Ukraine was, until February 24, the most important country in the world that most people couldn’t find on a map. It has now become the most important country in the world that the world is not saving. We, the West, cannot solve our own economic and ensuing political woes until we do.
Before Russia’s latest assault on Ukraine, the smaller country was, despite being the poorest in Europe per capita, an economic powerhouse with an outsized role in global supply chains. Its agricultural sector accounted for 10% of global grain exports; 12.8% of global maize and 10.5% of global wheat supplies, for example. It also produced over 45% of the world’s sunflower oil. Ukraine was a mining and industrial stronghold; it was the fourth largest iron ore exporter on earth; and the 13th largest steel exporter. It also exported significant quantities of nickel, uranium, and other minerals. It manufactured and exported chemicals, engines, heavy equipment, and more. This is not in any way an exhaustive list.
Ukraine was also critical for energy. Until 2020, approximately 90 billion cubic meters (bcm) of natural gas flowed from Russia through Ukraine to the European Union (EU), accounting for more than half of the recent annual average of 170 bcm. Those flows are now below 40 bcm and may well be cut off entirely. Meanwhile, Russia has retaliated against the West by cutting off gas supplies to Poland and Bulgaria, and drastically reducing them to Germany, France, Italy, Slovakia, and others. Many expect Russian supplies to Europe to stop entirely in the next few months. Germany has declared a gas crisis and others are considering similar emergency measures.
The effect of the war in and on Ukraine is, not least through these various supply chains, having a catastrophic impact on prices. Inflation, already an issue after COVID-19 shocks, is skyrocketing due to both geopolitical instability and commodity shortages caused by the invasion. In turn, these economic problems are stoking voters’ dissatisfaction with their political leadership (see recent events in Sri Lanka.)
Western governments who were unwilling to commit fully to saving Ukraine when public sentiment supported tough action, will now be held to account for the economic fallout by voters whose appetite for prioritizing Ukraine over domestic problems has now diminished.
The US Federal Reserve estimated in May that Russia’s invasion of Ukraine and its disastrous consequences will end up reducing 2022 global GDP by 1.5% while contributing 1.3% in 2022 to global inflation. It attributed this to “lower consumer sentiment, higher commodity prices, and tighter financial conditions.” Given how the world has been caught flatfooted on everything else about Russia’s offensive and Ukraine’s struggle, while simultaneously underestimating inflationary pressure, these figures may well be an underestimate.
In the US, inflation is currently at least 8.6%. Fuel prices have almost doubled for drivers. Food prices are up 11.9%. Housing is up 5.5%. In Europe, the situation is just as bad, if not worse. Overall inflation is also officially 8.6%, with energy prices up 41.9% and food up 8.9%. It is likely to get much worse.
Recessions are now feared if not fully expected throughout the Western world. In response, monetary authorities are increasing interest rates. The US Federal Reserve hiked the benchmark interest rate by a huge 0.75% in June and promised additional hikes in 2022 and probably 2023. The European Central Bank is raising interest rates by 0.25%, with further increases expected later in the year.
These measures are too little too late. They will take effect slowly, and some economists and market analysts say they are anyway the wrong tool for the problem. The rate increases are demand-side adjustments, whereas the problem is supply-side. The war in Ukraine is a supply chain crisis, with Russia blockading the Black Sea ports through which Ukrainian farmers export agricultural products. The energy sector too faces a supply-side problem. Germany is enacting measures to reduce consumption there, too, but in the middle of a summer heat wave in Europe, the real issue is the lack of natural gas.
In the meantime, governments are going to begin to fall as voters voice their malcontent with inflation and recession. It is not a coincidence that French President Emmanuel Macron lost his parliamentary majority in June. Even he recognized that the war is having “a profound impact on many things,” and that “it wasn’t sufficiently taken into account in France’s public debate.” In the US, where inflation is now the top issue for Americans, President Joe Biden’s approval rating has dropped to 39% in the face of the worst price increases in 40 years. Pundits universally expect Democrats to lose control of the House in the mid-term elections in November. Other governments and administrations will be tested as elections approach.
Of course, the longer the war, the worse the global economic outlook. One missed Ukrainian planting or harvesting season is a disaster, but two is a global famine. Eventually, demand-side monetary policies will tame inflation, but probably not without recessions intervening. Depending on how long the war lasts and how many months or years are needed to bring prices down, voters may have ample time to inadvertently hand Vladimir Putin victories at the ballot box by venting their economic frustrations. If the blowback is sufficiently strong and results in governments seeking to appease the Kremlin, Putin might hope for sanctions relief as part of some grand bargain at Ukraine’s expense.
There is an alternative. Western governments’ best economic response is exactly the same as their best military and political responses — to seek a supply-side solution by helping to definitively liberate Ukraine from Russian occupation. Ukrainians could then get back to farming, smelting, and mining to the benefit of the whole world.
Not only would this be significantly cheaper and more efficient than partially arming Ukraine over the course of a multi-year military stalemate, but it might even happen fast enough to save our governments before they’re voted out.
