The ongoing dispute between Russia and Ukraine is one that is hotly debated among world leaders. What began with Ukraine throwing out its Moscow-backed president and adopting a new pro-West government has turned into a dire military intervention. As a result, Russia has aggressively and unilaterally invaded Crimea to maintain its Black Sea Fleet and reclaimed a region of two million people, one that has been a part of Ukraine for over 60 years.
At the same time, Russia has threatened Eastern Ukraine in much the same way as Crimea, with some protesters demanding a referendum similar to Crimea’s, wanting to be annexed by Russia. As the world struggles to deal with these alarming events, the Russian and Ukrainian economies both face huge challenges and the potential for economic disaster.
Ukraine is struggling to keep itself from collapsing as a sovereign state and prevent itself from bankruptcy, while Russia’s stock market has plummeted and its domestic economy continues to weaken. Meanwhile, the world economies are beginning to experience the shockwaves of this Russian military intervention in the form of a potential energy war with Russia and the consequences of an increasingly unstable global economy.
Russia’s invasion of Crimea has also raised fears of other countries carrying out similar invasions, and thus has raised global demand for defence spending and nuclear weapon capabilities. This in turn makes the world even less safe and more unstable.
Overall, the Russian invasion of Crimea and the continued aggression against Ukraine will have repercussions for many years to come, and these 10 immediate effects to the global economy are just the tip of the iceberg.
10) Economic Sanctions
Top Russian officials and businessmen, mostly in Putin’s inner circle, are being hit hard with targeted sanctions for their involvement in Crimea. These individuals face visa bans in the US, foreign asset freezes, and the prospect for further sanctions from other countries. While Putin has personally laughed off these sanctions, they could in the long term embitter some of Russia’s oligarchs and billionaires against him as they feel the pinch of increasing sanctions targeted against them.
The US and European Community seem ready and willing to employ further economic sanctions to voice their displeasure over Russia’s aggression in Ukraine. This could escalate further, as more regions in Eastern Ukraine with pro-Russian protesters could potentially follow Crimea’s footsteps and be annexed by Russia as well.
The destabilization of Ukraine has affected tourism not just in Ukraine and Russia, but also in other countries such as England. Wealthy people in Russia are spending less on British luxury goods, while Western tourists are avoiding Russia and Ukraine due to the risk of upheaval.
If tourism falls in Russia and Ukraine, the unemployment rate could rise in the tourism sector of those countries, further damaging their economies. The Russian Foreign Ministry has even released statements discouraging Russians from traveling to the US for fear of being interrogated by the CIA, which is a rather ridiculous allegation. As the war of words continues between East and West, tourism revenues, particularly in Ukraine and Russia, will plummet and add to their economic woes.
China has historically supported Russia, the two often voting together in the UN Security Council. However, it could punish Russia’s recent aggressive behavior by pressuring Russia to stop its aggressive push to dominate Ukrainian affairs and isolating Russia further economically.
China sees Russia’s invasion and annexation of Crimea as a dangerous precedent for regions that have long sought independence from Chinese rule, such as Tibet. Conversely, China may continue to sit on the sidelines of the conflict and neither support nor denounce Russia’s action, even tacitly endorsing Russia.
The real test of China’s intentions will be whether it supports new pipelines for Russia to pump natural gas directly to China, potentially an industry-saving measure as Russia alienates its European customers. China’s reaction will likely make or break Russia’s resolve to continue with its Ukrainian aggression.
7) Ukraine’s Possible Economic Collapse
It remains unclear which country will supply Ukraine’s much needed bailout funds as it teeters on the edge of national bankruptcy. Following the fall of the pro-Moscow leader in Ukraine and the appointment of pro-West leader, Russia has frozen its 15 billion dollar bailout to Ukraine. However, the IMF is willing to provide the 35 billion dollar bailout Ukraine says it needs, but only if Ukraine lowers its high gas subsidies.
Still, it seems Ukraine has little choice if it hopes to be able to pay its debts and remain financially afloat in the coming months. If Ukraine’s economy did implode, it would have dire consequences on the global economy, and could cause a chain reaction that would spread to other economies in the region.
6) Russian Economic Downfall
Russia’s economic future is looking very bleak if they do not stop their aggression soon. The IMF has lowered its economic growth projection for Russia’s GDP from 0.8 percent to 0.5 percent. Even the Russian ruble has depreciated to its lowest level in five years against the euro and the dollar, while the Russian capital outflow has already exceeded $64 billion this year.
Furthermore, investment in Russia has already decreased as interest rates continue to rise in order to keep the ruble afloat. This will eventually increase inflation and slow down economic growth in Russia.
5) Global Economic Instability
Recently, the IMF chief warned that the Ukraine crisis could destabilize the global economic recovery if it spills over to other European countries at a time when global economic growth is still weak. The G-7 has also expressed the same concern over the global economic upheaval.
With a fragile world recovery and a recent Great Recession, the world is not ready for another global economic crisis, which could lead to a devastating outcome – potentially another global economic crash.
4) Global Defence Spending
Russia’s recent invasion of Crimea will likely increase Eastern Europe’s defence and military spending. This has the potential effect of benefiting the US arms industry, since the US has defence contracts with many European countries.
Even neutral countries, such as Sweden and Norway, are considering closer cooperation with NATO in order to increase military spending as the threat of Russian aggression continues. The end result could isolate Russia’s militarily if Russia’s neighbouring counties upgrade and modernize their own armed forces.
3) Higher Food Prices
With Ukraine being the sixth-largest wheat exporter, investors are speculating that wheat prices will increase, which could further bring instability to the market. Already there has been a rise in sugar, coffee, and soybeans throughout the world. Higher food prices can lead to a slowdown in the growth of economies in two ways.
First, with high unemployment rate still looming and food prices on the horizon, people will be forced to allocate funds towards basic necessaries and away from non-essential goods. Second, higher food prices in turn spike inflation rates, which could force banks to react by increasing interest rates in order to offset sharp upward prices.
2) Natural Gas Disruptions
Currently, 40 percent of Europe’s gas supply from Russia through Ukraine is being threatened if Ukraine does not repay its gas debts that Russia has already hiked up. If Ukraine’s gas gets cut off, then Europe’s supply of gas would be affected and the subsequent rise in energy prices could greatly impact the global economy.
With the threat of a potential gas war on the rise, European leaders are seeking out alternative gas suppliers and ways to tap into their own natural gas resources. However, this in turn could backfire on Russia if Europe decides to pull away from its dependence on Russia’s natural gas resources.
1) Nuclear Weapons
In 1994, Ukraine signed an agreement with world leaders, including Russia, to give up its nuclear weapons in exchange for a promise that their territorial sovereignty would be respected. Russia has gone back on that promise by invading Crimea, and the message it sends to those countries that are pursuing nuclear arms is a dangerous one.
The greatest risk to the global economy comes in the form of nuclear weapons ultimately being used as a result of some future conflict. With countries like South Korea, Japan, Iran, and others now more scared than ever at the prospect of foreign invasion, the demand for nuclear weapons has grown.
In the end, if countries do expand their nuclear weapon capabilities it will endanger the world economy as a nuclear conflict becomes more likely. The damage done to nuclear disarmament and global stability could be one of the most enduring consequences of the Ukraine crisis.