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The price of war: Macroeconomic effects of the 2022 sanctions on Russia
Pestova, Anna ; Mamonov, Mikhail ; Ongena, Steven
Abstract: Following Russia’s invasion of Ukraine on 24 February 2022, the US, Europe, and many other
countries imposed new economic sanctions on Russia. This column assesses the economic effects of these
sanctions using a structural vector auto-regression model of the Russian economy. The findings suggest
that industrial production, consumption, and investment will all decline, and that Russian GDP will
contract by -12.5% to -16.5% in 2022. Nevertheless, the Russian economy will continue to rely on its
existing export model, which may be difficult to undermine, even with potential oil and gas embargoes.
Posted at the Zurich Open Repository and Archive, University of Zurich
ZORA URL: https://doi.org/10.5167/uzh-218249
Scientific Publication in Electronic Form
Published Version
Originally published at:
Pestova, Anna; Mamonov, Mikhail; Ongena, Steven (2022). The price of war: Macroeconomic effects of
the 2022 sanctions on Russia. London: VoxEU, CEPR Policy Portal.
Macroeconomic effects of the 2022 sanctions on Russia
https://voxeu.org/print/73526
Published on VOX, CEPR Policy Portal (https://voxeu.org)
Home > Macroeconomic effects of the 2022 sanctions on Russia
The price of war: Macroeconomic effects of
the 2022 sanctions on Russia
Anna Pestova, Mikhail Mamonov, Steven Ongena 15 April 2022
Following Russia’s invasion of Ukraine on 24 February 2022, the US, Europe, and many other
countries imposed new economic sanctions on Russia. This column assesses the economic
effects of these sanctions using a structural vector auto-regression model of the Russian
economy. The findings suggest that industrial production, consumption, and investment will all
decline, and that Russian GDP will contract by -12.5% to -16.5% in 2022. Nevertheless, the
Russian economy will continue to rely on its existing export model, which may be difficult to
undermine, even with potential oil and gas embargoes.
a
A
Related
• The impact of uncertainty on investment by Russian firms [1]
Sumru AltuÄŸ, Sevcan Yesiltas
• China’s overseas lending and the war in Ukraine [2]
Sebastian Horn, Carmen Reinhart, Christoph Trebesch
• Sanctions and the international monetary system [3]
Markus K Brunnermeier, Harold James, Jean-Pierre Landau
• Russian sanctions: Some questions and answers [4]
Richard Berner, Stephen Cecchetti, Kim Schoenholtz
Editors’ note: This column is part of the Vox debate on the economic consequences of
war [5].
Following the Russian invasion of Ukraine in late February 2022, many countries imposed
sanctions on Russian banks, entities, and individuals. The current sanctions are well described
in Berner et al. (2022). Huang and Lu (2022) and Deng et al. (2022) deliver the first estimates of
the sanctions impact on world financial markets. Ferrara et al. (2022), in turn, apply a highfrequency approach to connect the financial stress index and macroeconomic risks of the
sanctions for the euro area. Brunnermeier et al. (2022) discuss the implications of the sanctions
against the Central Bank of Russia for the architecture of the international monetary system.
However, the current debate is missing a comprehensive set of model-based estimates of the
macroeconomic effects of the sanctions.
We fill in this gap using a vector auto-regression (VAR) model of the Russian economy
developed in Mamonov and Pestova (2021) specifically to capture the macroeconomic effects of
sanctions.
The effects of the current sanctions could be roughly divided into (i) financial and demand-side
effects and (ii) supply-side effects. Our model is able to capture the demand-side effects. The
supply-side disruptions arising from technological bans and the breaking of supply chains are yet
to be fully realised in the future and that requires a different modelling framework.
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The demand-side effects: Back-of-the-envelope calculations
To estimate the demand-side effects of the sanctions, we build on our structural VAR (SVAR)
model. In our analysis, we approximate the severity of sanctions by the sovereign international
bond spread (over the US short rate). According to Mendoza and Yue (2012), this indicator
summarises investors’ expectations about the future path of the economy; in our case—under
sanctions.1
We add the central bank’s key interest rate as one of the endogenous variables in the structural
VAR model. This flexibly accounts for monetary policy responses to rising currency risks during
crisis times. In the structural identification (Cholesky ordering), we order monetary policy rate last
among the eight endogenous variables in the model. By doing so, we assume that the
international bond spread reacts faster to the sanction news than the central bank. The
estimation period covers January 2000-December 2020.
The estimated impulse response functions (IRFs) of the endogenous variables to a one
percentage point international bond spread shock appear in Figure 1. All the responses, except
for the trade balance (TB), are statistically significant and are in line with macro theory
predictions: industrial production, consumption, investment, and foreign borrowings decline,
whereas the real effective exchange rate and monetary policy rate rise. We will use the peaked
levels of the estimated IRFs below.
Figure 1 Impulse responses of key macroeconomic variables to the country real interest rate
(RIR) shock
Note: IP is industrial production, Consum is real consumption expenditures of the households, Invest is gross fixed
capital formation, TB is trade balance, ExtDebt is corporate external debt, RIR is the real interest rate,
MonetPolRate is the CBR’s key interest rate.
Source: The authors’ estimates
Our model successfully identifies periods of the large positive country spread shocks over and
above macroeconomic conditions. Among the identified periods, we observe spikes in the
spread (or real interest rate, holding short-term US interest rate constant) during the Crimean
‘first wave’ and US/Syrian ‘second wave’ sanctions (Figure 2).
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Figure 2 Time evolution of the identified real interest rate (RIR) shock
Source: Authors’ estimates
We do not have a model-identified country spread shock now. However, information on spreads
suggests that an exogenous—or clearly prior to the current macroeconomic worsening—rise of
the spread has amounted to 35-45 percentage points, depending on whether the one-year yield
is taken into account or not (Figure 3) and assuming constant international short-term rate (as
average in March–February 2022). This increase in spreads could be partly explained by the
heightened default risks of the Russian government. A full default, however, has not occurred.
Still, even when the first payment on dollar-denominated Russian bonds was made following the
invasion and panics were relieved, sovereign international bonds are traded with about 40%
yield to maturity.2
Figure 3 Yield to maturity of the Russian US dollar-denominated government bonds
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Source: Bloomberg
With the estimated IRFs (Figure 1) and the size of the country spread shock that occurred during
the first month of the war (+35-45 percentage points, Figure 3), we produce a set of out-ofsample forecasts. We predict that industrial production (IP) will decline by 21-27% per annum by
the end of 2022. Given the 0.67 elasticity of GDP to IP, we further obtain that the GDP will fall by
–12.5 to –16.5%, per annum. Regarding private consumption, we have a range of estimates:
between –11 and –15%; a similarly obtained range of estimates for investment is bounded by
–30% and –40%.
Given the expected decline in imports, our model produces a sharp rise in the trade balance—by
+40 to +60% in 2022. However, it does not—and cannot—account for problems with cargo
deliveries and export embargo which jointly reduce exports. Overall, we expect the 2022 trade
balance to stay at the levels of 2021.
Concerning corporate external debt, our out-of-sample forecasts imply a complete shutdown of
firms’ borrowing abroad, given the size of the country’s spread shock.
Finally, we predict that the real effective exchange rate (REER) will rise by 40%, on average in
2022, given the country’s spread shock. Assuming a 20% consumer price index (CPI) in Russia
and 4% CPI abroad, we obtain that the growth of the nominal exchange rate (US dollar to ruble)
may reach 63%, meaning that, absent capital controls, we may observe 122 rubles per one
dollar, as an average in 2022.
Discussion of the forecasts
Sanctions will no doubt generate a deep recession in the Russian economy. First, according to
the Bloomberg forecast, the Russian GDP will fall by 9.6% in 2022 with a peak quarterly GDP
decline reaching –15.7% of annual growth rates.3 This survey-based forecast fairly
accommodates our model’s forecast. Russia’s government bodies provide a less pessimistic
forecast of a 6-8% decline.4
The history of the last three decades shows that the Russian GDP was falling by up to 16% at
the peak of the transformation crisis at the beginning of the 1990s, by 5% during the sovereign
default crisis of 1998, by up to 9% during the global crisis in 2008, and by just 3% in the local
crisis phase in 2014. Therefore, the currently predicted decline exceeds in magnitude all of those
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previously observed during normal crises and is comparable to the one during the most painful
transformation crises.5
Debates on the effects of potential oil (and gas) embargo on
Russia’s balance of payments
Clearly, a potential embargo on oil and gas has not been ‘priced’ yet by the country’s sovereign
spread (Figure 3) and is thus not accounted for in our macroeconomic forecasts. In turn,
Bachmann et al. (2022)’s estimates show that the German economy could lose only up to 3% of
GDP in case of a full embargo on the import of Russian oil and gas. In turn, Chepeliev et al.
