What effect will the Russia-Ukraine war have on world trade?

Industry News | | MIC Customs Solutions |

As the biggest crisis to world peace since 1945 looms, the threat could be significant from an economic and trade perspective too.

Last week, the world watched in shock and horror as Russian tanks rolled into Ukraine to mount what president Vladimir Putin called a 'special military operation' - an invasion, by any other name.

With the two countries now at war and Ukrainian citizens fighting for their lives as well as their rightful territory, nations across the globe are taking steps where they can to punish Russia and make it more difficult for the Putin regime to sustain the military's actions.

But what will be the effects of these actions when it comes to the economy? How will trade be affected? Let's take a closer look at some of these issues.

Sanctions from the west

US president Joe Biden and German chancellor Olaf Scholz were among the first to outline their sanctions against Russia, with Mr Biden saying it would be vital to present a united front.

Washington froze Russian assets in the US, halted exports of some electronic products and sanctioned Russian banks, while Germany took similar action to prevent the opinion that it would have sympathies akin to those during the Cold War era.

Elsewhere, Australia and Japan also imposed their own sanctions on financial institutions and wealthy individuals, as well as putting stops on semiconductor exports.

Britain followed after prime minister Boris Johnson called the invasion a "catastrophe for our continent", swiftly announcing the exclusion of all major Russian banks from the financial system, suspension of export licenses for items that could be used for military purposes and a freeze on exports of oil refinery equipment.

Perhaps the strongest reaction came from the European Union as a whole, which targeted 70 percent of the Russian banking market and also banned the sale of aircraft to Russian airlines, among other measures.

Forced to take a hit themselves

Unfortunately, although these actions are necessary to demonstrate the abhorrence of Russia's treatment of Ukraine, they will undoubtedly force the countries taking them to accept an economic hit as well as a political one.

For instance, around 45 per cent of Europe's imports of natural gas come from Russia, and Germany's plans for the Nord Stream 2 pipeline that would have increased this total now lie in tatters. 

Putin is unlikely to accept the sanctions without retaliation either, and the fear is that this revenge could come in the form of cutting off natural gas shipments into Europe. According to figures from the European Central Bank compiled by Bloomberg, a gas rationing shock could cause an economic contraction of three percent for the continental bloc - and that's an optimistic estimate. Ultimately, this could lead to recession.

The UK would not be as directly impacted by energy supply issues as Europe, since it is able to draw from reserves in Norway, the North Sea, Qatar and the US. However, the knock-on effects would certainly impact prices on things like food, transport and manufacturing, potentially hitting industry and businesses hard.

According to government figures, Russia had been the UK's 19th largest trading partner in 2021, with top exports including cars, pharmaceuticals and power generators and big imports including energy and metals, all of which could now be affected by tit-for-tat sanctions.

Across the world as a whole, technology companies are bracing themselves to take a financial hit as they are forced to abide by export controls to prevent products falling into the wrong hands, while cyber attacks could become a reality as the Kremlin attempts to cause maximum disruption to the nation it views as ganging up against it.

Defiance - and defenders?

Russia has said it is already taking action to minimize the effects of Western sanctions, in part by reaching out towards Asia.

"The rhetoric of some of our foreign colleagues was such that we have been ready for potential new sanctions for a long time," Reuters quoted a Russian government official as saying.

In particular, Putin is keen to boost his ties with China, his some-time ally against the west. Yet this puts Beijing in an interesting position as it finds itself caught between its usual sympathies and international interests going forward.

On the one hand, analysts believe China is likely to continue to support Russia from a trade point of view. As professor of economics at the China-Europe International Business School Bala Ramasamy told the South China Morning Post: "The relationship between the US and China has not improved in the last few years. So, how do you expect China to suddenly join all the sanctions that the Western countries are going to impose? I do not think China would abide by the sanctions, at least initially."

Indeed, China has always adhered closely to its position of not interfering with other countries' affairs as long as they do not interfere with its own.

Yet on the other hand, Beijing is unlikely to risk completely severing its ties with western allies like the UK, and it surprised the world by abstaining from a UN Security Council vote condemning the Ukraine invasion.

China would also surely not stand by without reaction should Putin make good his threats of using nuclear weapons.

So, to answer our earlier question, the Russia-Ukraine war looks set to take an enormous economic toll on a world not yet fully recovered from the effects of the coronavirus pandemic. Just how big will depend on what happens next - and what Putin's empire does to strike back.