Suriya Evans-Pritchard Jayanti is an Eastern Europe energy policy expert. She served for 10 years as a US diplomat, including as the Energy Chief at the US Embassy in Kyiv, Ukraine (2018-2020), and as international energy counsel at the US Department of Commerce (2020-2021). She is currently Managing Director of Eney, a US-Ukrainian decarbonization company.
For weeks, if not months, we have witnessed a barrage of narratives suggesting that global powers help Russian face-saving following its illegal and unprovoked invasion of Ukraine. It is a position adopted in various forms by European politicians of varying degrees of prominence — from G7 leaders like President Macron of France and Chancellor Scholtz of Germany to analysts and Russian-sympathizing political parties, to Brazil’s President Bolsonaro or India’s Prime Minister Modi.
The common message in various versions of this Putin-pacifying approach is that the only way of ending the hostilities is by forcing Ukraine to agree to some form of concession or defeat.
Allowing Russia to get away with mass murder and ethnic cleansing has significantly more far-reaching consequences than just the suffering of tens of millions of Ukrainians (although the notion of deliberately causing human suffering of such magnitude in the 21st century is in itself despicable.)
The wider world will suffer as well, with the turmoil potentially lasting decades, greatly undermining the quality of life of hundreds of millions, if not billions of people.
The world is struggling with a post-pandemic economic slowdown, inflationary pressures, continued and accelerating climate change, and food and energy supply issues.
So let us additionally imagine a scenario where Russia re-emerges with Putin’s face intact.
Russia has abused the global energy trade for years (in one recent example, it’s meddling with gas supplies to Europe in 2021 sent natural gas prices skyrocketing.) It no longer even denies that it uses energy as a tool of pressure: not just with gas supplies to Europe, but also enriched uranium for the United States. With his military aggression unpunished, Putin’s energy blackmail will continue: why would Russia refuse the windfall revenues from the distorted markets it can manipulate, when it also allows it to reap political benefits?
Food shortages will increase. Ukraine is a major global grain producer and exporter, and Russia’s key competitor in grain and other food exports. The blockade of ports, destruction of storage and export logistics, and looting of grain are therefore not accidental. Ukraine is, or was, a key supplier for the UN World Food Programme, feeding millions in the poorest countries. If Russia kills off competition from Ukraine, it will have even greater leverage to use global hunger as a lethal weapon.
Russia will continue to poison other countries’ internal affairs. For years, it has been attempting to rig elections and has carried out extrajudicial political assassinations. It has promoted corruption and rent seeking in the political and economic life of Western democracies, bribing or insinuating its way into establishments and media, supporting all manner of wild conspiracy theories. At home, it has completed the process of destroying all democratic institutions, imprisoned or killed its opposition leaders, subdued all media, and indoctrinated its population.
Putin will also continue to use one of his favorite weapons: refugees. Direct Russian military action or covert operations have helped force millions of refugees to seek safety in Europe, Turkey, Jordan, and other countries even before the latest Ukraine invasion. As NATO’s Supreme Commander noted in 2016, Putin and his allies helped create and then mercilessly exploited the EU’s Syrian migrant crisis. Now that he has added hunger to bombs, there will be more global exoduses.
But perhaps “off-ramps” will at least bring peace? Again, no.
Russia’s security strategy has always been to surround itself with a “belt of insecurity”, creating conflicts in Transnistria in Moldova, supporting Armenia’s occupation of Karabakh and the war with Azerbaijan, helping defeat pro-democratic forces in the Tajik civil war, occupying South Ossetia and Abkhazia in Georgia in 2008, not to mention two brutal Chechen wars domestically. Then came the Ukraine invasions of 2014 and 2022. A little-noticed flare-up is under way in Tajikistan, which Russia already promised to “defend”. Further afield, Russia undertook full-scale military action in Syria, and has blessed brutal and rapacious private army operations in Sub-Saharan Africa.
Where might these so-called private armies of Russian mercenaries show up next? As many top Russian officials explicitly stated, there is no intention to stop. Helping Russia avoid defeat in Ukraine now would only allow it to rebuild its military capacity, damaged in Ukraine, using its massive energy profits.
Governments near and far will be forced to respond. Defense budgets around the world will surge, just as increased energy prices will hit voters in both developed and developing worlds. Public spending will be reduced, affecting healthcare, education, and social services. Forget new investment in infrastructure and non-military R&D: green economy and climate change-related initiatives will be shelved. As disposable incomes dry up in the West, China’s consumer goods exports and economic growth prospects will suffer.
Such is the price of saving Putin’s face: a poor, insecure, hungry, militarized world.
Are you ready for this world for your children?
Or shall we arm and finance Ukraine now, and let Ukrainians fight for our joint future?
Artem Shevalev is an International Economics graduate from Kyiv National University. He also holds an Executive MBA from London Business School. He served in Ukrainian diplomatic service, moving into public development finance in 2002, spending most of his time since with the EBRD. In 2015-2016 Artem served as the Deputy Minister of Finance for European Integration, launching the state banking reform in Ukraine. He currently sits on the Board of Directors of the EBRD and the Supervisory Board of PrivatBank, the largest bank in Ukraine.