(2022) argue that banning Russia’s exports of fossil fuels will have overwhelming adverse
impacts on the Russian economy. As Guriev and Itskhoki (2022) further suggest, this embargo
could be “the fastest way to stop Putin’s war in Ukraine.” Although desirable, our draft
calculations show that such an embargo would not necessarily undermine Russia’s balance of
payment because of the record-high prices on exported raw materials (even under discounts)
and the imposed capital controls.
Let us clarify this important issue. In the pre-war year 2021, Russia enjoyed the current account
surplus and record-high exports of $490 billion of which oil and gas products constitute only half,
according to the official balance-of-payments data. In 2022, a potential oil embargo by the EU
and US (50% of Russian oil export) and cutting of natural gas imports by the EU (70% of
Russian exports) by two-thirds would decrease the exports by only one-fourth. The EU ban on
imports of metals costs as little as €3 billion.6 Restrictions on food, agricultural, and wood and
paper exports implemented by Russia are of lower importance for the overall stability of external
balance because they constitute less than 10% of total exports.7 Under reasonable assumptions
on import dynamics,8 which is expected to decline by almost two times, this yields around $200
billion of trade balance surplus in 2022,9 roughly the same number as in 2021, i.e. before the
war.10,11
Overall assessment of the effects of sanctions
The war and the sanctions, even absent of a potential oil and gas embargo, are likely to produce
one of the deepest economic crises in Russia over the last three decades, most comparable to
the transformation crisis (1992) that followed the Soviet Union’s collapse and possessing some
features of the sovereign default crisis (1998). The Russian economy will nonetheless continue
to rely on the existing export model which is hard to undermine. The population will struggle with
the ‘new poor’ who will be appealing to the mechanisms of household adaptation to deep crises
that had been widely employed in the 1990s (switching from to informal sector of the economy
and turning to home production of food due to very high inflation, see Mamonov et al. 2021). As
a negative unintended spillover effect, this will touch on not only the Russian population but,
more broadly, a wide range of households in many developing countries across the globe (Artuc
et al. 2022).
References
Artuc, E, G Falcone, G Porto and B Rijkers (2022), “War-Induced Food Price Inflation Imperils
the Poor [6]”, VoxEU.org, 1 April.
Aguiar, M and G Gopinath (2006), “Defaultable Debt, Interest Rates, and the Current Account”,
Journal of International Economics 69(1): 64-83.
Bachmann, R, D Baqaee, C Bayer, M Kuhn, A Löschel, B Moll, A Peichl, K Pittel and M
Schularick (2022), “What if? The Economic Effects for Germany of a Stop of Energy Imports from
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Russia”, ECONtribute Policy Brief No. 028.
Berner, R, S Cecchetti and K Schoenholtz (2022), “Russian Sanctions: Some Questions and
Answers [4]”, VoxEU.org, 21 March.
Born, B, G Müller, J Pfeifer and S Wellmann (2020), “Different No More: Country Spreads in
Advanced and Emerging Economies”, CESifo Working Paper No. 8083.
Brunnermeier, M, H James and J-P Landau (2022), “Sanctions and the International Monetary
System [3]”, VoxEU.org, 5 April.
Chepeliev, M, T Hertel and D van der Mensbrugghe (2022), “Cutting Russia’s fossil exports:
Short-term pain for long-term gain [7]”, VoxEU.org, 9 March.
Deng, M, M Leippold, A Wagner and Q Wang (2022), “Stock Prices and the Russia-Ukraine War:
Sanctions, Energy and ESG”, Swiss Finance Institute Research Paper No. 22-29.
Ferrara, L, M Mogliani and J-G Sahuc (2022), “High-frequency Macroeconomic Risk Measures in
the Wake of the War in Ukraine”, VoxEU.org, 7 April.
Guriev, S and O Itskhoki (2022) “The Economic Rationale for Oil and Gas Embargo on Putin’s
Regime”.
Huang, L and F Lu (2022), “The Cost of Russian Sanctions on the Global Equity Markets”, SSRN
Working Paper, 18 March.
Mamonov, M and A Pestova (2021), ”‘Sorry, You’re Blocked.’ Economic Effects of Financial
Sanctions on the Russian Economy”, CERGE-EI Working Paper Series 704.
Mamonov, M, A Pestova and E Sargsyan (2021), “Food Supply, Poverty and Public Health
during the Transformation Crisis of the 1990s in Russia”.
Mendoza, E and V Yue (2012), “A General Equilibrium Model of Sovereign Default and Business
Cycles”, The Quarterly Journal of Economics 127(2): 889–946.
Monacelli, T, L Sala and D Siena (2018), “Real Interest Rates and Productivity in Small Open
Economies [8]”, CEPR Discussion Papers 12808.
Uribe, M and V Z Yue (2006), “Country Spreads and Emerging Countries: Who Drives Whom?”,
Journal of International Economics 69: 6-36.
Endnotes
1 Of course, this indicator has limited ability to capture other aspects of sanctions including
technological disruptions and particular asset freezes. However, it follows a long literature
stressing the role of the country spread shocks in emerging economies’ business cycles (Uribe
and Yue 2006, Aguair and Gopinath 2006, Born et al. 2020, Monacelli et al. 2018).
2 This means that even under no ‘illiquidity-type’ default (because of asset freeze), the country’s
medium- and long-run economic perspectives are perceived by investors as gloomy enough (low
or negative future technological and economic growth).
3 See here [9].
4 See here. [10]
5 Of course, we need to treat the out-of-sample forecasting results obtained with our (S)VAR
model with some caution because the size of the country spread shock is unprecedented and
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the model is simply not ‘experienced’ in this direction. A clear drawback in our forecasts is that
corporate external debt is predicted to be completely shuttered by the beginning of the next year,
which seems over-estimated. However, we stress that in the rest, the model delivers GDP
forecasts that are fairly within the broader range of estimates born by economists around the
world nowadays.
6 See here. [11]
7 See here. [12]
8 See here. [13]
9 We do not know yet many parameters, for example how serious are the transportation
problems of export deliveries, and by how much export prices will go up.
10 Recently, under the pre-war structure of export deliveries and world prices, for the two months
of January and February 2022, Russia earned $39.2 billion in revenue [14] on its current account.
11 As of the current writing, we do not know yet the size of capital outflow in February and March
2022—probably, it was huge. Without the CBR’s international reserves to sustain the balance of
payments, the inflow of currency through the current account should exceed capital outflow
through the financial account. Under no new debt issuances, capital outflow through the channel
of Russia’s net external debt payments in 2022 can be estimated as $70-80 billion. Of this,
nonfinancial corporations amount to $25.6 billion [15] per one-two quarters of 2022; roughly $50
billion per year plus $10 billion by banks and $10 billion by the government. Similar numbers are
provided by CMASF [16] (a pro-government think-tank in Moscow). Given the restrictions on ruble
convertibility and cross-border money transfers and asset freezes, it is hard to expect further
capital outflow through asset and foreign currency purchases. Therefore, capital outflow may be
less than it would be without sanctions, and therefore under current regulation, the oil and gas
embargo alone may be inefficient in stopping currency inflows and producing a balance of
payment crisis in Russia.
