Joanna Shelton: Economic effects of war | Columnists

Russia’s unprovoked war against Ukraine is creating economic turmoil, not only in Ukraine, Russia and Europe, but also in America and other countries far removed from the violence.

Ukraine is sustaining the greatest hit from Russia’s assault. Its economy is expected to shrink about 40% this year due to the destruction of farms, factories, roads, ports and other infrastructure. Many of its people, as we’ve seen vividly in media reports, lack food, water, medicine and other essentials.

The United States and our partners have joined forces to impose high costs on Russia for its aggression. Economic and financial sanctions levied by America and nearly 40 other countries are the toughest and most wide-ranging ever against another country.

These sanctions, coupled with hundreds of Western firms pulling out and a near-total shutdown of non-energy trade between Russia and the West, are hitting Russia hard. Its economy could contract up to 10% this year and will experience much higher inflation.

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In addition, because Russia can’t access dollars held in American or other banks, the country defaults on its foreign debt heading for the first time since the Bolshevik Revolution of 1917. Over the longer term, Russia will be isolated from the rest of the world, with deepening costs on its economic and consumer and defense industries.

Europe, the region closest to the conflict and which also is absorbing millions of refugees, will see its post-pandemic recovery stunted. And because its heavy dependence on Russian oil and gas is now widely recognized as a liability, many European countries are moving quickly to find other sources of supply.

America and other countries outside of Europe also are feeling the war’s effects, especially in sharply higher prices for energy, food and certain essential metals and minerals.

These higher prices not only feed into already high levels of inflation in the United States and elsewhere; but they also jeopardize food security for lower-income countries, especially in the Middle East and Africa.

The war’s impact on other countries is so pronounced because of Russia and Ukraine’s importance as suppliers of energy, food and other materials.

Russia supplies about 10% of the world’s oil and even more gas. With many traders and refiners in Europe, America and other regions shifting purchases from Russia to other suppliers, energy prices are rising around the world.

Russia and Ukraine together produce nearly a third of the world’s wheat, which feeds billions of people in the form of bread, pasta and packaged foods. They also are big suppliers of barley, corn, sunflower oil and other food products.

Global food prices have sought to the highest level ever due to shortages stemming from the war. Countries like Egypt, Somalia, Mongolia, Kazakhstan and other lower-income countries rely on Russia and Ukraine for much or all of their imports of grain and vegetable oils. Food shortages in these and other countries will bring an increase in hunger; and food insecurity can spill over into political unrest.

The war will also hurt industrial producers in America and other countries. Russia and Ukraine lead global production of metals such as nickel, copper and iron; and materials like neon, palladium and platinum. These critical metals and materials are essential for a wide range of products — everything from computer chips, mobile phones and aircraft to automobile exhaust systems and even dental fillings.

A disruption in supply will hit US and other producers hard just as they’re beginning to recover from COVID-induced disruptions. We’ve already seen how supply chain problems can cause shortages and higher prices, so we should expect more of the same in the coming months and possibly years.

Finally, Russia is a major supplier of key components of fertilizer. Supply problems due to the war are hitting a market which was already experiencing higher prices. The price of some fertilizer nutrients has more than doubled over the past year, which hurts farmers and ranchers in Montana and elsewhere and leads to higher food prices for consumers.

The net effect of these war-related supply disruptions will be slower global growth. The IMF and World Bank predict global growth will be 1% lower due to the war, expanding a modest 3 to 3.5% this year versus 6% last year.

Slower growth and reduced trade will hit poor countries hardest and increase poverty in vulnerable lower-income countries.

Such are the effects of war in a relatively small but important part of the world.

Joanna Shelton was Deputy Secretary General of the Organization for Economic Cooperation and Development (OECD) in Paris; held senior positions in the executive branch and Congress in Washington, DC; and teaches occasionally at the University of Montana.

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