Current Affairs

Just before the war in Ukraine, I pointed out that after Russia’s invasion of Crimea, the Russian economy grew by 4%, which meant that there had been growth in the Russian economy from 2014-2020, even after the sanctions placed on the Russian economy by Europe and the United States. A growth of 4% in an economy is enormous and there was a realisation that Russia was going to invade Ukraine.

So what does Ukraine bring to the worlds economy, what exactly is Russia trying to achieve through its invasion and annexation of the provinces. There have been murmurings that this is once again about mineral supremacy, rich earths, but it is more than that, the industrial centre of Ukraine was in the East before the war in 2014, the wealth tied up in coal, metals and other primary industrial hubs, has now come into the hands of Russia, but the reality is that there are other questions that need to be asked, and that is what is the wealth tied up in these areas and what does Russia think it can achieve through the exploitation of this wealth, if anything?

In the World Economic Forum, Spencer Feingold argued that 45% of Ukraine’s economy was made up from agricultural exports, writing in July while the Russian blockade was in place, he argued that Ukraine’s economy was taking a massive 45% hit to its GDP. UN Secretary General Antonio Guterres, argued that the agricultural products exported by Ukraine were “desperately needed to address the global food crisis and ease the suffering of millions of people in need around the globe”.

Ukraine has often been called the breadbasket of Europe and in 2021, Ukraine’s agricultural exports totalled US$21 billion in an economy that was roughly worth US$200.9 billion. It accounted for 41% of the country’s exports, according to the US Department of Agriculture, but most of all the United Nations humanitarian food-assistance buys 40% of its wheat from Ukraine.

According to the World Economic Forum, the war has had a “ripple effect” and the “wars impacts are cascading through the region’s strong trade, financial and migration linkages, resulting in considerable economic damage to neighbouring countries”. The International Monetary Fund views the war as a “major blow to the global economy that will hurt growth and raise prices”. Kristaline Georgieva, the Managing Director of the IMF said that “We live in a more shock-prone world [and] we need the strength of the collective to deal with shocks to come”.

But until the war, Ukraine’s economy was doing well, in 2012 before the war in Crimea, Ukraine’s GDP was US$190.5 billion, in 2014 it was 133.5 billion and only in 2021 growth had been realised to US$200.9, after six years of struggling to recover from Russia’s invasion of Crimea in 2014. Before the war in 2022, GDP per capita per person was $12,943.61, but like everything this is going to change with the economy on a war footing.  

 But there is a positive aspect to the war in Ukraine, the current account switched to a surplus of US$1,285 million in July 2022 from a deficit of US$545 million in the previous year. This surplus is accounted for through massive transfers from the EU and several other countries in the world. However, the goods account deficit was US$2,036 million from US$756 million and the services account switched to a deficit of US$1,178 million compared to a surplus of US$257 million.

Before the war, Ukraine was one of the largest producers of iron ore and steel in the world. According to the Ukrainian Steelmaking Industry Association, in 2021 Ukraine produced 21.4 million metric tonnes of steel, a growth of 3.4%, rolled steel accounted for 19.1million mt about 3,5% growth. Ukraine’s steel industry accounted for about 10% of Europe’s steel imports and companies such as ArcelorMittal, the worlds number one steel producer, has its largest steel plant in Ukraine. But a lot of this production was tied up in Mariupol, which is in Russian hands. The problem that Ukraine’s steel makers face is that they have had to find other ways to export their production held in warehouses.

On NPR, Yuri Rajekov, said that “traditionally Black Sea ports exported the steel and iron products, but with the blockade this is no longer possible”. Jason Beaubien reporting for NPR details that Ukraine is trying to export through railways, but Ukrainian railways runs on a different gauge and the steel has to transferred onto other rail stock at the border. Initially, the steel companies paid steel workers two thirds of their salaries, but they have had to lay off thousands of workers now. Andrew Lowson on NPR talking about the plants in occupied territory, talks about how the steel industry is reliant on coal, but that is now within territory that has been occupied by Russia.  