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Topics: Politics and economics [17]
Tags: Ukraine [18], Russia [19], war [20], sanctions [21], vector autoregression [22], demand shock [23],
debt [24], credit spread [25]
Related
• The impact of uncertainty on investment by Russian firms [1]
Sumru AltuÄŸ, Sevcan Yesiltas
• China’s overseas lending and the war in Ukraine [2]
Sebastian Horn, Carmen Reinhart, Christoph Trebesch
• Sanctions and the international monetary system [3]
Markus K Brunnermeier, Harold James, Jean-Pierre Landau
• Russian sanctions: Some questions and answers [4]
Richard Berner, Stephen Cecchetti, Kim Schoenholtz
Source URL: https://voxeu.org/article/macroeconomic-effects-2022-sanctions-russia
Links
[1] https://voxeu.org/article/impact-uncertainty-investment-russian-firms
[2] https://voxeu.org/article/china-s-overseas-lending-and-war-ukraine
[3] https://voxeu.org/article/sanctions-and-international-monetary-system
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[4] https://voxeu.org/article/russian-sanctions-some-questions-and-answers
[5] https://voxeu.org/debates/economic-consequences-war
[6] https://voxeu.org/article/war-induced-food-price-inflation-imperils-poor
[7] https://voxeu.org/article/cutting-russia-s-fossil-fuel-exports-short-term-pain-long-term-gain
[8] https://cepr.org/active/publications/discussion_papers/dp.php?dpno=12808
[9] http://www.bloomberg.com/news/articles/2022-03-25/russia-seen-on-course-for-deep-two-year-recession-20inflation
[10] http:// http://www.forecast.ru/_Archive/analitics/DB/foreparam2022.pdf and http://www.cbr.ru/statistics/ddkp/mo_br/
[11] https://ec.europa.eu/commission/presscorner/detail/en/ip_22_1761
[12] https://rosstat.gov.ru/storage/mediabank/neW9Deg7/ts-exp.xls
[13] http://www.forecast.ru/_Archive/analitics/DB/foreparam2022.pdf
[14] https://cbr.ru/statistics/macro_itm/svs/bop-eval/
[15] https://cbr.ru/statistics/macro_itm/svs/1hy_2022/
[16] http://www.forecast.ru/_ARCHIVE/MON_FI/2022/findicators_march2022.pdf
[17] https://voxeu.org/content/topics/politics-and-economics
[18] https://voxeu.org/category/tags/ukraine
[19] https://voxeu.org/taxonomy/term/41
[20] https://voxeu.org/taxonomy/term/215
[21] https://voxeu.org/category/tags/sanctions
[22] https://voxeu.org/taxonomy/term/11537
[23] https://voxeu.org/taxonomy/term/2025
[24] https://voxeu.org/taxonomy/term/1441
[25] https://voxeu.org/taxonomy/term/13120
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The Economic Costs of the RussiaUkraine Conflict
Iana Liadze, Corrado Macchiarelli, Paul Mortimer-Lee,
Patricia Sanchez Juanino
NIESR Policy Paper
32
Date:
2 March 2022
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This paper was first published in March 2022
© National Institute of Economic and Social Research 2022
National Institute of Economic and Social Research
Policy Paper no. 32
The Economic Costs of the Russia-Ukraine Conflict1
Iana Liadze, Corrado Macchiarelli, Paul Mortimer-Lee, Patricia Sanchez Juanino
•
Using our Global Econometric Model, NiGEM, we estimate that the conflict in Ukraine could
reduce the level of global GDP by 1 per cent by 2023, which is about $1 trillion off global GDP
(Figure 1) and add up to 3 per cent to global inflation in 2022 and about 2 percentage points in
2023.
Russia and Ukraine are important suppliers of commodities, including titanium, palladium, wheat,
and corn, and we envisage supply chain problems intensifying for users of such commodities,
including car, smartphone, and aircraft makers.
Europe is the region affected most, given trade links and reliance on Russian energy and food
supplies; emerging markets are affected less than advanced economies.
We expect higher public spending to support a massive inflow of asylum seekers from Ukraine and
to bolster military spending, which will limit adverse effects on European GDP, though both are
likely to add to pressure on resources and therefore inflation.
The sanctions costs to Russia are partly offset by higher prices for gas and oil exports but the net
effect on the economy will be negative with Russian GDP expected to contract by 1.5 per cent this
year and more than 2.5 per cent by the end of 2023.
Russian inflation is expected to soar above 20 per cent this year. Western inflation to go still higher
with recession risks mounting.
We see the impact on the UK could be to reduce GDP growth by around 0.8 per cent to 4.0 per
cent in 2022 and to 0.5 per cent in 2023.
For the UK, we now expect inflation to average 7 per cent in 2022 and 4.4 per cent in 2023, up
from 5.3 per cent and 2.7 per cent, respectively, in our February Outlook.
The war intensifies the dilemma facing monetary policy makers since it will add to inflation but
weaken growth and damage consumer and business confidence, already undermined by Coviddriven price increases.
Our advice is for central banks to proceed carefully but to use communication to signal that any
delays in rate hikes are merely postponements, not cancellations.
•
•
•
•
•
•
•
•
•
Figure 1 The GDP cost of the conflict for the global economy
World
United States
United Kingdom
Eurozone
Russia
Per cent diff. from base
0.0
-0.5
-1.0
-1.5
-2.0
-2.5
-3.0
2022
1
2023
This simulation is conducted in NiGEM and is available to model subscribers on request. Contact Iana Liadze
for more information (enquiries@niesr.ac.uk).
1
National Institute of Economic and Social Research
Policy Paper no. 32
Source: NiGEM simulations
2
National Institute of Economic and Social Research
Policy Paper no. 32
The main impact of the Russia/Ukraine conflict on the world economy is through higher prices
for energy and weaker confidence and financial markets, bolstered by strong international
sanctions against Russia. Ukraine is not a significant trading partner for any major economy,
Russia has a great exposure to the European Union and the UK. Countries such as China, US,
Germany, France and Italy represent one of the major import partners for Russia, where Russian
demand accounts for between 1-3.7 per cent of its GDP (Figure 2). Russia’s share of global GDP
was expected to be 1.6 percent in 2022, according to the International Monetary Fund (IMF),
whereas Ukraine’s economic output was predicted to account for 0.2 percent of world
production. While the Ukrainian and Russian economies are in aggregate small in relation to the
global economy, they are significant in some key areas, particularly energy and food. The
conflict’s impact on commodity prices and therefore household spending is more important than
potential contagion through trade linkages with other nations. We have estimated these
spillover effects using the National Institute Global Econometric Model (NiGEM).
4.0
3.5
3.0
2.5
2.0
1.5
1.0
0.5
Finland
Rest of the
World
Spain
United Kingdom
India
Czech Republic
Ukraine
Netherlands
Vietnam
Poland
Kazakhstan
Turkey
Japan
South Korea
France
Italy
Belarus
United States
Germany
0.0
China
2020, per cent of Russian GDP
Figure 2 Russia imports by country
Source: authors’ calculations based on data from Trading Economics.
One important channel of trade spillovers is agricultural exports. According to the US
Department of Agriculture, Russian and Ukrainian wheat exports are about a quarter of the
global total (USDA, 2022). There are also significant exports of corn and other coarse grains,
with Ukraine and Russia accounting for nearly a fifth of global exports. About 80 per cent of
exports of sunflower oil are accounted for by Ukraine and Russia. Sanctions and disrupted
supplies would lead to higher prices for wheat and other grains, adding to already strong
inflationary pressures in the global economy. There could also be adverse political implications
in some emerging economies that rely on imported grain and where food is a high share of
household spending.
In the UK, bread and cereals have a weight of 2.1 per cent in the CPI. While flour prices move
closely with wheat prices, this is less true for bread, where the cost of production, ingredients,
packaging, and advertising mean that flour is a relatively small proportion of the cost of a loaf of
bread (ADHB, 2020). However, higher energy costs mean the cost of baking and transporting
bread has risen, and with global supplies already tight, pass through-to retail prices seems likely
to be noticeable and might add 0.1 per cent or so to inflation. Higher food prices could have a
much more important effect on emerging markets importing grain from Ukraine and Russia,
such as Egypt and Bangladesh, where food is a much larger share of the CPI basket.
3
National Institute of Economic and Social Research
Policy Paper no. 32
Further up the tech scale, Russia is a major producer of palladium, used in engine exhausts to
reduce emissions, where it produced 40 per cent of global mine production, and about 10 per
cent of global platinum supply. Russia and Ukraine produce about 15 per cent of global supply
of titanium sponge, used in aircraft. Russia accounts for about 13 per cent of global fertilizer
supplies. Disruptions to global supplies of these commodities, added to existing supply chain
problems, have the potential to heavily disrupt specific industries and prolong shortages, for
example of cars, thus helping to keep prices high.
While exposure to Russian real activity and demand might alone not be material enough to
significantly disrupt the global economy, Russia’s involvement could also have indirect effects
on the world due to Russia being one of the world’s largest oil producers and energy exporters.
