How the Russia-Ukraine War is Reshaping the Global Economy

By: Nihaal Oberoi

The Russia-Ukraine War has brought a series of challenges, casting a shadow on global growth while considerably raising inflationary pressures. As seen by the IMF, global growth was downgraded to 3.6% for both 2022 and 2023, as both advanced economies and emerging markets were affected adversely. For example, the growth forecast for the EU alone was cut by 1.1 percentage points because it relied on Russian energy supplies. This contraction occurs alongside an increase in inflation to a 40-year high in major economies like the U.S., where the rate of inflation was over 8.5% in the year 2022. For an economist, however, it created long-term supply grains in the price of primary consumables like oil, gas, and wheat.

Together, Russia and Ukraine export 30% of the world's wheat. Disruptions because of the war thus far have raised wheat prices by more than 25%. Rising prices sharply increase the risk for poorer economies, especially those in places such as sub-Saharan Africa that rely heavily on food and energy imports or have limited fiscal flexibility to absorb such price shocks.From now on, this inflationary pressure is likely to indicate higher interest rates, probably aggressive, by the central banks, which will derail the stability of capital flows to emerging markets. Also, in case this geopolitical landscape becomes even further fragmented, there may also be a split in standards involving technology, currency reserves, and trade blocks, entailing inefficiencies and increasing the long-term cost for global trade and financial stability. These risks also render policy responses imperative: targeted fiscal measures to help the most vulnerable sections of the population cope with higher energy and food costs; monetary policies will have to be carefully calibrated in an environment with a prevention of avoiding further inflation, without slipping into recessionary conditions. What will be of utmost importance over the longer term is that multilateral cooperation be sustained to deal with structural issues and avoid economic fragmentation that may hobble global growth for many years beyond.