From food to inflation, the Russia-Ukraine war has a global impact

A protester cries during a demonstration in support of Ukraine in Trafalgar Square on February 27, 2022 in London, England. Russia’s large-scale invasion of Ukraine has killed scores and prompted a wave of protests across Europe.

Leon Neal | Getty Images

When Russia invaded Ukraine no one knew how long the ensuing conflict would last, or how deep the shockwaves sent through Europe or the rest of the world would be.

As the war approaches its third month, however, the economic fallout from the conflict is becoming clearer and the outlook does not look good.

Against an already turbulent backdrop of global inflationary pressures amid rising food and energy prices and disrupted supply chains following the coronavirus pandemic, the war between Russia and Ukraine is exacerbating supply and demand tensions, damaging consumer sentiment and is threatening global economic growth.

Markets tense

Global financial markets continue to focus on the war as it enters a second phase in which fierce fighting has begun in the east of the country, with analysts saying the “battle for Donbas” could be determining the outcome of the war.

Investors are rattled by rampant inflation and its dampening effect on global growth – the international Monetary Fund predicts the US inflation rate will reach 7.7% this year and 5.3% in the euro zone. Concerns over rising prices are prompting investors to sell bonds, pushing yields higher; the yield on the benchmark 10-year Treasury note touched 2.94% Tuesday, a level not seen since late 2018.

Traders on the floor of the NYSE, April 14, 2022.

Source: NYSE

Global growth hit

Whatever happens on the front line in the next few days and weeks, the shock waves from the conflict will continue to reverberate around the globe with both the World Bank and IMF lowering their global growth forecasts.

The IMF cut its global growth projections for 2022 and 2023 on Tuesday, saying the economic impact from Russia’s invasion of Ukraine will “propagate far and wide, adding to price pressures and exacerbating significant policy challenges.” Meanwhile, the World Bank lowered its global growth forecast for 2022 by nearly a full percentage point, from 4.1% to 3.2%, citing the pressure that Russia’s invasion of Ukraine has placed on the global economy.

Several customers inside a supermarket in Spain. European sanctions on Russia has prompted an increase in the prices of the most basic food such as oil and cereals.

Sopa Images | Lightrocket | Getty Images

Both institutions said the downgrades to their forecasts had been made as they expected supply shocks to intensify, and for commodity prices – of which Russia and Ukraine are major suppliers – to rise dramatically.

“Russia is a major supplier of oil, gas, and metals, and, together with Ukraine, of wheat and corn. Reduced supplies of these commodities have driven their prices up sharply,” the IMF said Tuesday.

Jari Stehn, chief European economist at Goldman Sachs, told CNBC Wednesday that the impact of the war in Ukraine was already putting the brakes on Europe’s economy.

“The broad picture here is that the euro area economy is slowing pretty rapidly because you have much higher inflation that’s starting to weigh on incomes and on consumption, and … energy prices are weighing on producers. Then on top of that you have a whole bunch of supply chain issues … that have been amplified by the war in Ukraine, “Stehn told CNBC’s” Squawk Box Europe “on Wednesday.

Food price rises

With the war converging with other disruptions – supply-chain strains, inflation and the pandemic – it is now posing “a looming threat to our global food supply,” Daniel Aminetzah, leader of McKinsey’s Chemicals and Agriculture Practices, and Nicolas Denis, a partner at the management consulting firm, said in the company’s latest podcast Wednesday.

The Ukraine – Russia region is seen as one of a small handful of global “breadbaskets” (or major food producers) and plays a vital role not only as an exporter of primary staples like wheat, but also as one of the major suppliers of fertilizer worldwide.

“There are six breadbaskets that together supply roughly 60 to 70% of global agricultural commodities. The Ukraine – Russia region is responsible for roughly 30% of global exports of wheat and 65% of sunflower, in a context where those markets are increasingly tight and interconnected — so a slight disruption in supply creates some impact on price, “Denis noted.

Looking at the broader global food supply chain, “we clearly see this conflict shaking important pillars of this system in an already disturbed context,” Aminetzah said.

“In the global food system, previous supply – demand scenarios were mostly encoded around weather and other supply-related events … But now, we are in an unimaginable situation: a war of this scale in Europe, in such a critical food supply hub – especially when it comes to wheat and to fertilizers – as the Black Sea, “he added.

Global prices for some grains have spiked since the Russia-Ukraine war started, with both countries contributing a significant percentage of the world’s supply for some of those commodities such as wheat.

Vincent Mundy | Bloomberg | Getty Images

This instability will start to create what he described as a “whiplash effect” in the food supply chain and while Aminetzah said it’s hard to fully project the implications, “this crisis will have clear secondary effects on other breadbaskets, like Brazil.”

Rising food prices could have another concerning impact, the IMF said on Tuesday. The Fund warned that “increases in food and fuel prices may also significantly increase the prospect of social unrest in poorer countries.”

“Immediately after the invasion, financial conditions tightened for emerging markets and developing countries. So far, this repricing has been mostly orderly. Yet, several financial fragility risks remain, raising the prospect of a sharp tightening of global financial conditions as well as capital outflows , “the IMF said.

The depth of the impact on the global economy of course depends on how long the war lasts, and the scale of the devastation and disruption that it causes.

There’s no signs Russia is willing to relent anytime soon, despite being hit with a raft of international sanctions targeting vital sectors of its economy, from oil and gas to its financial system. Analysts say sanctions are unlikely to deter Russian President Vladimir Putin from his objectives in Ukraine, however.

These aims are believed to include annexing, at the very least, the Donbas region in eastern Ukraine and creating a land bridge to Crimea in the Black Sea to aid Russia’s military and trade, if not going further by attempting to seize the capital Kyiv and removing Ukraine’s pro-Western government from power.

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