Should a military conflict lead to new international sanctions being imposed on Russia, those
sanctions could target Russia’s ability to export oil and gas with an ensuing escalation on energy
prices.
abs diff. from base, percentage points
Figure 3 The inflation cost of the conflict
3.5
24
3.0
21
18
2.5
15
2.0
12
1.5
9
1.0
6
0.5
3
0.0
0
World
United States
United Kingdom
2022
Eurozone
Russia (RHS)
2023
Source: NiGEM simulations
We have seen the Brent oil price surge to over $100 per barrel, the highest since 2014. Changes
in crude oil represent about 40 per cent of the changes in the cost of fuel at the pump in the US,
but far less in Europe, where the tax content is significantly higher. We assume that the oil price
jumps by $40 per barrel in our simulation. We expect that this surge will result in US inflation in
averaging 7.1 per cent in 2022 and 3.5 per cent in 2023, compared with 4.6 per cent and 2.5 per
cent, respectively, in our February forecast. In the euro area, we expect inflation of 5.5 per cent
in 2022 and 2.1 per cent in 2023, as against the forecasts we had of 3.1 per cent in 2022 and 1.3
per cent in 2023 in the February forecast.
For the UK, we now expect inflation to average 7 per cent in 2022 and 4.4 per cent in 2023, up
from 5.3 per cent and 2.7 per cent, respectively, in February (Figure 3).2 Inflation peaks at 8.1
per cent in 2022 Q3, 2.3 percentage points higher than at the time of our February forecast. The
simulation assumes the Monetary Policy Committee (MPC) responds strongly to the rise in
2
The behaviour of the UK inflation is a combination of the UK being a small open economy, with the import
prices increase having a larger impact on headline inflation in the short-term, and regulatory assumptions
embedded in the baseline.
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National Institute of Economic and Social Research
Policy Paper no. 32
inflation. As argued by Stephen Millard at the Treasury Select Committee on 28 February, the
MPC may decide to raise interest rates more gradually and by less than is implied by our
simulation on account of the ongoing uncertainty and the possibility of a recession. In that case,
it is possible that inflation may peak at a higher rate.3
Regarding our modelling assumptions, there are several channels to consider.
First, the economic sanctions on trade to Russia. More than 80 per cent of Russia’s daily foreign
exchange transactions and half of its commerce is in US dollars. The United States, the European
Union, the United Kingdom, Australia, Canada, and Japan have declared intentions to target
banks and rich individuals, while Germany has put a stop to a major Russian gas pipeline project.
Russian central bank reserves abroad have been frozen, and its banks have limited access to the
international payments system SWIFT, though energy transactions and payment of gas bills will
still be allowed. These sanctions, which are more severe than the ones imposed in 2014
following the Russian annexation of Crimea, have been deployed in a first tranche, targeting
some of Russia’s state-owned banks block it from trading in its debt on US, European and
Japanese markets.
The EU is also restricting access to European capital markets, preventing access to funds stored
by EU banks, and prohibiting commerce between the EU and the two rebel-controlled
territories. A partial closure of SWIFT to some Russian banks and the freezing of Russian central
bank assets puts in the spotlight on Western bank claims on Russian entities where, according
to the BIS, the largest exposures are for banks in Austria, France and Italy. Russian bank
subsidiaries outside Russia are facing severe stress, according to the ECB, and may be forced to
shutter.
Figure 4 The GDP cost of the conflict in Russia, by type of shocks
4
Per cent diff. from base
3
2
1
0
-1
-2
-3
-4
-5
-6
2022
Energy price
Inv. Premia
2023
Population
Gov. expenditure
Trade & Exch. rate premia
Total
Source: NiGEM simulations
Russia might face a prohibition on financial transactions involving US dollars, as well as a
restriction in hi-tech commerce with the US and Europe. The United States, for example, might
3
This peak is in line with Stephen Millard’s evidence at the Treasury Select Committee on February 28 th,
2022. Supply bottlenecks and rises in the prices of other (non-energy) commodities mean there is a risk
inflation could peak at a higher rate, possibly as high as 11%, but this is not our central expectation.
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National Institute of Economic and Social Research
Policy Paper no. 32
prohibit corporations from selling semiconductor microchips to Russia. This sanction would
affect not just Russia’s defence and aerospace sectors (worth USD 6.25 million of Russia’s
imports), but its whole economy. Overall, we expect economic sanctions could result in a
curtailment of Russian imports of up to 30 per cent, though the extent of circumvention of
restrictions through trade conducted through third countries makes this difficult to gauge.
Overall, we see the war contributing to a fall in GDP in Russia (relative to base) of 1.5 per cent
in 2022 and 2.6 per cent in 2023. Russian inflation will spike due to higher import prices
following the fall in the rouble and due to higher inflation expectations (Figure 4). The adverse
effect will result in lower confidence, weaker real incomes, and disrupted trade. The overall
effect on Russia’s GDP is not going to be entirely cushioned by higher Russian revenues from
exports of energy. If sanctions were to extend to Russian energy exports, the implications for
the Russian economy would be much more severe, but the cost to the West would be still higher
energy prices and a bigger growth hit, increasing the chances of recession accompanying
significantly stronger inflation.
Secondly, significantly higher energy prices will feed into inflation. In the US, for instance, in the
CPI relative importance of energy is 7.3 per cent, with energy commodities, such as fuel,
accounting for 4 per cent and energy services such as electricity and piped gas 3.3 per cent. In
the UK electricity, gas and other fuels’ account for 3.3 per cent of the CPI with fuels and
lubricants accounting for a further 2.7 per cent. Because many of the world’s economic
development engines, such as China, Japan, and Europe are net energy importers, increased oil
costs will limit global growth. The US is self-sufficient, but higher oil prices will transfer income
away from consumers to producers, with a potential adverse effect on demand there also.
Meanwhile the increased income of energy producers will not be spent immediately, meaning
that the oil price shock transfers income from spenders to savers, thus subduing global GDP.
The European Union is the most vulnerable of the major economies, not only to increasing costs,
but also to the risk of energy shortages. Almost one quarter of the EU’s crude oil imports from
outside the EU, and almost half of the EU’s imports for natural gas, come from Russia. The EU
energy dependency rate, measured by the share of net imports (imports minus exports) in gross
inland energy consumption (defined as the sum of energy produced and net imports), shows that
the EU relies upon imports to meet more than 60 per cent of its energy needs. This means that
the reaction to a surge in energy prices in the EU depends not only on the energy intensity of
imports of EU Member States but also the share of imports from Russia. European reliance on
Russian gas varies from zero in Spain to about 40 per cent in Germany and Italy but much higher
in eastern Europe such as Czech Republic and Bulgaria. With summer coming, gas supply
shortages in 2022 may not disrupt the economy too much, but the most crucial period if there
are interruptions to gas supplies will be next winter. Rebuilding gas in storage over the summer
will keep gas prices elevated. There is likely to be a significant investment in green energy in
Europe and on port facilities to import LPG to reduce reliance on Russia, though this will take
some time to build up: this will further add to GDP.
Were sanctions to be placed on Russia’s energy exports (i.e., Western nations could refuse to
buy oil and gas from the big Russian energy giants such as Gazprom or Rosneft) or were Russian
gas exports used as a tool for leverage through lower supply, European energy prices would rise
precipitously. If that happens, European energy prices will probably exceed the $140 per barrel
observed in 2008.
Third, there is the problem of asylum seekers. The UNHCR says there could be 4 million refugees
as the crisis unfolds. Shorter term, there will likely be considerable migration from Ukraine into
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Policy Paper no. 32
western Europe, with Poland likely amongst the most important recipients in the first instance.
In 2021, more than 600,000 people left Ukraine, not to return. In 2015, almost a million and a
half migrants sought refuge in Europe during conflict in Syria, Afghanistan and elsewhere.
Depending on what border controls are erected in Ukraine, how long the conflict lasts, and how
the economy settles down after the war, large scale emigration seems likely. We have assumed
a net outflow of two million a year in 2022 and 2023. This will present substantial challenges,
mainly for western Europe, in terms of finding homes, public finances, providing jobs, and
possible social tensions. The OECD in 2017 calculated that the initial year cost of an asylum
seeker was about €10,000. In 2016, asylum seekers cost Germany over €20bn (Kroet, 2017).
