Russia – Ukraine conflict and its impacts on the world economy

Russia – Ukraine conflict and its impacts on the world economy

Not only the global politics changed due to Russia-Ukraine tension, but it has some economic implications. The bloodless annexation of the Crimean peninsula affected global trade especially European Union trade where most countries in the union fulfill their energy requirements from Russian natural resources reserves. The situation is quite the same as the 2008 Georgian conflict where the European Union, United States and NATO raised voices but neither the United States nor, NATO took any military action against Russia to safeguard Georgia. However this time some sanctions are imposed to pressurize Russian government and such sanctions will have not only impacts on Russian economy but also the world economy will feel the heat.

Global Impacts of Russia/Ukraine Conflicts

The tension in the region will have some serious impacts on trading of various commodities particularly food products, oil, gas and gold. The geopolitical importance of Russia and Ukraine is vital and both are considered major suppliers of these commodities. Russia is considered one of the top producers of crude oil along with its main competitor Saudi Arabia and also enjoying a position of No. 2 in the production of natural gas in the entire world. Ukraine in the region is the largest producer of grain and is considered to be the third and sixth largest producer of corn and wheat respectively, this year.

Having such status in the market of grain, wheat, oil and gas no one can ignore the importance of these countries. Any conflict or sanctions on Russia can put pressure on Russian economy as well as the world economy. Over the last few years, Russia cut off gas supply to Ukraine twice because of payment disputes. Also, the pipeline used for supplying gas to Europe run through the territory of Ukraine so any type of tension can be felt throughout the continent.

Oil and Gas Trading

Oil and gas market are expected to be affected by the conflicts very seriously. Russia is considered one of the biggest producers of crude oil in the world and the production touch 10 million barrels on a daily basis. Similarly the country is blessed with natural gas, and there are quite chances Russia will cut off the supply of oil and natural gas in response to sanctions imposed due to the conflict in the region. On the other hand, both oil and gas exports account for about 60 percent of Russian annual budget, so any reduction can pressurized the European Union, but at the same time it will be extremely difficult for Russia to manage its budget.

Certain sanctions have already imposed, and the western powers have the intention to impose further sanctions in the form of economic penalties if Russia has not resolved the issue of Crimea region of Ukraine. Further sanctions will have drastic impacts on oil and gas global trading. The prices will show a significant bullish behavior on global price index.

Grain Trading

Though the presence of Ukraine is not considered vital on the scale of global trading, but it has a notable presence in the grain market. Before the conflict, it was expected that Ukraine will export 16 to 17 percent of corn and wheat respectively (i.e. the total world production) to the global market. If the situation remains the same and Crimea tension exists the exports will definitely reduce, and it will give a boost to grain prices to multi-month highs.

 Gold Trading

The tension in Crimean peninsula will have a significant impact on gold prices as people will buy gold as a safe haven, and as a result the demand for gold will increase. Usually investors prefer to buy gold or other precious metals especially in times of economic crunch and geopolitical stress, with the expectation that the metal will hold its values as there fall occur in other assets. Same is the case with gold in the current situation where Russians are keenly interested in occupying Crimea and beyond the border of Crimea.

Bottom Line

The built in fear reaction exists in every economic and financial market of the world. In case of Russian/Ukraine conflict the built in fear reaction is that prices of oil, gas and agriculture products will go up. Conversely, the fear on the other side i.e. stock market shows a downward trend.  If the tension prolongs quite chances are the world will face drastic economic crises. The matter is now global instead of regional.