Economic consequences in the EU during the conflict in Ukraine

The worst-case scenario was confirmed on February 24, 2022. The president of Russia, Vladimir Putin, decided to launch an invasion of Ukraine and at the same time test the reaction of the West and more specifically, NATO.

The United States, the European Union and other countries initially responded by applying economic sanctions to which, seeing the progression of the conflict, other packages of sanctions were added. It remains to be seen what Russia’s reactions to them will be since for the moment the centre of attention is on Ukraine, and the retorts such as charging gas and oil in rubles so as not to devalue the Russian currency and thus counteract the sanctions imposed reducing their impacts.

One of the first impacts of the belic conflict, apart from the humanitarian consequences and human lives that have been and will be lost, are the economic effects. The slowdown in imports and exports and the global spikes in oil prices (February 8%) and gas, raw materials and metals such as aluminium (3%) are just the first consequences that are being experienced.

The results of this war will go much further, as supply chains will also suffer and as sanctions and responses to them escalate, the costs will be higher, first of all for Russia, but also to some degree for the rest of the global economy.

The President of the Spanish Government, Pedro Sanchez has not hidden that the conflict “without a doubt” will have an impact on the Spanish and European economy (price increases, gas …) and has assured that the EU has been preparing the response for some time to take “as many measures as necessary to mitigate the economic and energy impact”.

One of the main points to highlight is the increase in the price of energy. This impact on the energy market is another scenario to analyse, because it can lead the markets to have to face a scenario of low growth and high inflation,  thus negatively affecting the global economy. To this toxic combination is added uncertainty.

In this energy situation, Europe is particularly vulnerable, since in recent years our continent has done little or nothing to minimise its dependence on Russian gas.

The question that arises is, how will the EU get rid of this dependence?

There is already a project on the table to reduce demand by two-thirds before the end of the year. And all the leaders also agree on the need for a progressive withdrawal.

But the idea of a total embargo will hardly succeed since France and Germany are already opposed to it.

On the other hand, the Germany announced as a measure the suspension of the start-up of Nord Stream 2, the mega-pipeline that was destined to transport gas from Russia to Germany. This is, however, this is a double edged sword, since it feeds, even more, the rise in the price of gas in Europe.

Another measure of the German country has been to increase its goal of generating renewable energy from 65% to 80% until 2030, a decision that most of the countries of the European community will surely follow.

What is clear is that all the measures are taken by each side so far (sanctions, rising energy prices , raw materials and metals) and the decisions that can be taken in the future while the conflict continues, will have a clear impact to which they will be passed on to the domestic economies and / or final consumer.

Affects, for example, the price of consumables, especially cereals and vegetable oils, since those same countries are the main producers and exporters for Europe. Only sunflower oil has risen in figures record, with an increase of 8.5% in February alone.

Dairy products and cereals are expected to continue to rise as the war lasts and there is less production.

With the new day of war, it becomes increasingly clear that the implications for the food and agricultural sector are profound.

Companies will have no choice but to pay higher prices that in the end will end up having an impact on the final consumer due to their already low-profit margin. Experts believe that the companies that will most notice the price increases are bakeries, breweries and vegetable oil producers due to their great dependence on cereals.

Russia and Ukraine account for only 1.9% and 0.3% of the value of world merchandise exports, respectively. But they are the largest exporters of sunflower oil together generating 59% of world exports, 36% of world exports of iron or steel and 26% of world wheat exports,” the report said.

The influence of these countries is so great that at the beginning of the conflict, the wheat and maize futures market in Chicago, the corresponding prices rose the maximum allowed by the stock market and had to block their quotation for hours.

It is true that other countries may be encouraged to increase production, but the rise in the price of energy, fertilizers and prices will exert a natural repellent by contracting even the possible margins of benefits.

In Spain alone, around 5,400 companies maintain commercial relations with Ukraine. The value of its operations amounted last year to more than 3,000 million euros, of which 2,410 million were in imports, while some 3,700 Spanish companies exported goods worth 680 million euros.