The fiscal cost of asylum seekers in Germany in 2015 was about 0.5 per cent of GDP, in Sweden
about 1.35 per cent of GDP; and in Austria in 2017 and 2018, the cost was about three-quarters
of a percentage point of GDP (OECD, 2017). Evidence suggests that these costs decrease in
subsequent years as asylum seekers find jobs and add to tax revenues (Joakim, 2021; d’Albis et
al., 2018). We see the problem of Ukrainian refugees as a European problem and would urge
centralised funding in the EU, to alleviate the burden that would otherwise fall
disproportionately on some Eastern EU countries, like Poland. In our simulations, we have
increased public spending by 1 per cent of GDP in countries neighbouring Ukraine and added to
public expenditure equivalent to 0.5 per cent of GDP elsewhere in Europe.
The conflict is expected to increase spending not related to the need of first assistance of
refugees, but also defence expenditure. As China rises and increasingly challenges the US in Asia
Europe, faced with a belligerent Russia, will have to spend considerably more on defence than
hitherto. That will present considerable fiscal problems when it is already facing demographic
challenges and some key players face profound debt problems coming out of the pandemic. For
instance, NATO EU countries which are particularly exposed to the crisis, such as Germany,
have boosted military spending, finally giving in to the US pressure to bring defence expenditure
close to 2 per cent of GDP. There is a strong likelihood that defence spending will increase in
NATO, over the next few years: we have assumed this would amount to 0. 5 per cent of GDP
over two years roughly equal to a 30 per cent rise in defence spending in Western Europe, where
most countries do not meet the NATO target of a spend of 2 per cent of GDP, with the average
being 1.6 per cent. Outside of NATO, countries such as Sweden, Finland and several Eastern
European countries are also likely to drive a significant acceleration in defence spending in
response to the Russia-Ukraine crisis.
Fifth, there is political risk and uncertainty. Russia’s Ukraine invasion has up-ended many key
western assumptions about the post -Cold War order. Indeed, the invasion symbolizes the shift
in global power and a move away from the unipolar world that followed the collapse of the Soviet
Union. U.S. hegemony has withered, and we are in a multi-polar rather than unipolar world,
which is more dangerous (Mearsheimer, 2019). Uncertainty may drive up savings ratios and
make firms more reluctant to invest. On the other hand, the crisis is another potential challenge
to globalization, coming after trade disputes and Covid, and so manufacturers may be tempted
to re-onshore some facilities.
With the freezing of Russian central bank assets, its banks’ access to SWIFT being restricted,
and Germany and the EU being willing to supply arms to Ukraine, risks in Russia are clearly more
profound than elsewhere in Europe, with the rouble plunging on foreign exchanges (we expect
it to continue its descent) and the central bank hiking interest rates to 20 per cent to contain
inflationary pressure. Russian bank subsidiaries abroad have seen share prices fall precipitously
and there have been queues at cash machines in Russia on worries of bank liquidity problems.
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National Institute of Economic and Social Research
Policy Paper no. 32
Lack of access to imports will result in supply chain problems, though Russia will seek to source
supplies through countries not applying sanctions.
In Russia, inflation is likely to surge while the crisis will damage economic activity, though higher
oil prices will buoy revenues. An increase in political risk and uncertainty mean inward foreign
direct investment flows will soon dry up and restrictions on exports would increase the reliance
on money printing to finance the war, increasing upside inflation risks. Worries over
counterparty exposures to Russian entities will keep new lenders cautious and those expecting
debt payments nervous. Risk premia on some European banks have risen, and share prices have
fallen. Markets will be watchful for any sign of default or liquidity problems for firms with strong
links to Russia.
Our recent analysis in the Winter 2022 Global Economic Outlook illustrated GDP growth and
inflation risk estimates for both the global economy and the Euro Area based on the possibility
of continued natural gas price increases starting from 2022Q1 (Macchiarelli et al., 2022). Here,
we supplemented this price risk with a 4 percentage point investment premium shock in Russia,
2 percentage point in Ukraine, both equivalent to what observed during the financial crisis, and
0.5 percentage point applied to all EU countries. This shock can be thought of as representing
an escalation of the situation in the Ukraine that represents a defence threat in the European
immediate neighbourhood, as it will increases country risks.
We have already seen that stock prices globally have been adversely affected by uncertainty
over Ukraine. A partial or full Russian occupation of Ukraine would raise serious questions
about what the reaction of the West would be in terms of stationing more troops in Poland and
other countries adjacent to Ukraine, Belarus, and Russia, and what the Russian subsequent
actions could be, with particular questions over the Baltic states. In these circumstances, risk
premia would be high, and investment might be deterred, in line with our assumed increase in
risk premia.
Figure 5 The Rouble and energy price inflation
140
120
100
80
60
40
20
2020
Rouble per US$
Rouble per US$ (baseline)
2021
2022
2023
Global oil prices [US$ per barrel year]
Global oil prices [US$ per barrel year] (baseline)
Source: NiGEM simulations
In our simulation, the downside range of the scenario implies that global GDP declines by 0.5
per cent in 2022 and close to 1 per cent compared with base in 2023, about 1.5 per cent lower
for the Euro Area in 2023; Russian GDP is 1.5 per cent below our baseline this year, with the
negative impact estimated to be up to 2.6 per cent next year. Increasing announcements of
Western corporate withdrawals from Russia will reduce foreign direct investment, lead to
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National Institute of Economic and Social Research
Policy Paper no. 32
outflows of capital that will soften the exchange rate and reduce know- how and technology
transfer to Russia, reducing its long-term potential growth rate. Nearer term, component and
shipping container restrictions could exacerbate supply-chain problems, reducing activity and
increasing upward price pressures. The unprecedented actions against the Russian central bank
will act to curb availability of foreign exchange, which could crimp imports, while being a
potential source of risk in the domestic banking system, where demand for liquidity has sharply
increased, draining funds from the banks and limiting credit. These effects are difficult to
quantify but suggest that the risks to our Russian growth outlook are on the downside and on
inflation on the upside. The rouble is expected to plunge by up to 70 per cent as the result of an
increase in risk and higher Russian inflation, which could be in excess of 20 per cent this year
(Figure 5). As the result of the conflict, the UK economy could experience up to 2 percentage
points higher inflation this year and the next.
The broad implications of this scenario are reminiscent of the 1970s energy crisis, when OPEC
countries effectively raised the price of oil, and subsequent oil price shocks. Higher prices and
supply limitations severely disrupted economic activity in the global economy and led to higher
inflation, which would also increase the cost of living and could further squeeze household
consumption.
The ECB recently opined that high energy prices would knock 0.2 per centage points off
European growth. If gas supplies were interrupted and that if there were rationing the ECB said
that the impact could be much worse, calculating that a gas rationing shock could knock GDP
down by 0.7 percentage points (ECB, 2022). If Russian gas supplies were to cease entirely, the
EU could go into recession. The UK draws most of its gas imports from Norway and produces a
sizeable chunk of its own gas needs, so interruptions in supply would be less likely, but it would
suffer from higher wholesale gas prices. With Ofgem limiting gas price hikes to households,
higher wholesale gas prices would pressure the financial position of gas suppliers and, if it were
to act to moderate the effect of higher prices, the government (Mortimer-Lee and Patel, 2022a,
2022b). Gas prices at the household level would likely rise when Ofgem reviews price limits
again in October.
Near term, President Putin’s demands over recent weeks extended beyond Ukraine, and it
should be expected that he will use any military victory to pressure NATO for concessions
elsewhere in Eastern Europe, with the clear threat that if it does not get what it wants, further
aggression is likely. His calculation will be that the US will not risk nuclear war with Russia over
the Baltics, say, or over Sweden and Finland joining NATO. We thus seem to be in for an
extended period of high tension where Russia repeatedly tries to strong-arm the West. Those
tensions will increase if, after a potential successful occupation of Ukraine, arms flow to Ukraine
resistance groups from neighbouring countries.
The war in Ukraine represents a challenge for the global economy with only a few winners –
energy exporters – and many losers. It calls into question monetary policy makers’ strategy since
it will simultaneously harm growth and put upward pressure on inflation when inflation is
already at high levels. In the short run, higher rates cannot mute the higher prices resulting from
the war but could exacerbate any fall in confidence and activity. Longer-term, lower activity will
help to mute the second-round effects on prices so for policy-relevant horizons, monetary policy
may not need to respond that much to the war itself. The dilemma for central banks is what to
do about rate hikes already in the pipeline. The Gulf War contributed to the early 1990s
recession and its end helped the recovery (Silk, 1991). In the face of uncertainty about the
impact on activity, and about the possibility of a gas supply interruption in Europe, our advice is
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National Institute of Economic and Social Research
Policy Paper no. 32
for policy makers to wait for more information about the extent and effects of the war before
raising interest rates. However, delay risks entrenching inflation, so that if they feel they must
raise rates in the months ahead we would counsel doing so only slowly while they assess the
impact on confidence and activity of the war and its squeeze, through energy, on real incomes.
