24 Jun 2022 4 min read

Ukraine: Protracted war, economic turmoil

By Matthew Rodger

The war in Ukraine will impact geopolitical risks and commodity prices for as long as it continues. Here, we examine the persistent effects of the war on Russia’s economy and on global financial markets.

It has been over 100 days since the start of Russia’s war with Ukraine on 24 February. The war contravenes almost every measurable environmental, social and governance (ESG) metric.
Economically, policymakers, markets and investors have dealt with a spike in energy prices, the expulsion of Russia from western capital markets and disruption to supply chains.

A troubled market

The consequences of the war have been severe for Russia’s domestic economy. The ejection of Russia from the SWIFT payments system and the freezing of G7 currencies has made external financing impossible, and domestic firms have been forced to look internally for further lines of credit. The stoppages in western deliveries and the decline in the rouble have pushed up domestic inflation, bringing Russia’s ‘misery index’ (the total of unemployment and annual inflation) to its highest level since the invasion of the Crimea in 2014.

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We expect that index levels will only rise in the near term. Inflation, despite an active central bank policy, is likely to stay high, as shortages of western-imported goods (both finished and components) mount and production takes a significant hit. Growth in export-oriented industries will suffer. As Russian firms are locked out of western export markets, layoffs and a rise in unemployment are likely to follow. Though this pain is likely to be transitory, Russia’s long-run driver of growth, after being deprived of technological transfer from the west and the exodus of some of the educated population, remains in doubt.

Commodity ructions

As the disruption from the war in Ukraine has continued, commodities have moved front and centre of investors’ anxieties. European natural gas is mostly supplied by Russia and represents a quarter of Europe’s energy supply. Prices have soared, putting households under strain and crimping the region’s energy-intensive industrial sector. As Ukraine and Russia together supply a third of the world’s wheat, food prices have also risen, with prices for wheat and animal feed rising by over 33% from its pre-invasion level.

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The costs associated with the war do not look set to abate any time soon. Russia’s blockade on the port of Odessa, through which Ukraine ships its wheat crop, looks set to persist for an extended period, keeping the pressure on wheat prices. Though Europe is extricating itself from Russian energy, attracting new supply will involve keeping energy prices high and constraining power demand from Europe’s consumers. Globally, the crisis adds yet another strain to the supply chains, as Russia is locked out of supplying metals, manufacturing components and lumber as well as energy. Among developed economies, pressure to re-shore these outputs to more secure domestic markets will increase, reversing the globalised trade economies have grown used to since the end of the Cold War.

Inflation: Here to stay

The elevated prices prompted by the war look set to persist. They have made a difficult job even worse for the world’s central bankers. Inflation levels which were already uncomfortable from the stresses in global supply chains, have now become unignorable, given the shock of the war and its visible effects on household food and energy bills. Rising commodity prices are painful for emerging markets, where food and energy comprise a larger share of consumer spending, but are accelerating monetary tightening in developed markets too, as policymakers fear a return to a 1970s-style wage-price spiral.

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Concerningly for the global economy, despite a considerable squeeze from rising commodities, prices for risk assets are currently overshadowed by the conflict’s geopolitical risks. Whether it is sparked by the accession of Finland and Sweden to NATO, tension over supplies to Russian Kaliningrad, or western weapons shipments to Ukraine, risks of a direct confrontation between NATO and Russia have not been this high since the end of the Cold War. Though eventually we expect we will reach a new equilibrium, if Europe’s diplomatic settlement remains in flux, the war’s capacity to negatively affect financial markets will not be over. As the war drags on, these geopolitical tensions are likely to persist beyond this year, and recent market volatility likely also reflects this greater risk premium.


Matthew Rodger

Assistant Economist

Matthew is an economist covering emerging markets. He uses countries’ historical experience, alongside fresh economic data and quantitative methods, to recognise new investment opportunities. Prior to joining LGIM, Matthew graduated with an MSc in Economics from the London School of Economics and worked in various economic research roles. When not studying EM economies, he is enjoys reading, hillwalking and skiing.

Matthew Rodger