The crisis in Ukraine has created a humanitarian crisis of immense proportions and has also dealt a severe blow to the global economy.
The brunt of the suffering and destruction are being felt by the people of Ukraine themselves but the costs in terms of reduced trade and output are likely to be felt by people around the world through higher food and energy prices and reduced availability of goods exported by Russia and Ukraine. Poorer countries are at high risk from the war, since they tend to spend a larger fraction of their incomes on food compared to richer countries. This could impact political stability. From a macroeconomic perspective, higher prices for food and energy will reduce real incomes and depress global import demand. Sanctions will impose economic costs on not only Russia directly but also on its trading partners. Besides Russia and Ukraine, depressed gross domestic product (GDP) will probably be seen mostly in Europe given the region’s geographic proximity and its dependence on Russian energy.
Trade costs will rise in the near term due to sanctions, export restrictions, higher energy costs and transport disruptions. As a result, the impact the war will have on world trade in 2022 could be greater than the impact on global GDP. While shares of Russia and Ukraine in world trade and output are relatively small, they are important suppliers of essential products, notably food and energy. Both countries accounted for 2.5 per cent in world merchandise trade and 1.9 per cent in world GDP in 2021. Yet they supplied around 25 per cent of wheat, 15 per cent of barley and 45 per cent of sunflower products exports in 2019.1 Russia alone accounted for 9.4 per cent of world trade in fuels, including a 20 per cent share in natural gas exports. Many countries are highly dependent on food imports from Russia and Ukraine.
For example, more than half of wheat imports in Egypt, the Lebanese Republic and Tunisia come from Russia and Ukraine. Other countries are more dependent on imports of fuels from Russia, such as Finland (63 per cent) and Turkey (35 per cent). Russia and Ukraine are also key providers of inputs into industrial value chains. Russia is one of the main suppliers globally of palladium and rhodium, key inputs in the production of catalytic converters in the automotive sector and the manufacture of semiconductors.
Semiconductor production also depends to a substantial extent on neon supplied by Ukraine, which further provides a number of low-tech products to the European automobile value chain, such as wire harnesses. Prolonged disruptions in the supply of these goods could harm the recovery of automobile manufacturing. Sanctions are already having a strong impact on Russia’s economy, with possible medium to long-term consequences. Disconnecting Russian banks from the SWIFT settlement system and blocking Russia’s use of foreign exchange reserves have triggered a sharp depreciation of the rouble, reducing real incomes in the country. Many international firms are also abandoning the Russian market. Oil and gas exports have yet to be strongly affected by the sanctions, but the crisis could accelerate the global transition towards greener energy sources. Longstanding economic relationships have been disrupted by the war and by the sanctions imposed in its wake. WTO economists have simulated various scenarios to illustrate the channels through which trade could be affected and to explore possible short-run and long-run effects.
Global trade growth is projected to slow by up to 2.2 percentage points in 2022. Longer term impacts could also be large and consequential. There is a risk that trade could become more fragmented in terms of blocs based on geopolitics. Even if no formal blocs emerge, private actors might choose to minimize risk by reorienting supply chains. This could reduce global GDP in the long run by about 5 per cent, notably by restricting competition and stifling innovation. The WTO has an important role to play in mitigating the negative effects of the crisis and in rebuilding a post-war global economy. Keeping markets open will be critical to ensure that economic opportunities remain open to all countries. This will be especially true in the post-war period, when businesses and families will need to repair their balance sheets and rebuild their lives. Through its importance for international trade and its monitoring, convening and other functions, the WTO is central to ensuring that international trade continues to serve billions of people across the world.