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Russian-Ukraine 2022 War: A Review of the Economic Impact of RussianUkraine Crisis on the USA
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DOI: 10.14738/assrj.93.12005
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Advances in Social Sciences Research Journal – Vol. 9, No. 3
Publication Date: March 25, 2022
DOI:10.14738/assrj.93.12005.
Mbah, R. E., & Wasum, D. F. (2022). Russian-Ukraine 2022 War: A Review of the Economic Impact of Russian-Ukraine Crisis on the
USA, UK, Canada, and Europe. Advances in Social Sciences Research Journal, 9(3). 144-153.
Russian-Ukraine 2022 War: A Review of the Economic Impact of
Russian-Ukraine Crisis on the USA, UK, Canada, and Europe
Ruth Endam Mbah
Department of Business, Bethany College, Lindsborg, KS, USA
Divine Forcha Wasum
CIFE, Centre International de Formation Européenne
ABSTRACT
The popular belief worldwide is that the global financial sanctions unleashed on
Russia, the seizure of assets and properties of the oligarch friends to President
Putin for Russia’s current attack on Ukraine will cripple the Russian economy and
hinder any further attack on Ukraine. This is logical reasoning, however, the impact
of this crisis extends to the global economy. Thus, the purpose of this study is to
review the economic impact of the 2022 Russia-Ukraine war on key global economic
actors, specifically, countries that have unleashed financial sanctions on Russia as
punishment like the USA, Canada, UK, and EU. This study uses the Social Contract
and the Interest Group Theories to explain the rationale behind this crisis from its
origin. Evidence from reviewed literature shows that although the consequences of
this crisis have had a fatal impact on Russia’s economy, the world economy has
begun to feel the impact of this crisis. Inflation which is already ravaging most
global economies is steadily rising due to the sharp increase in oil, natural gas, and
food prices just a few days into this crisis. Experts expect a negative impact on
household consumption, increase uncertainty, unpredictable stock swings, supply
chain disruptions, bulging utility bills, decreased investment due to political risks,
and economic growth impediments. It is therefore vital for policymakers
worldwide to seek alternative means of survival if Russia decides to react by
restricting its export of vital global commodities of which it is a significant export
leader like oil, natural gas, wheat, neon, titanium, palladium, and ammonium
nitrate.
Keywords: Russia-Ukraine war, Russia Invasion, Social Contract Theory, Economic
Impact, Financial Sanctions, Interest Group Theory
INTRODUCTION
The subject of Ukraine’s sovereignty was still questionable even in the wake of the December
1991 Independence referendum due to Russia’s prolonged and open reluctance (DragnevaLewers & Wolczuk, 2016). After the breakdown of the socialist system, former Eastern
European satellites of the Soviet Union have systematically integrated towards Western
institutions, such as the EU and NATO. Russia, however, did not accept the Maiden
revolutionary removal of the democratically-elected Yanukovych regime and the
intensification of Western orientation in Ukraine (Pabriks & Kudors, 2015, p.78). Russia’s
hostility towards Ukraine has often been pointed out by the western world (Charap & Darden,
2014). In Russia’s eyes, Ukraine was of vital importance, and hence, Russians considered this
Services for Science and Education – United Kingdom
Mbah, R. E., & Wasum, D. F. (2022). Russian-Ukraine 2022 War: A Review of the Economic Impact of Russian-Ukraine Crisis on the USA, UK, Canada,
and Europe. Advances in Social Sciences Research Journal, 9(3). 144-153.
separation as abnormal (Dragneva-Lewers & Wolczuk, 2016). Several mainstream historians,
political scientists, scholars, journalists, and; government leaders have thought that the subject
relating to the relationship between Russia and Ukraine (Ukrainian-Russian relationship)
needed a significant consideration, especially addressing the ‘Ukrainian side of the equation’
(Sol’cÌŒ anyk, 2001, p. 1).
Abnormality, instability, and conflict are what the Ukrainian-Russian relationship has been
since the fall of the Soviet Union (Kyiv and Moscow disagreement). Among a couple of other
problems that have strained the Ukrainian-Russian relationship, the following have played a
significant role: formal Soviet Union asset/debt disposal; Ukraine’s significant energy debt;
eastward expansion of NATO, border demarcation between both nations; and the situation of
the Russian minority in Ukraine (Sol’cÌŒ anyk, 2001, p. 9). Malyarenko and Wolff (2018) state that
Russia’s use of “violent civil conflict in countries in its so-called Near Abroad as a means to
extend its influence in the post-Soviet space and simultaneously to reduce that of the West…
Moscow prefers a stable and friendly neighborhood and seeks to avoid a stable but hostile proWestern neighborhood.” These authors equally expose the vulnerability of Ukraine as it is being
pushed/pulled from diverse directions- EU and NATO from the west and Russia from the east
coupled with Ukraine’s internal challenges like a socio-economic crisis, weak institutions, and
internal division. The late 2013 protest in Ukraine as a result of its government’s denial to sign
a new agreement with the EU did not only pull global attention but triggered significant
challenges to its statehood leading to more internal instability (Dragneva-Lewers & Wolczuk,
2016). The end product of this protest was not only the escape of president Yanukovych from
Ukraine but the occupation of Crimea by Russia and Russia’s propagation of separatist
movements in the Eastern part of Ukraine as an attempt to protect the ethnic Russian minority
(Korovkin & Makarin, 2019).
The 2014 crisis in Ukraine led to the overthrow of President Viktor Yanukovych (an ally to
Russia’s interest); the signing of a trade agreement with the EU as the first path towards
membership by the interim government (pro-western) in February; and Russia’s capturing of
Crimea in April of the same year. Between 2014 and 2015 the Minsk Accord (cease-fire) was
signed by Russia, Ukraine, France, and Germany; and by April 2019, Volodymyr Zelensky
(former comedian) was voted as President of Ukraine (Bigg, 2022). In January of 2021,
President Zelensky requested to join NATO resulting in Russia massing of troops at Ukraine’s
border with the excuse of training exercise, hence, a growing tension between the Western
countries, Russia and Ukraine leading to Russia’s invasion (“special military operations”) of
Ukraine on February 24, 2022. In response to this recent attack, Ukraine’s Western allies
announced heavy financial sanctions on Russia like “ restrictions on Russia’s central bank and
expelling key banks off the main global payments system” (Aloisi & Daniel, 2022).
PROBLEM STATEMENT/PURPOSE/CONTRIBUTION OF THE STUDY
Russia’s 2022 attack on Ukraine and the intense economic impact on Russia due to the fierce
financial sanctions unleashed on it, “are not only inflicting an economic catastrophe on
President Vladimir Putin’s Russia. The repercussions are also menacing the global
economy, shaking financial markets and making life more perilous for everyone” (Wiseman,
2022). Russia and Ukraine are significant players in the export of oil, natural gas, coal, wheat,
and other commodities in the global market. Mark Zandi, chief economist at Moody’s Analytics
reports that both countries produce 70% of global neon which is a vital commodity in the
URL: http://dx.doi.org/10.14738/assrj.93.12005
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Advances in Social Sciences Research Journal (ASSRJ)
Vol. 9, Issue 3, March-2022
production of semiconductors leading to panic with the current crisis as nations and
automakers especially are already witnessing a scarcity in computer chips. Zandi equally
observes that both countries are responsible for 13% of the global supply of titanium which is
used in the manufacturing of passenger jets as well as 30% of global palladium used in cars,
mobile phones, and dental fillings, thus, the impact of this crisis on global supply chain
(Wiseman, 2022).
Several studies have been published on the impact of past Ukraine- Russia conflicts before the
most recent crisis in 2022. Korovkin and Makarin (2019) examine the economic impact of the
2014 Russia-Ukraine conflict as trade exchange still took place between both nations despite
the beginning of the conflict. Very little academic research compilation has been made on the
2022 Russia-Ukraine crisis given that is an ongoing crisis with constantly updated information
flooding in via several news outlets. Moreso, a lot of attention is being given to the impact of the
current Russia-Ukraine crisis on Russia and Ukraine. Thus, the purpose of this study is to collate
the most recent information on the current global economic impact of this crisis with a focus
on the USA, Canada, the Uk, and European economies.
