sea ports have been sharply curtailed. And intense drought in South America is reducing global food production. Global food commodity markets are large and well-established, and – after a lag – they tend to self-adjust to disruptions in production. However, additional factors are making the current food supply problems more acute – namely the supply of fertilizers, energy prices, and self-imposed food export restrictions.
“Fertilizer prices are dependent on natural gas prices, which have surged. As LNG is shipped to Europe, LNG shortages are occurring elsewhere, reducing fertilizer production, and disrupting the sowing season and harvest productivity. Russia and Belarus are both large fertilizer producers, adding materially to the problem.
“The financial repercussions of the energy shock are intertwined with the global communityʼs efforts on climate change. Russia has been an important source for the worldʼs energy, including oil, coal, and gas – the latter supplying Europe through a network of pipelines. Iʼve been pleased to see Europe follow a path toward diversifying its energy mix away from Russia and considering LNG imports and nuclear power for electricity baseload, but these take time. The rapid addition of major new energy production in Europe and other parts of the world will be a necessary ingredient for global recovery and energy security in Europe.
“The World Bank Group strongly supports the integration of climate and development goals. This recognizes the urgency of growth and development at the core of our mission of alleviating poverty and boosting shared prosperity; and the global communityʼs pledges to slow the growth in human-linked greenhouse gas emissions. These pledges for global public goods will require hundreds of complex, multi-decade projects that reduce emissions and are funded by the global community. We are working to tackle these challenges through analytical work, including our Country Climate and Development Reports and our Infrastructure Sector Assessment Programs. We are pleased to support Polandʼs efforts to increase energy efficiency and continue its transition away from coal.
“Weakening Economic Outlook
“On the economic front, trends are not encouraging. Prior to the war in Ukraine, the recovery in 2022 was already losing momentum due to rising inflation and lingering supply bottlenecks. While advanced economies were expected to return almost to their pre-pandemic growth rates in 2023, developing economies were lagging substantially behind.
“The war in Ukraine and the COVID-19 lockdowns in China are further reducing the recovery path. Of concern, the repercussions are worsening the inequality as the war affects commodity and financial markets, trade, and migration linkages, and investor and consumer confidence. Advanced economies with well-developed social protection systems are cushioning parts of their populations from the damage from inflation and trade blockages, but poorer countries have limited fiscal resources and weaker systems to support those in need. Currency depreciations and inflation are hitting the poor hard, causing fast increases in 2022 poverty rates. Adding to the burden, developing country debt has risen sharply to a 50-year high—at roughly 250 percent of government revenues. Debt vulnerabilities are particularly acute in low-income countries, where sixty percent are already experiencing or at high risk of debt distress.
“Most emerging market and developing economies are ill-prepared to face the coming debt shock. Exposures to financial sector risk are opaque at this point, but one measure, the cost of insuring against default in emerging markets, has reached its highest point since the onset of the pandemic.”
A few thoughts
While there has been improved cooperation among multilateral institutions in addressing some of the crises identified, including supporting Ukraine during this period of enormous challenge from Russiaʼs unprovoked war, solutions to some of the inflationary spikes appear more remote during the pendency of the war and are aggravated by Chinaʼs lockdown of areas of the country in pursuit of its zero-COVID policy.
It is clear that Europe, the United States and some of their close allies will be changing investment and trade flows to address the unacceptable dependence on countries which donʼt support the global rule of law and respect for national sovereignty. There will likely be spillover effects for other countries unable or unwilling to distance themselves from the Russian Federation. It is hard to see such fragmentation ending even with the end of Russiaʼs war whenever that occurs.
The increase in food security concerns are at least partially addressable by joint action to keep markets open and not impose export restrictions and ensure funding for UN World Food Program purchases during a period of inflated food prices. While the WTOʼs efforts during the COVID-19 pandemic have improved transparency on export and import actions on food and medicines, it is unclear what level of cooperation will occur from countries with a history of imposing export restraints on food during periods of rising food prices. As history shows, increased food insecurity often leads to increased social unrest, as was true in 2007-2008.
While the need to move from fossil fuel imports is apparent for European countries and hence can have positive effects on increased use of renewable energy sources, the current high prices for fossil fuels and the role of Russia in the global supply of such fuels has countries scrambling to increase production to address short-term demand needs. Such increased production of fossil fuels and reduced cooperation among many countries on some issues will likely hurt global efforts to address the existential issue of climate change.
Russia has reportedly started a new phase of its invasion of Ukraine in the east this week. How long the conflict will go on is, of course, unknown. But the rest of 2022 is likely to be challenging for governments and people around the world addressing the fallout from the war and other crises.
Terence Stewart, former Managing Partner, Law Offices of Stewart and Stewart, and author of the blog, Current Thoughts on Trade.
To read the full commentary from Current Thoughts on Trade, please click here