International 
 

International

The Ukraine War

Former Russian allies seek their best interests elsewhere as trade diversion changes the global economic and political landscape.

By Dua Zaidi | October 2022


Ukraine became the largest sovereign state formed during the collapse of the Soviet Union 1990-91. The state had a population of 52 billion and a farming industry worth 20 billion. This eastern democratisation sparked western optimism, only to be short-lived with Ukraine’s Russian relations and geo-location positioning the state at the centre of communism. The Orange Revolution 2004-5 was a Ukrainian rebellion rooted in the initial corrupt election of pro-Russian Viktor Yanukovych – a result overturned with multiple run-off votes. The current president is Volodymyr Zelenskyy.

Despite Ukrainian independence, Putin has continued to view the state as a part of his nation. “Ukraine never had stable traditions of genuine statehood,” he has asserted. Alongside, Putin believed the West (NATO and European Union) would move to wage a proxy war using Ukraine. The only solution: ensure Ukraine’s neutral status. However, any proposition for this agenda, especially one suggesting alignment with EU and NATO, did not satisfy Putin and war ensued.

Putin’s movements were justified by the need to “demilitarise and denazify the state” An arguable statement when, in Ukraine, antisemitism is punishable by fines or imprisonment for up to 5 years. Putin simply wants to divide, capture and eventually annex Ukraine, a goal reflecting the historic ideal of Russian nationalism and thus a policy of de-Ukrainization, a mandate to restore Russia to its former Soviet Glory. Understanding this, Ukraine cannot be a part of NATO and NATO cannot exist within Ukraine.

Besides the evident human cost of war, global and inter-region economic consequences emerge, primarily because of sanctions and impeding trade.

On 21st February 2022, the day Putin orders troops to Ukraine, sanctions started. The UK blocked the provision of financial services to Russian citizens and froze the assets of five Russian banks. European Union froze assets and imposed travel bans on individuals (e.g. Putin, the Russian Foreign Minister Lavrov and 351 State Duma who voted in favour of the recognition of Donetsk and Luhansk on 15 February 2022). Biden’s executive orders banned all investment, imports and exports, while sanctioning VEB, PSB – financial institutions critical to the Russian defence industry.

As Russia is a major fossil fuel supplier globally, the most impactful sanction has been on oil and natural gas. Sanctions threaten to contract Russia’s economy by up to 10% this year and hike inflation by more than 20%. Meanwhile, Russia accounts for 29% of the global wheat supply, while both Russia and Ukraine supply 75% of the global sunflower oil supply. Globally, consequential supply chain uncertainties and disruptions have skyrocketed prices. The World Bank quantifies impact as a 0.7% decrease in global income primarily through global exports. Countries, for example, Vietnam, Thailand, and Mexico, have heavily imported Russian energy for manufacturing sectors, resulting in a clear negative impact. Trade sanctions and thus similar analysis extends to the Russian agriculture sector.

Resulting supply chain uncertainties and logistic disruptions in the broader region have caused global surges in cost of living. This is rooted in higher prices of longer air routes to avoid the Ukraine-Russia air space, blocked Ukrainian ports and thus slower Rail Transit relevant to transport between Europe and China. Higher transport costs from port congestion worsen commodity prices.

The effects of the Russo-Ukraine War are being felt globally. Costs of living have swollen due to reduced supply of wheat and oil, while investors shy away from South Asian (riskier) investments.

The new policy, in the form of trade diversion, will circumvent higher costs and reduce commodity inflation. This changing global landscape provides opportunities for individuals and countries to make new alliances.

A primary example is India. Current and future expected prices are already high in India due to entrenched vulnerabilities in their economy: supply-demand gaps in the availability of essential daily goods, large current account deficit and commodity inflation. These compounding financial issues are worsened by the Ukraine War. With investing risks on the rise, capital or Foreign Direct Investment (FDI) flows out to safe havens, such as the United States. Although, this is supposed to reduce cost-push inflation – rises in fuel and wheat prices, through the loss of Ukrainian wheat imports and India’s ban on wheat export, have pushed food prices and general cost of living. This is worsened by India’s liquidity crisis.

Clearly, India is adversely impacted by the Ukrainian war. It must look for opportunities, create new relations and thus, hedge its risk against further economic damage: strengthening its balance sheet and reviewing the quality its assets. Meanwhile, India has already formed new relations.

Biden visited India in early May 2022. This visit formed the Indo-Pacific Economic Framework to target four pillars: Fair and resilient trade, supply chain resilience, infrastructure, clean energy, decarbonisation and tax with anti-corruption. Thus, the IPEF works to relieve damage done within India from the Ukrainian War. The bindery contract is of strategic importance and will provide for ambitious labour and environmental standards, creating new guidelines for how data flows between countries. A White House fact sheet states, “IPEF will enable the United States and our allies to decide on rules of the road that ensure American workers, small businesses, and ranchers can compete in the Indo-Pacific.” The IPEF crucially opens-up diversification of Indian exports to US, and possibly eventually other Indo-Pacific Countries, such as Japan.

However, to note, the cost of inflation in India is largely offset by the country benefiting from low-cost oil imports from Russia. As a result of sanctions, Russia has increased sales to India and China by importing 11mn tonnes more oil from Russia in the second quarter of 2022 compared with the first quarter. This was most significant in India, where imports of Russian oil jumped from 0.66mn tonnes to 8.42mn tonnes. Trade diversion and diversification is more desperately needed in countries with high dependency rates on Russia for imports. For example, Egypt has an 82% wheat import dependency.

Beneficiaries of the war are exporters of energy and wheat. The Middle East and Northern Africa have seen their current account benefit: Italy agreed new gas deals with Angola and Congo-Brazzaville to end its dependency on Russia by mid-2023.

The effects of the Russo-Ukraine War are being felt globally. Costs of living have swollen due to reduced supply of wheat and oil, while investors shy away from South Asian (riskier) investments. At this time, developing countries must exploit every resource available. For Pakistan, this might be the Gwadar Port and the Silk Road.

Read More