THEORETICAL FRAMEWORK
This study is based on the Social Contract Theory and the Interest Group Theory. The Social
Contract is a long-standing political theory or philosophy established by some of the founding
fathers of modern political philosophers – Thomas Hobbes (famous for ‘Leviathan), John Locke
(known for ‘Two Treaties of Government’), and Jean Jacques Rousseau (renowned for ‘The
Social Contract’) (Mbah, 2021a). Thomas Hobbes in his publication titled ‘Leviathan’ portrays
the State of Nature as a chaotic lawless society in which mankind constantly lives with the ‘fear
of death and as such gets into a Social Contract as a pathway to peace (preservation of lives and
property). In an attempt to preserve their lives and properties, citizens (subjects) voluntarily
give away their rights and freedom in its entirety to a sovereign power who in return must
ensure their security (Mbah, 2021a; Ebenstein & Ebenstein, 2000, p. 412).
On the other hand, John Locke does not present the State of Nature as pessimistic as Thomas
Hobbes does. The State of Nature in Locke’s view is a more peaceful environment without
appropriate established institutions that can enforce law and order in an event of a dispute.
Thus, the Social Contract is needed to ensure established governmental institutions
(legislative) with the responsibility of enforcing law and order. According to Locke’s Social
Contract, legislators are trustees who ought to serve in the interest of those who voted them
into power (Ebenstein & Ebenstein, 2000, p. 430). Meanwhile, Jean Jacques Rousseau’s State of
Nature is neither as optimistic as that of Locke nor as pessimistic as that of Hobbes. His State of
Nature is characterized by each person following their interest to the point that they realize
that doing so is not effective, thus the need for a Social Contract. Unlike Locke, Rousseau
postulates that in the Social Contract, the citizens do not surrender their will to a specific
individual but rather to the community (social organizations) who they expect to ensure their
liberty, rights, and freedom (Mbah, 2021a; Elahi, 2014; Ebenstein & Ebenstein, 2000, p. 498).
Simply put, citizens of every nation get into a Social Contract either by fully or partially
surrendering their rights to the government and its institutions in exchange for policies and
laws that guarantee the preservation of life and property. This explains the continuous tension
between Russia and Ukraine over the years as each party is seeking to preserve the interest of
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and Europe. Advances in Social Sciences Research Journal, 9(3). 144-153.
their respective subjects (Social Contract). In examining the 2014 Russia-Ukraine crisis, Harris
(2020) argues that “while the Ukrainian crisis is not an ethnic conflict per se, nationalism was a
significant contributory factor in fueling the conflict and remains a relevant obstacle to its
resolution.” In a recent address, Antony Blinken, the US Secretary of State stated, “Russia claims
that this crisis is about its national defense, about military exercises, weapons systems, and
security agreements” (U.S. Department of State, 2022).
Apart from looking at the Russia-Ukraine tension in the light of the Social Contract theory, this
persistent tension can be analyzed using the lenses of the Interest Group theory. According to
Birkland (2016, p.158), an interest group is “a collection of people or organizations that unite
to advance their desired political outcomes in government and society.” The power of interest
groups can not be undermined because individual voices become stronger when they get
together into groups, thus, the reason why interest groups are important in the policy process.
These groups can constitute economic interest groups, political interest groups as well as public
interest groups with the sole role of protecting the interest of their respective members (Mbah,
2021b; Birkland, 2016, p. 160-161). Despite the ‘divorce’ between Ukraine and Russia,
Ukraine’s progressive Euro-Atlantic amalgamation since the 2004 Orange Revolution has
resulted in incessant tension between both countries. The European Union’s interest in a Wider
Europe Policy has tempered with regions which Russia considers as ‘Sphere of its National
Interests, (Samokhvalov, 2007). In an attempt to examine the interest of each party in the Wider
Europe or Post-Soviet Space, Samokhvalov (2007) terms the Russia-EU-Ukraine triangle a
sought of ‘zero-sum game.’ The author states that even though the
EU and Russia would like to avoid any clash in the Wider Europe, both sides have been pursuing
their strategies with the same goal in mind- shaping the Post-Soviet Space (PSS) according to
their vision… Ukraine’s European project as it is currently evolving with the support of Brussels
tends to undermine the main component of Moscow’s regional project for PSS… Therefore, as
a matter of urgency, the EU needs to think over its foreign policies in the Easter Neighborhood
with great care, bearing in mind their impact on relations with Russia, as well as Moscow’s
possible response.
The consequences of each party fostering its interest are the result of the current RussiaUkraine 2022 crisis. According to Pabriks and Kudors (2015, p. 78-79), before Russia escalated
the invasion of Ukraine, NATO sources indicate Russia has not only supported separatists in
Ukraine, but Russian Special Forces and troops have participated in the annexation of Crimea
for the Russian Federation and fight in eastern Ukraine. They suggest that the obvious
involvement of Russia in the Ukrainian conflict has rapidly eroded the EU’s trust in Russia and
raised questions as to whether Russia can still be regarded as a reliable partner for the EU and
if the EU should decrease its economic dependence on the Russian Federation
LITERATURE REVIEW: THE ECONOMIC IMPACT OF RUSSIA-UKRAINE 2022 CRISIS
Countries worldwide are barely recovering from the economic impact of the covid-19
pandemic, the recent 2022 Russia attack on Ukraine could worsen the situation as global
economies may witness yet another rise in commodity prices and ‘supply chain chokeholds.’
Russia is known as the ‘world’s largest supplier of wheat and in combination with Ukraine, both
countries account for almost a quarter of the sum of global export (Cohen & Ewing, 2022).
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The Economic Impact of the Russia-Ukraine Crisis on the USA
Although Russia’s attack on Ukraine is occurring several thousands of miles away from even
the nearest American city, its economic impact will be felt by millions of USA households since
the global economy and financial markets are interrelated (Egan, 2022). A reporter from CNN
Egan (2022) reports the words made by RSM economist Joe Brusuelas who said, “The average
American household is going to bear the burden of Vladimir Putin’s invasion of Ukraine.”
Smialek and Swanson (2022) of the New York Times report that a potential consequence of the
Russi-Ukrain crisis could be a rise in inflation due to an increase in the prices of oil and food
worldwide and would increase uncertainty in the USA. They suggest that even though unlike
Europe that imports a significant amount of its food from Russia (the world’s largest wheat
exporter), the USA imports very little from Russia but a “commodities crunch caused by a
conflict could have knock-on effects that at least temporarily drive up prices for raw materials
and finished goods when much of the world, including the United States, is experiencing rapid
inflation.” In other words, even though the USA imports an insignificant amount of oil from
Russia compare to Europe, the energy commodity market is global, thus, a change in the price
of oil in one part of the globe will eventually affect the prices of oil everywhere, including the
USA. This report also reveals that such worldwide unrest could prompt Americans to cut
consumption and other diverse economic activities leading to an impediment to the Federal
Reserve’s plans of increasing interest rates by March 2022.
Ivanova (2022) a reporter for CBS News reports that the price of oil which has been on an
increase over the past year has ‘hit an eight-year high’ due to the current Russia-Ukraine
tension and this rise in the prices might escalate if the tension becomes uncontrollable or if USA
policymakers push forward ‘another round’ of sanctions on Russia as predicted by experts. This
report equally reveals Patrick DeHaan, head of petroleum analysis at GasBuddy worry as he
says “ If Russia makes a run on Ukraine, we could see [oil prices] over $100 a barrel next week…
That $4 is something we haven’t seen in so long — it would cause shock waves across America…
If Russia’s economy is going down the tubes, they’re going to take the global economy with it.”
In the same light, JPMorgan equally warns that the price of oil could “easily” rise to $120 a barrel
because of this conflict (Egan, 2022). Analysts from Wall Street also expect USA stock indices to
remain unpredictable during the length of this conflict while economists fear that the conflict
will reduce the amount of money available to USA consumers for discretionary spending due to
the rise in commodities (Ivanova, 2022). An analysis by RSM reveals that if oil hits $110, the
‘year-over-year inflation rate could climb above 10%’ which has not happened since 1981 when
inflation climbed to 10% and not forgetting the fact that inflation is the ‘biggest problem facing
the US economy (Egan, 2022). A possible shortage in the global supply of vital metals like nickel,
aluminum, and palladium is powering the fear of inflation in the USA (Cohen & Ewing, 2022).
