The war in Ukraine and the consequences for the world economy

The war in Ukraine and the consequences for the world economy

May 5, 2022

by Miriam Frauenlob

[This article published on May 5, 2022 is translated from the German on the Internet, https://awblog.at/krieg-ukraine-folgen-fuer-weltwirtschaft/.]

Russia's war of aggression against Ukraine is leading to increasing distortions in the global economy: famine is feared in the Global South. In countries like Austria, on the other hand, there is still great dependence on fossil energy. The global interdependencies with the Ukrainian and Russian economies are now clearly emerging. In addition to oil and gas, Russia is also a producer of important industrial metals, which means rising prices on the commodity markets. There is also a growing concern that the current situation could be used to put social and environmental challenges on the back burner.

War in the breadbasket of Europe

The brutal war of aggression waged by Putin's army against Ukraine is at the same time having negative effects in countries tens of thousands of kilometers away. Indeed, Russia and Ukraine are among the world's most important producers of corn, wheat and rapeseed. Many countries, especially in Africa, rely on exports. The UN World Food Program is also supported to 40 percent by wheat from Ukraine. Short-term supply problems and the threat of a shortfall in future harvests have caused the price of wheat to skyrocket. This poses an acute problem, particularly for people in countries where a large proportion of income has to be spent on food. In Egypt, for example, which is particularly dependent on food imports, supply bottlenecks are already feared. But speculation in food can also exacerbate existing problems. While the market for agricultural commodities was highly regulated until 2000, since the Commodities Future Modernization Act futures exchanges have determined the prices for agricultural goods. On these exchanges, mere assumptions of scarcity can continue to drive up prices - a dynamic that speculators can exploit and that fuels such situations.

In Austria, the global distortions are mainly reflected in higher prices. Bottlenecks exist only for individual products. As an example, we saw that eggs became scarce shortly before Easter because chicken farming is becoming more expensive due to increased grain prices. However, we need not fear serious supply problems in the food sector. After all, Austria grows more than 85 percent of its own wheat.

High time for a raw material turnaround

But it is not only the price of wheat that has risen sharply as a result of the Russian war of aggression. Oil and gas are experiencing record prices, which is reflected at gas stations and in gas bills. Prices for metallic commodities have also skyrocketed. For example, the price of nickel rose so sharply in the short term that trading in it on the London Metal Exchange was suspended for a few days. The prices for palladium, aluminum and iron ore have also exploded.

The chaos on the commodity markets reflects the dependencies in these metals. Palladium, for example, is needed for the production of semiconductors and 37 percent of it comes from Russia. Nickel, on the other hand, is an important production factor for batteries, which are currently in high demand due to the increase in electromobility, among other things. Neon, which is needed for the production of semiconductors, is also abundantly mined in Russia. While the sanctions against Russia do not affect precisely this raw materials sector, the price fluctuations nevertheless impressively demonstrate the instabilities and dependencies in these global supply chains.

Numerous human rights violations and systematic environmental destruction highlight that there are enough reasons to strengthen due diligence along supply chains and promote the circular economy. Current dependencies also underscore the need for a raw materials turnaround as part of progressive industrial policy and the promotion of a trade policy that prioritizes the interests of society as a whole. With regard to metallic raw materials, this would mean taking compliance with human and labor rights along the supply chain more seriously, promoting recycling and also expanding the substitution of primary raw materials.

The state of oil and gas

The dependencies with regard to wheat, corn or even metals should not be underestimated. But the debate is still dominated by the enormous dependence on Russian oil and gas. While oil is the more relevant export factor for Russia itself, dependence on Russian gas is fatal for Austria in particular. The question of how dramatic a gas embargo would be for Austria remains controversial. It is clear that these consequences are difficult to assess, and model calculations are often unsuitable for weighing up the possible domino effects. It is also clear that an acute embargo would require ambitious steering intervention by the state in order to socially compensate for the economic consequences and to distribute the negative effects fairly.

In the current situation, however, it is clear that a gas embargo could also come from Russia and that preparatory action must be taken here. In a policy brief, the German Institute for Economic Research has worked out how to prepare for a gas shortage. The experts warn that in the event of an acute embargo, there could be enormous price increases, which would then lead to social upheaval. Ensuring security of supply at an early stage is thus also central to social justice.

While it remains to be seen what will happen to oil and gas supplies, the circumstances that got us into the predicament in the first place are clearer. Even after Russia's annexation of Crimea, Austria's dependence on Russian gas continued to grow. Under Rainer Seele, OMV's CEO until 2021, OMV increased its involvement in Russia while exiting more politically stable countries like Norway. While the problems of this dubious friendship are just now becoming clearly apparent, the economic relations, which have long been questionable, have long been quietly tolerated.

What does this mean for the global economy?

It is clear that the war in Ukraine is challenging many of the existing beliefs in trade policy. The war has now caused even economic elites to recognize that the current shape of the global economy is not forward-looking. For example, Larry Fink, the CEO of the hedge fund BlackRock, has spoken of globalization as we have known it in recent decades being over. Even critical voices that have long argued for a different form of globalization, such as political scientist Ferdi De Ville, recognize a momentum toward a different form of globalization in the current situation. He argues that in the current situation it is becoming clear that geopolitical conflicts cannot be ignored and certainly cannot be solved by liberal trade policies. He sees the thesis that trade relations would lead to more peace refuted. Historian Adam Tooze argues similarly. The sanctioning of Russia's central bank, at the latest, would mean that the West would also be engaged in "financial warfare," he writes. This could lead to falling trust among economic elites in the future. After all, if the Russian central bank can be sanctioned from one day to the next and the assets of Russian elites are confiscated, other countries could also realize that economic cooperation takes second place as soon as geopolitical conflicts come into play. In this respect, it is feared that the heyday of global economic cooperation is over and that we are entering a phase of greater economic autonomy between hostile blocs.

Making Progressive Alternatives Strong

While progressive actors have long warned that the current form of globalization is unsustainable, the message now seems to be getting through more broadly. This is to be applauded. After all, neoliberal trade policies have long led to wage and social dumping, ecological destruction, and exploitation along supply chains. In this respect, a rethinking of globalization is long overdue. At the same time, the conclusions drawn by many liberal and conservative economists and politicians seem to be different from those of globalization critics.

Caution is warranted when arguing for a deconstruction of global cooperation against the backdrop of security interests and mutual mistrust. Although efforts to achieve more autonomy in production, especially with regard to critical goods, are to be supported, deglobalization motivated by security policy is neither a guarantee for peace nor the solution to global challenges. Ferdi de Ville argues that economic decoupling could even make military conflicts more likely.

It can already be observed that the situation is also being used to put the management of social challenges on the back burner. German economist Lars Feld, for example, claimed that the cost of rearmament means that the German government's social goals now take second place. At the same time, geopolitical conflicts are being used to push neoliberal trade agreements with "friendly" partners, and there are already calls from various quarters for a new edition of TTIP. Here, too, care must be taken that the situation is not used to disregard social and environmental objections in trade relations. After all, in the form in which TTIP was last negotiated, corporate interests had first priority.

In this sense, the current debate around globalization must be used to make our visions of a fair world economy strong. It is good that skepticism is being expressed about the current shape of globalization. However, ecological and social issues must not take second place. The Corona pandemic already shows that a rethink of trade policy is needed and that the neoliberal form of globalization is not fit for the future. Large-scale investments in renewable energies, a sustainable raw materials strategy and a fair design of trade agreements would be advances that benefit everyone.