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  • Daira Povez-Gamboa

Economic Implications of the Russia-Ukraine war

More than two months have passed since the start of the Russian Invasion of Ukraine. This has generated the biggest refugee crisis since World War II, with more than 4 million Ukrainians leaving the country; however, this is not the only consequence. The effect of the war has extended to a global approach, affecting the EU, USA, and UK principally.

In Germany, the peak sales of flour and cooking oil (206% and 123% increase respectively during the second week of March) are due to the panic of potential disruption of supplies from Ukraine and Russia. Half of the exports of global sunflower oil come from Ukraine and 21% from Russia; therefore, both countries are preponderant suppliers.

While in the eurozone in general, inflation hit a new high. Polish year-on-year inflation was 10.9% in March, the highest level in 2 decades. Another example is Lithuania which has the highest national annual inflation rate in the eurozone, 15.6%. Consumer prices increased by 7.5 % in March compared to the levels one year ago, overpassing the forecast of 6.6.%. Energy prices described a similar trend, rising by 44.7%. The main factors of the EU's current inflation situation are the higher energy and food prices since the invasion of Ukraine by Russia. Consequently, there is increased pressure on the European Central Bank to accelerate the tightness of the monetary policy.

The UK is not an exception. With the rise of the bank rate from 0.50% to 0.75% and current inflation of 6.2% (4.2% above the target), British households are the most affected by the increase in prices. Half of the population has difficulties paying their bills, and the significant increase in energy cost is the main factor. The survey published by the Office for National Statistics highlighted that energy bills would rise by 54%. At the same time, the data showed that the cost of living had increased more than 20% above the levels reported in November (when the survey started), reaching 87% at the end of March. Kit Malthouse, Minister of State for Crime and Policing, denoted that "it's a very tough moment" driven by factors outside of the government's immediate control, such as post-pandemic effects and the war in Ukraine.

On the other hand, the Asian stocks market fell sharply, following the decline in Wall Street, US stocks' worst quarter since the pandemic started. Moreover, the ongoing Russian invasion of Ukraine is the main factor why the business confidence has decreased among large Japanese manufacturers.

In the US, the elevated levels of uncertainty and pessimism regarding the war in Ukraine and the federal reserve policy have driven the decline of the S&P 500 index and Nasdaq Composite by 4.9% and 9.1%, respectively. It was the first quarter of losses and the worst quarterly performance for the S&P 500 since 2020. Furthermore, as the federal reserve has increased the interest rates, the two-year yield has risen too, and the US treasury bonds have suffered severe losses: a rise of 0.82% in the benchmark 10-year Treasury yield and 1.58% in the two-year yield.

Focusing on Russia, the rouble fell dramatically at the beginning of March (150 for one US dollar, which was a loss of almost half of its value). By applying draconian capital control and blocking foreign traders from leaving their investments, Russia has nearly recuperated all its losses and avoided a financial collapse. However, these measures isolate Russia from the global financial markets and generate an economic pullback of fuel.

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