The Economic Impact of the Russia-Ukraine Crisis on Canada
Canada was the first western nation to acknowledge the independence of Ukraine on December
2nd, 1992 and both countries have had a close bilateral relationship since then. Based on this
relationship, Canada has dedicated more than $890 million in diverse forms of assistance to
Ukraine since January 2014 (Government of Canada, 2022). Experts are concerned about the
potential economic impact that the 2022 Russian attack on Ukraine could have on Canada
(inflation, cost of food, and immigration). A report from Neustaeter (2022), a reporter of CTV
News discloses that the Canadian government under the leadership of Prime Minister Justin
Trudeau is ‘prioritizing immigration applications’ for Ukraine citizens and it is worth noting
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and Europe. Advances in Social Sciences Research Journal, 9(3). 144-153.
that Canada has the biggest number of Ukraine immigrants outside of Russia of about 1.3
million Ukrainians. This report also discloses Sylvain Charlebois, Dalhousie University
professor of food distribution and policy worry about the impact of this crisis on “an already
fragile Canadian supply chain, especially when it comes to food prices.” The uncertainty
brought about by this current crisis has caused stocks to swing sharply and financials to
decrease in the past few days following the attack. An example is the fact that “the Canadian
dollar traded for 77.93 cents US Thursday compared with 78.63 cents US on Wednesday due to
the crisis” (Neustaeter, 2022). Experts predict that Canadians should expect a significant rise in
the price of gas given that Canada imports about $550 million worth of oil per year from Russia
as reported by the Canadian Association of Petroleum Producers. The head of the CanadaUkraine Chamber of Commerce voiced out the uncertainty that this crisis is causing on trading
relations with Canada as investors fear the political risk associated with investing in Ukraine;
“it’s very difficult. Investors are watching, especially with all the Western countries saying,
‘Don’t travel to Ukraine’” (Bharti, 2022).
The Economic Impact of the Russia-Ukraine Crisis on the UK
Just like many other western nations, the UK has been facing elevated and rising inflation with
prices increasing at a very fast rate in 30 years. Experts are concerned that the current attack
on Ukraine by Russia might push up the inflationary pressure in the months ahead and might
lead to higher interest rates as a response to higher inflation by the Bank of England (United
Kingdom Parliament, 2022). Like the USA, even though Russia is a significant exporter of gas to
several European nations, it is not to the UK but the impact of the sharp rise in oil prices in the
global market has equally affected the UK leading to a lot of uncertainty. An analyst from the
banking group Investec called Martin Young cautions that yearly household consumption of
fuel could reach £3000 (Jones, 2022). There is also a great concern about the increase of food
prices since Russia and Ukraine are both significant producers of diverse agricultural products
like wheat and a rise in inflation might place additional stress on both household and business
budgets in the UK (United Kingdom Parliament, 2022). Even though the UK produces 90% of
its wheat, farmers might have to pay more for fertilizer, which is one of Russia’s top export
commodity (Jones, 2022) and two-thirds of the ammonium nitrate fertilizers used by farmers
globally is from Russian as pointed out by British Meat Processors’ CEO, Nick Allen (Lanktree,
2022). A significant supply chain economist, Chris Rogers points out that the greatest economic
impact of this crisis on the UK and Europe in general “is very much going to be in terms of what
it means for supply chain cost inflation,” (Lanktree, 2022).
The Economic Impact of the Russia-Ukraine Crisis on Europe
Like the UK and many other nations worldwide, experts suggest that European nations will face
higher rates of inflation and a supply chain disruption due to Russia’s attack on Ukraine in 2022.
Saudi Arabia’s denial to release more oil supply to supplement that of Russia if its export
declines, would greatly impact the price of the commodity globally (Lanktree, 2022). A 2022
report from the European Council on Foreign Relations suggests that Russia’s attack on Ukraine
would significantly alter the way Europeans think about their safety since most of the “public
debate on the crisis has portrayed European governments as divided, weak, and absent” (
Krastev & Leonard, 2022). Russia is not only the world’s biggest exporter of natural gas and oil
but is the major exporter of these commodities to Europe (Bhattarai et al., 2022). Top EU
finance officials declared that although the current attack on Ukraine by Russia will slow down
the EU economic growth via rising energy prices and decreased business confidence, the
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“European Union is ready for it” (Thomas & Strupczewski, 2022). These authors also advise
that even though it would be costly to Russia, Russia (EU major energy exporter) might respond
to EU sanctions by restricting oil, gas, and coal exports to the EU, thus, leading to higher prices
on these commodities, uncertainty, and weaken consumption. European nations (import) rely
on Russia for about 25% of their oil and 40% of natural gas (Wiseman, 2022).
Christina Lagarde, the European Central Bank leader said, “What we know is that the two main
channels through which the euro area economy will be affected will be through energy, prices,
and confidence or the uncertainty channel; not so much through trade, which is limited
between Russia and the euro area… Persistent uncertainty will probably be a drag on
consumption and investment and will impede growth” (Thomas & Strupczewski, 2022).
Natural gas in Europe is about six times higher than what it was at the beginning of 2022 due
to Russia’s recent attack on Ukrain leading to a 20% rise in natural gas prices, thus, increasing
inflation and bulging utility bills (Wiseman, 2022). A forecast by the European Commission
reveals that the impact of Covid-19, supply chain limitations, and the rise in energy prices
(inflation) could drop the economic growth curve for all EU countries using the euro to 4.0% by
the end of 2022, which is below the 4.3% as predicted in November 2021 and this current
forecast is even more uncertain with Russia’s attack on Ukraine (Thomas & Strupczewski,
2022). In the same light, the chief economist at Berenberg bank voiced, “The drag from higher
prices and the negative confidence effect may lower real GDP growth in the eurozone from 4.3%
to 3.7% for 2022” (Wiseman, 2022).
CONCLUSION
The 2022 Russia-Ukraine war can be summarized in the words of Antony Blinken, the US
Secretary of State as he stated, “it’s bigger than a conflict between two countries. It’s bigger
than Russia and NATO. It’s a crisis with global consequences, and it requires global attention
and action” (U.S. Department of State, 2022). The global intensity of this cisis can be felt in
President Biden’s speech on March 08, 2022 as he said, “Russia’s aggression is costing us all,
and it’s no time for profiteering or price gouging” (The White House, 2022). Several articles
have focused on the impact of the Russia-Ukraine tension on both nations, with a primary focus
on Russia given the intense global financial sanctions currently plaguing its economy. Thus, to
deviate from the current trend of write-ups, this study is focused on the economic impact of the
recent 2022 Russia-Ukraine war on major global economic actors, specifically, those who have
unleashed intense financial sanctions on Russia like the USA, Canada, Uk, and the EU. We used
the Social Contract Theory and the Interest Group Theory in an attempt to explain the origin of
this conflict using a political philosophy lens. It is evident that each party Russia, Ukraine, and
NATO seek to secure the lives and properties of its citizens/members (Social Contract Theory)
but their strategies are stepping on each other’s interests (Interest Group Theory). Ukraine’s
interest in joining NATO is a threat to Russia, who “ has repeatedly turned away from
agreements that have kept the peace across the continent for decades. And it continues to take
aim at NATO, a defensive, voluntary alliance that protects nearly a billion people across Europe
and North America, and at the governing principles of international peace and security that we
all have a stake in defending” as stated by Antony Blinken (U.S. Department of State, 2022). This
resistance led to Russia’s February 2022 attack on Ukraine followed by severed global financial
sanctions unleashed on Russia by major global economic actors. Although these sanctions
would severely impact Russia’s economy, their impact would be felt globally. From the above
pieces of literature reviewed, it is evident that this crisis would lead to higher inflation,
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and Europe. Advances in Social Sciences Research Journal, 9(3). 144-153.
reduction in household consumption due to higher prices (oil, gas, wheat, minerals), supply
chain disruptions, uncertainty, economic growth impediments, reduction in investment, and
stock swings globally and in Europe in particular since both countries are significant exporters
to Europe. It is therefore important for policymakers in these countries that significantly rely
on Russia for vital commodity imports to begin negotiations on alternative means of survival if
Russia decides to react by punishing the west through restrictions on exports, as well as
sponsore ‘inhouse’ production of such vita commodities if possible. It is worth noting that is
study is limited to the economic impacts of the Russia-Ukrain war on the USA, Canada, UK, and
EU. Further research could focus on the political or social-cultural impact of this crisis.
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URL: http://dx.doi.org/10.14738/assrj.93.12005
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