A Year in the Markets: How the Ukraine War has Changed the World

by: John Minyen

As the one year milestone of the Russia-Ukraine War passes by, the severity of the conflict is still causing distress across several sectors in international financial markets. Oil and agricultural markets, particularly, have been hit hard, and political fallout from the war between world powers continues to add fuel to the flame. Combined with the severely weakened state of most countries’ economies coming out of the COVID-19 pandemic, the growth that was expected to occur is not developing at optimal speed. In some cases, the situation has become more dire as continued stalled growth adds pressure to over burdened markets. While the war in Ukraine is not the only source of market concerns, it has proven to be a focal point for global events. The combination of multiple negative factors has led to unfavourable projections, resulting in the beginning of severe market fluctuations.

One of the major worries for economists rightnowisthatoilandgasinfrastructurein Ukraine is being targeted, while Russia’s status as a major natural gas exporter has put European governments in an awkward position. One of the most important assets to both sides of the war, oil production, is being affected on a global scale, thereby resulting in drastic implications for years to come no matter the outcome of the war. These changes can be observed in the United States, where on October 20th of 2022, 180 million barrels from the US oil reserves were released to offset the Organization of the Petroleum Exporting Countries’ (OPEC)decision to reduce all oil production. The decision to reduce oil production soon after laying out plans to increase production to meet new post-COVID demands has direct political implications, and stands in open defiance of the United States’ request to not cut production. While the justification for this slash was stated to be a decrease in demand and an untenable price fall, behind the scenes it is quite obvious that Russia is using its status as a co-founder of OPEC and one of the top three oil producers in the world to exert pressure on foreign markets.

Countries in Europe have been especially wary of these changes, as the decision by many European countries to distance themselves from reliance on Russian oil has been met with Russia shutting off said natural gas to cause immediate destabilization of those countries' economies. For instance, the Nord Stream pipeline attack and the decision by Russia to shut-off another major gas pipeline to Germany are indicative of the repercussions of the war. Moreover, on September 7, 2022, the Russian government announced that a major oil pipeline between Germany and Russia would be temporarily shut off, and on September 28, the Nord Stream pipeline in the Baltic Sea was bombed. This series of undersea pipelines leads directly from Germany to Russia, and is a major artery in the fuel supply to not only Germany, but the entirety of Western Europe. Russia’s status as the largest exporter of natural gas to the European Union has persisted despite direct opposition to the war from those governments, which has brought an immediate power crisis to many European nations.

Russia continues to hold significant economic power within the region, even as their domestic economy suffers. Disruption to the flow of natural gas to the European Union would be catastrophic for the world economy, since the fallout from the war has already severely hampered the growth of markets following the COVID-19 pandemic. Particularly, the recovery of the United Kingdom’s economy has declined due to crippling global supply chain issues. The significant downturn of the United Kingdom’s economy can be clearly reflected in the economic predictions from the start of 2022 to the present. In June of 2022, the Organisation for Economic Co-Operation and Development released an updated prediction for economic growth across the European sectors, and saw Britain reduced from a 4.7% increase in 2022 and an increase of 2.1% in 2023 reduced down to 3.6% in 2022 and a 0% growth in 2023. As the United Kingdom’s shortage of supplies persists, the threat to international markets increases.

In addition to the oil markets, global agriculture has been disrupted on an extreme scale. Ukraine produces 10% of the world’s wheat export, but has now suffered almost $6.6 billion USD in damages to their agricultural infrastructure. As Russia consolidates land in the east and continues bombing campaigns, Ukrainian farmers have experienced difficulties returning to the fields and growing the work-intensive wheat crop. Instead, many farmers are switching to sunflower and oil producing crops, hoping to maintain a profitable crop yield that can be exported. As a result of this drastic shift, Ukraine has engaged in economic diplomacy with Poland to build an oil pipeline between the two countries to accommodate this new influx of organic oil. However, this trade off will not come without a shock to the agricultural markets.

According to the Ukrainian Ministry of Agrarian Policy, land dedicated to wheat cultivation has decreased by 35%. Combined with the still recovering supply chain issues from the COVID-19 pandemic, inflation for agricultural products have spiked significantly in recent months. Wheat grain earmarked for export still sits in the harbor under Russian blockade, despite an intense diplomatic effort that saw nearly $9 billion worth of wheat channeled out of the Black Sea harbors. Wheat and oil production are not the only issues disrupting the agricultural world.The Russian export of fertilizer accounts for 20% of fertilizer exported globally, but the sudden sanctions of Russian exports with no immediate alternative has imperiled the world’s ability to produce food. Although many farmers were protected with locked input prices for 2022, there is a noticeable volatility in the market that will affect 2023 and potential crop yields for years to come.

As the war in Ukraine continues, each passing day continues to hamper necessary economic growth in sectors all over the world. The economic pressure being put on these markets is intense, and the development of international financial distress will be followed with rapt attention by experts, thereby dictating the tone of the world markets for years to come.