The impact of the Russia-Ukraine war on developing countries

While it is no secret that the war in Ukraine has resulted in tragic loss of life and human suffering, it has sent a wave of crisis globally creating an adverse shock to both inflation and activity, amid already elevated pressures after getting battered by the much recent pandemic.

The global economy is poised to be sent on another unpredictable course with the heightened conflict in Ukraine as it could further disrupt energy supplies, exacerbate food insecurity and push commodity prices. With higher commodity prices solidifies the threat of long lasting high inflation which increases the risks of social unrest and stagflation – which is whereby the inflation rate is high, the economic growth rate slows, and the unemployment rate remains steadily high.

Certain sectors such as the automotive, transport or chemicals are also more likely to suffer.

As unprecedented sanctions have been announced on Russia, crippling its economic activity, there will definitely be a substantial impact on the global economy and financial markets, with significant spillovers to other countries across the borders of Europe, and even greater spillovers in the developing counties.

Countries that have very close economic links with Russia and Ukraine are at a particular risk of scarcity and supply disruptions. A derangement of the Russian energy exports as a result of this conflict could temporarily contribute to a rise in global energy and food prices.

The Russia-Ukraine conflict has triggered turmoil in the financial markets, and drastically increased uncertainty about the recovery of the global economy. Now, there is a further danger: Financial investors who had been betting on speculative asset markets have begun to find other places to park their money, as this crisis may lead to temporary market volatility, creating uncertainties.

However, as history has demonstrated time and again, these types of crises tend to only have a significant and lasting impact on global financial markets if they have a sustained macroeconomic impact on major economies, such as that of China and the United States of America, said Dirk Hofschire of Fidelity’s Asset Allocation Research Team.

The economy of Russia is not big enough by itself to affect global markets or economic growth, even if it suffers significant economic damage as a result of the sanctions imposed on it by the US and Europe.

Because of its dependence on Russian oil and natural gas, Europe appears to be the region most exposed to the consequences of this conflict. In the short-run, it would prove impossible to replace all the Russian natural gas supply to Europe and current price levels will have a significant effect on inflation.

Be that as it may, no region will be spared by imported inflation and global trade disruptions, particularly the developing countries which are still struggling to recover from the pandemic, leaving policymakers with less wiggle room.

“The Russia and Ukraine war has accelerated the supply disruptions that were already in place as a result of Covid-19 because many industries closed down and that reduced supply of various goods and services, therefore, prices had to increase as a mechanism to absorb such demand while supply was decreasing.

The war fuelled the already existing supply disruptions and now in vital energy products like paraffin, petrol and diesel hence the prices are to go further up,” said Lehlohonolo Mantsi, an economist at the National University of Lesotho.

“It is important to actually take a moment to take in what exactly is happening in Russia and Ukraine.

First of all, think of the world as a ‘football net’ – or any other if you may – and think of the football itself as an economic shock. When the ball (shock) hits the net (economic interconnectedness), the hit in one place causes a ripple effect throughout the entire net.

“Some parts will be affected a little more than others and probably a lot more. With Ukraine and Russia being the largest importers of both oil and grain, we should expect most commodities to face scarcity on our shelves and storehouses.

Now, with the supply lower but the demand constant, there will be some excess supply in the grain and oil markets.

“We all can relate to this: ‘when demand exceeds supply, prices shoot’; and this is exactly what we are going to feel in our pockets.

It is my value judgement that witness the prices of maize meal, bread flour and, predominantly, oil products like petrol, diesel, petroleum jelly and kerosene (paraffin) rise persistently.

“This will likely splurge into other goods and services being more expensive because oil is in one way or another an input most businesses depend on e.g. taxi fares. So, if it prolongs indefinitely, the cost of living will be extremely high for the foreseeable future,” Mantsi said.

Amanda Baidoo