The effects of Russia’s invasion of Ukraine, which started on February 24, illustrate the fundamental feature of contemporary international economic relations – the far-reaching interdependence of phenomena and processes. It is important what happens domestically in a given country and what happens in its more distant or closer surroundings. Obviously, the greater the initial change initiating impulse strength, the stronger the reaction and the greater the range of influence. It is hard to imagine a stronger impulse than war.
The decisions made by Russian President Vladimir Putin and his government will inevitably bring short-term and long-term economic consequences observed at all levels – from global, through regional, national, local, to effects on individual households. It is impossible to present all the consequences of the ongoing war in Ukraine in a short essay, but let us try to indicate at least some of them for the world, Ukraine, Poland, which borders Ukraine, and the aggressor country, Russia.
At the global level, markets have become significantly destabilized, especially in energy and agricultural commodities. Due to increased uncertainty related to supply, oil, and wheat prices are rising dynamically. Since the beginning of the war, crude oil prices have increased and even exceeded 120 USD per barrel. Then, they decreased but still are at the level above 100 USD per barrel. The threat of a stable supply on the world market resulting from possible restrictions on Russian oil or gas exports is pushing up the prices of these strategic raw materials.
Similar trends apply to crops, of which both Ukraine and Russia are significant producers. Together, these two countries account for as much as a quarter of the world exports of wheat and one-fifth of corn exports. Who will replace these great producers in a short time? The supply is unlikely to be replenished quickly from other sources.
These two examples confirm the operation of the fundamental law of economics: reducing the supply of a product, ceteris paribus, will increase its price. Since the current price increases concern products strategically crucial for economies, this will lead to the consolidation of inflationary trends already present in numerous economies. This is a very negative phenomenon due to the decline in the purchasing power of money and the real decline in the value of savings, which contributes to the impoverishment of societies. In addition, it should be remembered that higher food prices increase poverty and hunger in the world. These negative results will be widely visible in poorer economies of the world.
Moving from the global level to the national level, there is no point in deluding ourselves. From Poland’s point of view, the adverse economic effects will also be deeply felt. The increase in uncertainty of management is not a factor conducive to the development of economic activity. Thus, one can expect a slowdown in economic growth, and perhaps even stagflation – a situation in which the dynamics of economic growth is equal to or close to zero with a high level of inflation. The latter phenomenon, which has already been identified as a consequence of the global economy, will be, unfortunately, very intense in Poland.
Even before the hostilities began in Ukraine, we were worried about high inflation. Currently, it is almost certain that the price increase will be substantial, strengthened by the strongly weakening currency (Polish zloty). It is worth recalling that the value of the Polish zloty in relation to the US dollar has been the lowest in more than 20 years in recent days, and to the euro since 2009, the Swiss Franc was the most expensive in history. These unfavorable changes in the foreign exchange rate are caused by the declining interest of investors in the increasingly risky area of Central and Eastern Europe. If we join the weak zloty with high crude oil prices (which, incidentally, are priced in US dollars), we are not surprised by soaring prices at gas stations. Observing the dynamics of these changes, it can be said that it may be even worse.
Polish authorities are trying to save the situation by, among others, raising interest rates (currently at 3.5 percentage points), which may bring some improvement in the inflation situation, but which also has other and, unfortunately, adverse effects. Higher interest rates may additionally weaken economic activity (higher cost of loans for enterprises) and worsen the situation of those households that repay their loans. And there is no shortage of such households. Further consequences for the Polish economy, related to the war in Ukraine, are caused by the unprecedentedly high immigration of the Ukrainian population (as of March 18, the Polish border was crossed by approximately 2 million people).
This situation is not surprising, as we all want security, but it must also be remembered that this process will also have economic consequences. What those consequences will be remains to be seen only in the long run. It all depends on how we manage the incoming population of refugees – whether we include them successfully in our labor market or not. From an economic point of view, immigrants are a labor resource, indispensable in any economic activity. Looking at the Polish labor market, it seems that some of the incoming population should be managed, which will have positive effects. On the other hand, it must not be forgotten that there is also an outflow of Ukrainian labor from the Polish labor market. These are mainly men who return to Ukraine to defend their homeland. This process, in turn, may harm industries such as transportation, where many professional drivers are Ukrainians. Among other things, challenges of this kind are currently facing the Polish economy, but they are relatively small compared to the economic costs to be borne by Ukraine.
The full-scale war in Ukraine is disrupting the country's economic fabric. While the Ukrainian economy was not in the best shape until the outbreak of hostilities, economic losses will be very severe after their commencement. Destruction of infrastructure, reduction of agricultural production, reduced exports, forced emigration are just factors that will put the Ukrainian economy in one of the worst economic recessions in its history. Ukraine will not be able to cope with an immediate reconstruction without external assistance. Substantial financial assistance from third countries will be required for reconstruction. And here comes a positive statement. The solidarity with Ukraine shown by the Western world in the face of Russian aggression allows us to formulate cautiously optimistic forecasts – governments and international organizations will support Ukraine's economic recovery. Many individual countries already provide aid, and the World Bank is also using its instruments to support Ukraine.
The Western world shows similar solidarity in its actions aimed towards the aggressor’s country – Russia. It seems that Russia did not expect such an unequivocal reaction from the West. This is reflected in the unprecedented sanctions imposed on Russia (I will not list all of them here, as we have all become SWIFT specialists in recent days). Yes, many analysts argue that the sanctions are not yet bringing the intended results. Nevertheless, in this case, in my opinion, they will have profoundly negative consequences for the Russian economy, especially in the longer term. However, a question arises about the short term: can even such seemingly severe sanctions cause the suspension of hostilities and the adoption of diplomatic solutions? Activities taken by Russian authorities seem to confirm their determination to continue the war.
From an economic point of view, the effects of the war on Russia are already being felt. The dramatic fall in the value of the Russian ruble, the suspension of the stock exchange, a substantial increase in interest rates (up to 20 percentage points!) are just some of the signs of deterioration of the situation. The closed sky over Europe for Russian airlines, the growing boycott of Russian products in the world, the withdrawal of major investors from Russia, such as Toyota, Honda, Shell, etc., all mean that, from the point of view of the average Russian, his standard of living will go down. If he cannot use a VISA or MasterCard, he will not be able to watch his favorite series on Netflix, and he will not use TikTok, Facebook, or Twitter, his quality of life will probably decline. The latter examples are perhaps not the most essential effects of Russian aggression, but there is a chance that all these macroeconomic and microeconomic effects together will change the mood of Russian society and lead to political changes in Russia. May it happen sooner than later.
We still have to wait for a complete assessment of the consequences of the war in Ukraine initiated by Russia. However, there is no doubt that many phenomena and processes were triggered, causing the need for adjustments. We will observe changes at the global, regional, and national levels. One is certain – after the war the economic world will undoubtedly be different.
