Global economic instability after 6 months of conflict between Russia and Ukraine

It's not just Russia and Ukraine, most governments, businesses and households around the globe are feeling the economic impact of the war.

Martin Kopf needs gas to run his family's company - Zinkpower. They specialize in making anti-rust coatings for steel products. Zinkpower's factory is located in Bonn, a city in western Germany. Every day, they have to use gas to melt 600 tons of zinc worth 2.5 million euros to plating steel.

However, six months after Russia launched its military campaign in Ukraine, the very existence of companies like Zinkpower is under threat. Not only is gas more expensive, but it could disappear if Russia completely cuts off supplies to Europe in retaliation for sanctions.

Germany may have to allocate quotas for gas use, threatening a range of industries from steel to pharmaceuticals. "If they cut off all the gas, all of our machines will be shelved," said Kopf, who is also president of the German Galvanizing Association. Zinkpower currently has 2,800 employees.

A Zinkpower employee is working at the factory. Photo: AP

Governments, businesses and families around the globe are feeling the economic impact of war. This comes just two years after the pandemic devastated global trade. Inflation is skyrocketing, and energy prices have peaked in a row, raising fears of a cold winter. Europe is also being pushed to the brink of recession.

Expensive and scarce food has been warned that it can cause hunger and instability in developing countries. In Uganda's capital Kampala, Rachel Gamisha says the war in Ukraine has affected her grocery store.

All the essentials have gone up in price, like gasoline, which currently costs $6.90 a gallon (3.78 litres). This week's price is only 2,000 shillings ($16.7), next week it can go up to 3,000 shillings. "You have to limit yourself to shopping," she said.

Gamisha also noticed another trend. That is, the product price stays the same, but the weight decreases. A cake that used to weigh 45 grams is now only 35 grams. Bread that used to weigh 1kg is now 850g.

Last month, the war in Ukraine prompted the International Monetary Fund (IMF) to downgrade its global growth outlook for the fourth time in less than a year. The organization forecasts that global GDP will grow only 3.2% this year, down from the 4.9% forecast in July 2021 and much lower than last year's increase of 6.1%.

"The world could soon be pushed to the brink of recession, just two years after experiencing the last recession," said Pierre-Olivier Gourinchas, chief economist at the IMF.

The United Nations Development Program (UNDP) says rising food and energy prices pushed 71 million people globally into poverty during the first three months of hostilities. The countries of the Balkans and sub-Saharan Africa are hardest hit.

In Bangkok, rising prices of pork, vegetables and oil prompted a restaurant owner, Warunee Deejai, to raise prices, reduce staff and increase opening hours. "I don't know how long I can keep the prices," she said. "Just got out of the blockade because of Covid-19 and then I came across this situation. I don't see a way out yet."

A grocery store in Jakarta (Indonesia). Photo: AP

Since before Russia launched a military campaign in Ukraine, the global economy has been under pressure. Inflation increased sharply due to a faster-than-expected recovery after the pandemic. Factories, seaports, and yards are all overloaded, causing delays, shortages of goods and high prices. To solve it, central banks of a series of countries simultaneously raised interest rates .

"We're going to continue to experience this," said Robin Brooks, chief economist at the Institute of International Finance (IIF), "The volatility in inflation and growth will make it difficult for central banks to navigate more economy".

China is still pursuing the Zero Covid policy, applying a strict blockade that weakens the economy. At the same time, many developing economies are still grappling with the pandemic and the debt pile arising from stimulus policies.

These challenges could have been solved. But when Russia launched a military operation in Ukraine on February 24, the West responded with strong sanctions. Both of these actions disrupted the global food and energy trade. Russia is currently the third largest oil producer and the world's top exporter of gas, fertilizer and wheat. Farms in Ukraine also provide food for millions of people around the globe.

As a result, inflation was pervasive . In Johannesburg (South Africa), Stephanie Muller compares prices online and compares multiple grocery stores to find the best price. "I have three children who are all going to school. So I feel the difference very clearly," she said.

Bui Thu Huong (Hanoi) has to limit spending and reduce weekend dinners. But at least, she finds it beneficial to have the whole family cook together. "We can increase the engagement when cooking, and save money," she says.

Agriculture Minister Syahrul Yasin Limpo this month warned that the price of instant noodles - an essential product in the country - could triple because of high wheat prices. In neighboring Malaysia, farmer Jimmy Tan also struggled because fertilizer prices increased by 50%. He also spends more money on bags and sacks.

In Karachi (Pakistan), Kamran Arif had to get a second job, working part-time to earn extra income. "We have no control over prices, so we can only try to increase income," he said. The Pakistani currency has depreciated about 30% against the USD. The government also increased electricity prices by 50%.

When the war dragged inflation up, central banks chose to raise interest rates to slow the price increase. As a result, lending rates skyrocketed, affecting businesses like FlooringStores (New York, USA). Their flooring sales plummeted as homeowners hesitated to borrow to renovate their homes.

"A large number of our customers are taking out loans to fix their homes. This means higher interest rates will hurt our business," said CEO Todd Saunders. "Interest rates are more influential than inflation."

Europe - which has for years been dependent on Russian oil and gas - is hardest hit. The risk of recession here is increasing as the Kremlin gradually cuts off gas exports to Europe. This threatens businesses and households as winter approaches. Gas prices in Europe have increased 15 times since March 2021, when Russia sent troops to the Ukrainian border.

"Compared to developed countries, the risk of recession and pressure in Europe is much greater," said Adam Posen, director of the Peterson Institute for International Economics.

The Russian and Ukrainian economies, of course, cannot escape the influence. Preliminary data released by Rosstat - Russia's Federal Statistical Service in mid-March showed that the country's GDP fell by 4% in the second quarter compared with the same period last year. According to Bloomberg , Russia 's current GDP is comparable to 2018.

Analysts said that Russia's GDP fell due to weak consumer demand after Western sanctions. This is the first complete quarter that the Russian economy has experienced since the opening of the military operation in Ukraine at the end of February. The previous quarter, Russia grew by 3.5%. The IMF forecasts that Russia's GDP will shrink by 6% this year.

Ukraine is in talks to get a $15-20 billion bailout from the International Monetary Fund (IMF) this year to revive its war-torn economy . GDP of this country is forecasted to decrease by 35%-45% this year. The monthly fiscal deficit has reached $5 billion. The country is also heavily dependent on financial resources from Western countries.