Five ways the war in Ukraine will change the world’s economy
The war in Ukraine is a tragedy that will continue to play out for months, with an uncertain ending as far as the sad cost in human life, new alignments in global geopolitics and the stunning damage that will be done to the economies in countries beyond just Russia and Ukraine. Even though the repercussions of this war will reverberate for decades, we can already identify some trends that will impact the global economy in the future. As with any volatile trade and economic situation, there will be clear losers (the Russian economy), but there will also be potent secondary developments that arise as a result of this aggressive invasion of a democratic, Western-oriented Ukraine.
Energy Security / Renewable Energy
The U.S. and EU have spent decades wringing their hands over the Transatlantic joint dependence on oil and gas from ‘bad actors’, including Russia, Saudi Arabia, and Venezuela. In the last few weeks, attempts to punish Russia economically have been hamstrung due to the fact that much of Europe still receives about half of its gas from Russia, an impossible dependency when it comes to confronting Russia for its illegal actions in Ukraine. While the ‘fracking revolution’ has assisted the U.S. to a certain level of energy independence, a sizeable portion of the nation’s oil still comes from unreliable external sources. The irony of Russia’s attack on a democratic Ukraine is that it might finally push the U.S. and EU to commit to a substantive, immediate and dedicated pursuit of renewable energy sources for which environmental activists and innovative business leaders have been lobbying for decades. Renewable energy’s strongest proponent just became the national security crowd.
Defense Spending – Globally
The same national security concerns will also lead to a huge rise in defense spending from EU and other nations. Germany’s proposed budget increase alone will be a critical shot in the arm for the European defense industry, but we can assume that other nations that have put off investments in this area were shaken by Russia’s willingness to break global norms and attack Ukraine and will respond with substantial budget increases. Images of Turkish Bayraktar drones destroying Russian armor and video of the U.S.-made Javelin helping to stymie the 7th largest army in the world are going to change how smaller nations structure their arms inventory. More importantly, Russia’s actions have disabused any remaining doubters of the notion that a country like Russia will ‘play by the rules’ of international law in the modern era. If Russia can so brazenly violate their international agreements and obligations, then so can China – and that realization will have a substantive domino effect on the planning and defense expenditures of everyone from Finland to the Philippines.
Wheat and Foodstuffs – Even Greater Price Inflation
Russia and Ukraine accounted for 30% of the global wheat trade prior to this conflict. But that is not the only food product that will be taken off of the market as a result of the war – sunflower oil, corn and other key products will either be destroyed (or unplanted) as a result of the fighting or will be locked inside Russia’s domestic market due to sanctions and the inevitable tariffs. The rest of the world will see massive price increases and shortages in certain foodstuffs. Combined with the global surge in inflation and increasing transportation costs, many global food-producing companies will struggle to provide products that are affordable for their usual clients. If there is a silver lining to this cloud, it is that locally-sourced products and wheat-alternatives (rice, corn, bulgur) should see a boom in demand.
Cybersecurity and Information Warfare
Russia and China have been fighting a shadow war with the U.S. and EU in the cyber realm for years, but this conflict has pushed that fight into the light of day. U.S. and European struggles with Russian governmental and pseudo-governmental cyber strikes (from denial of service attacks to outright hacks for information and funds, as well as documented attempts to impact elections in both regions) should have the same impact on corporate and governmental cybersecurity spending as watching Russian tanks roll into Ukraine did for defense spending. No one wants to be the easy target in this war and corporations that took some risk and saved money on cybersecurity will be scampering to close those gaps as quickly as they can. Russian desperation to get at global fund sources in the next few months dramatically increases the risk of pseudo-governmental ransomware attacks, and the information warfare we are seeing between Russia/China and the rest of the world is astoundingly blunt (and for Ukraine, remarkably effective in generating global support). The gloves are off. Is your company ready to defend its business interests from cyber and information / reputational attacks?
A More Unified, Emboldened EU
The last month has been a litmus test for EU leadership, and they have come out looking much more poised and united than anyone would have believed. Should they have taken this threat more seriously in the last decade? Absolutely. Have they tolerated Putin-loving populists in the EU club for years (Orban, Zeman, Le Pen, Salvini)? Sadly, yes. But all of that changed when Russia headed for Kyiv. Member state leaders closed ranks and the EU turned from a reluctant bystander into ardent supporters of Ukrainian defense efforts in a few short weeks. From an economic perspective, this more unified and confident EU will disrupt a number of patterns. They’re likely going to be much more aggressive in nurturing and protecting their internal innovation in technology and defense. They will redouble efforts to reduce their dependency on external energy sources (to the benefit of renewable technologies, electric vehicle innovations, the nuclear industry and even public transportation ventures). Most importantly, they can be expected to be stronger proponents of democratic ideals in their foreign political and business affairs. Countries (and companies) that interact with this new EU will likely find that they are much more insistent on ESG concerns and support for human rights, democratic principles and adherence to the rule of law.
Kirk Samson is a Director at the International Trade Association of Greater Chicago. He is a former U.S. diplomat and spent ten years as an international law advisor for the Department of Defense.
The Shifting US-China Trade Landscape