By Yufan Chen
We see the Ukraine-Russia conflict for the heartbreaking images of people running for their lives, their homes shattering in front of them, their cities crumbling in a split second. But how much do we know about the economic impacts of this crisis? Sky-high oil prices. Crippling Economy. The war between Russia and Ukraine has no doubt triggered turbulence in the financial markets and has raised many doubts about the future of the world economy.
With more sanctions placed on Russia by European powers, supply chain pressures are exacerbated as some of the world’s greatest trade links with Russia are broken. In general, the Ukraine-Russia conflict has led to the vulnerability of the automotive, transport and chemical sectors of the world, as well as led to economic recessions with high inflation rates. The Russian economy is no exception - standing at an estimated Gross Domestic Product (GDP) of -7.5%.
The Russian economy is no exception - standing at an estimated Gross Domestic Product (GDP) of -7.5%.
But how does this conflict escalate to affect Asia’s economy? Simply, the oil sector would be the most affected in the Asia economy, leading to sky-high prices that can trigger an economic collapse. Since Russian oil is a key factor in the region's economic expansion, the conflict between Ukraine and Russia will have a significant impact on Asian economies. Though there are few direct economic ties between Russia and the Southeast Asian region, particularly the Association of Southeast Asian Nations (ASEAN) countries, there has still been an exponential increase in prices of oil, which has contributed to producer and consumer price inflation in the region. With Asia being one of the most oil-consuming regions and Russia being the third largest oil producer in the world, supply chain disruptions brought on by economic sanctions on Russia are certain to raise oil prices. The countries being majorly net oil importers makes them sensitive to oil shocks by raising the cost of production and escalating the cost of consumer products. Who is most affected, you say? China and India being one of the biggest oil importers, would likely be the largest victims of this Ukraine-Russia conflict. Aside from oil, there is also expected to be a sharp rise in commodity prices like nickel, wheat and corn.
With Asia being one of the most oil-consuming regions and Russia being the third largest oil producer in the world, supply chain disruptions brought on by economic sanctions on Russia are certain to raise oil prices.
Asian countries depend on oil for three main reasons - transport, power plants and food. Higher oil prices are then directly related to rising transport, electricity and food costs. The expanding Asian markets will be more impacted by the rising oil costs than any other part of the world since the majority of Asian economies are centred on consumption, and many are also developed enough to have an extensive network of transport vehicles. As such, consumer expenditures are likely to rise, and some might not even be able to afford these goods with the increased prices anymore. Then, inflation comes into play. And what are the impacts of inflation? Decreased consumer purchasing power, low wages, unemployment, decreased investments, and ultimately, an economic crisis.
Now, to zoom in on one country facing an economic crisis which was further catalysed by the Ukraine-Russia conflict - Sri Lanka.
Prior to the conflict, Sri Lanka had already been going through its largest ever economic crisis. The country was facing a shortage of fuel, with a lack of foreign reserves to supply more fuel for essential services in the country like transport and electricity. Inflation rate was even at a rate of 50%. Furthermore, the economic crisis required a functional government to resolve, yet the president’s sudden departure seemed to indicate the lack therefore. With these conditions already in place, how did the Ukraine-Russia conflict further exacerbate the situation in Sri Lanka?
Western sanctions led to the spiralling international fuel and food prices. Sri Lanka was already at a state of near bankruptcy, with a severe dearth of foreign reserves. These sanctions increased the prices of fuel further, which Sri Lanka now has no ability to afford with its foreign exchange reserves completely depleted. Wickremesinghe himself even stated that the country's economy had "totally collapsed," and Sri Lanka had gone from having a significant debt issue to complete bankruptcy. The Ukraine-Russia conflict triggered the economic collapse, endangering people’s livelihoods and social stability within the country.
Wickremesinghe himself even stated that the country's economy had "totally collapsed," and Sri Lanka had gone from having a significant debt issue to complete bankruptcy.
With Sri Lanka exemplifying the effects of the Ukraine-Russia conflict on poor economies in Asia, how then can countries mitigate the effects of the Ukraine-Russia war to prevent economic crises from landing into their country? There are three main mitigation methods:
Minimising energy consumption to curb the impacts of rising oil prices by decreasing electricity usage
Opting for renewable sources of energy to reduce dependence on foreign imported oil
Reducing dependence on imported foods by increasing domestic food production
That being said, countries still have to consider their own states of development when implementing these measures. After all, a country deep in debt should probably place technological development, domestic food production and energy-saving infrastructure as a lower priority. Until countries can adjust their mitigation methods, the Ukraine-Russia conflict would still remain a dire threat for all economies, even Asia.
Until countries can adjust their mitigation methods, the Ukraine-Russia conflict would still remain a dire threat for all economies, even Asia.
Citations
Chellaney, Brahma. “Ukraine War Hastens Sri Lanka's Economic Meltdown.” Nikkei Asia. Nikkei Asia, July 13, 2022. https://asia.nikkei.com/Opinion/Ukraine-war-hastens-Sri-Lanka-s-economic-meltdown.
“Economic Consequences of the Russia-Ukraine Conflict: Stagflation Ahead.” Coface. Accessed October 1, 2022. https://www.coface.com/News-Publications/News/Economic-consequences-of-the-Russia-Ukraine-conflict-Stagflation-ahead.
“Effects of Russia-Ukraine Conflict on Asian Economies.” Hindustan Times, May 23, 2022. https://www.hindustantimes.com/ht-insight/economy/effects-of-russia-ukraine-conflict-on-asian-economies-101653290378940.html.
Perera, Ayeshea. “Sri Lanka: Why Is the Country in an Economic Crisis?” BBC News. BBC, July 14, 2022. https://www.bbc.com/news/world-61028138.
“Russia and Ukraine Conflict: Economic Implications.” KPMG. Accessed October 1, 2022. https://home.kpmg/xx/en/home/insights/2022/03/russia-and-ukraine-conflict-chief-economist-team.html.
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