The trade volume with Russia is even higher, they say from Cesce. Some 5,000 Spanish companies exported goods and services worth 2,200 million euros, while another 4,600 companies imported 6,000 million. These are data, which will not be very serious in a relative way in the Spanish economy, but, nevertheless, some sectors such as the automotive or food industry may go through difficulties. Keep in mind that Spain is the 1. ª exporter in Europe of feed, using supplies of Ukrainian cereals to make the final product that después exports to the rest of the continent.

Another point that must be taken into consideration is health. Due to the rise in products, companies are looking for alternatives to Ukrainian/Russian materials due to the possible problem, shortages of certain products and the rise in prices.  One of the solutions could be to go and get these supplies to countries with different food safety conditions and regulations, and certain companies could even vary the production of their products made, for example, from sunflower oil to palm oil to reduce possible costs.

Several sectors are calling on Europe to be more flexible because of the casuistry.

Prices at the end of February for food from Russia and Ukraine are on average 21% more expensive than a year ago around the same time. The rise in prices has not been marked only by the outbreak of war, but also by the mismatch created in a bottleneck, between demand and supply, that occurred during the recovery from the pandemic. But it is clear that the belic influence in recent weeks has been more than remarkable at this point.

This situation in the markets could collide with the economic recovery undertaken after the pandemic and endanger many companies in the global economy that have already been suffering similar problems as a result of the covid-19 crisis.

Conclusión:

The control of wages and prices is one of the measures that should begin to be taken to try to minimise the consequences of the economic crisis. In addition to studying the possibility of rationalizing the quantities of energy or supplies because in energy matters, Europe has more than five decades depending on Russia and today there is a great tension in this matter.

The experts consulted agree that the coup will depend essentially on the duration and intensity of the belic conflict. “The longer the conflict is prolonged and the longer the increases in energy prices are prolonged, the greater the translation to the rest of the products in the economy.

It should be borne in mind that in global economic relations every link adds up positively to economic growth, and Russia’s progressive isolation will eliminate a small positive share.

But even right now there can be relatively positive effects. De la Torre, in this sense, predicts that the conflict in Ukraine will mean that “the increases in interest rates will be softer than expected” both in the eurozone and in the United States, which will contain the increase in the cost of financing that is already beginning to appreciate,  for example, in mortgages. At the moment, what floods everything is uncertainty.

And in general terms, uncertainty is never good for the economy!

However, as the world continues to respond to the Russian invasion, concerns about GDP seem minor in comparison.

Much more important is a world in which people and countries feel safe. And that’s something worth paying for, even more than the world’s leaders have paid so far.

Sources

https://www.elmundo.es/economia/macroeconomia/2022/03/08/62264050fc6c8362518b459e.html

https://www.rtve.es/noticias/20220224/guerra-ucrania-amenaza-economia-espanola-nueva-escalada-precios/2296841.shtml

https://www.eleconomista.es/mercados-cotizaciones/noticias/11634336/02/22/Desplome-en-los-mercados-Putin-ordena-invadir-Ucrania-y-empieza-la-mayor-guerra-en-Europa-desde-1945.html

https://es.euronews.com/my-europe/2022/03/10/los-lideres-de-la-union-europea-abordan-en-versalles-la-guerra-de-ucrania-y-sus-posibles-s

https://www.ondacero.es/emisoras/aragon/noticias/que-consecuencias-economicas-tiene-guerra-que-puede-hacer-minimizarlas_202203106229e47af5e39e0001f2a48a.html

https://www.bbvaresearch.com/publicaciones/global-consecuencias-economicas-de-la-guerra-en-ucrania/

https://www.eleconomista.com.mx/opinion/Las-consecuencias-economicas-de-la-guerra-de-Ucrania-20220301-0136.html

https://www.eldebate.com/economia/20220308/consecuencias-economicas-guerra-ucrania.html

https://www.eleconomista.es/economia/noticias/11654848/03/22/La-guerra-entre-Rusia-y-Ucrania-tensa-la-cadena-de-suministro-y-pone-en-riesgo-las-operaciones-de-miles-de-empresas.html

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