According to SMM News a metals information provider in China, in 600,000 square kilometres of territory, Ukraine is very rich in coal, iron and manganese and has 70 different types of mineral resources. Pre-1989, Ukraine was responsible for a quarter of the Soviet Unions scientific and technological ability. Ukrmetallurgprom, reported that Ukrainian steelmakers in the first quarter of 2022, reduced steel production by 31% compared to the same period in 2021.

Volodymyr Shatokha wrote a report 2013, and argues that Ukraine has lost 25% of its GDP and 40% of export revenue, with steelmaking making up a quarter of production. But there are other elements that need to be accounted for and that is that the steel industry made up to 38% of pollution and was the largest industrial consumer of electricity and fuels.

A report by the Federal Reserve, argues that “geopolitical risks have soared since Russia’s invasion of Ukraine.[…] Commodity markets are in turmoil and financial markets have been highly volatile since the start of the conflict.” The Fed argues that the geopolitical risk that has ensnared the markets has been compounded by declining consumer confidence and stock prices, which are all factors that itself weakens demand in world economies. This is one of the reasons that the Dollar has strengthened as “spikes in global uncertainty and adverse risk […] can trigger flight-to-safety international capital flows.” (Forbes and Warnock, 2012) As such, oil prices increase, which depresses global activity and pushes inflation in an upward direction. The conclusion to the Fed’s report is that the “Russian invasion of Ukraine will weigh adversely on global economic conditions throughout 2022 [but…] unforeseen developments in the conflict could generate further changes to geopolitical risk and worsen its economic effects.”  

So countries such as Britain, which has been feeling inflation (even before the Chancellors stupidity), exacerbates the policy that central banks can take to control inflation and its part in the global recovery from the pandemic, with the underlying inflationary pressures challenging how an economy develops, how it is perceived and most of all the confidence that the markets have in the management of an economy. According to the Fed geopolitical risk produces a risk of about 1.7% on global output and that global inflation will move by 1.3 percentage points by the second half of 2022, after which the worlds economies begin to recover.

Ukraine will find other means to grow its economy throughout this war and through its relationship with Europe there are answers to future growth through not only association but also through new trade deals, therefore the Ukrainian economy has a future. I have not spoken about the Russian economy because of the complexity of gathering data that is accurate and the sanctions that have been placed on the Russian economy. Without actually being able to review the Russian economy it would be a pointless exercise. But there are tell-tail signs that Russia’s economy has shrunk and the gamble that the leadership took on invading Ukraine has shrunk the economy to pre-2014.

BIbliography

‘A Brief Look into the Steel and Energy Industries in Ukraine_SMM | Shanghai Non Ferrous Metals’. Accessed 28 September 2022. https://news.metal.com/newscontent/101764937/a-brief-look-into-the-steel-and-energy-industries-in-ukraine/.

‘Ukraine GDP – 2022 Data – 2023 Forecast – 1987-2021 Historical – Chart – News’. Accessed 28 September 2022. https://tradingeconomics.com/ukraine/gdp.

 World Economic Forum. ‘Ukraine’s Economy Will Shrink by Almost Half This Year, Says World Bank’. Accessed 28 September 2022. https://www.weforum.org/agenda/2022/04/ukraine-economy-decline-war/.

GMK. ‘Подведены Первые Итоги Деятельности Металлургов Украины в 2022 Году’. Accessed 28 September 2022. https://gmk.center/en/news/the-first-results-of-ukrainian-steel-industry-in-2022-revealed/.

‘Russia’s War in Ukraine Pushes Ukrainian Steel Production to the Brink’. All Things Considered. NPR, 12 August 2022. https://www.npr.org/2022/08/12/1116312634/russia-ukraine-war-steel-iron-industry.

Caldara, Dario, Sarah Conlisk, Matteo Iacoviello, and Maddie Penn. ‘The Effect of the War in Ukraine on Global Activity and Inflation’, 27 May 2022. https://www.federalreserve.gov/econres/notes/feds-notes/the-effect-of-the-war-in-ukraine-on-global-activity-and-inflation-20220527.html.

 World Economic Forum. ‘Ukraine’s Economy Will Shrink by Almost Half This Year, Says World Bank’. Accessed 28 September 2022. https://www.weforum.org/agenda/2022/04/ukraine-economy-decline-war/.