Russia’s war in Ukraine has shaken both global politics and international resource markets, and is likely to result in long-term impacts on economies and societies around the world.
Russia’s invasion of Ukraine continues to be a seismic global event, the full implications of which the rest of the world is still struggling to grasp. On the battlefield, where Russia may have hoped for a quick and easy victory, the war has now moved into a more attritional phase. Russia cannot control Ukraine, and Ukraine cannot eject Russian forces from its territory. As of early April 2022, a supposedly unstoppable force has been met by a seemingly immovable object.
The Russian government’s immediate political objective – ensuring that Ukraine ceases to pivot towards the West – is not being realized by military means. How might the impasse be resolved? There are five plausible scenarios for how this war of attrition might play out:
- A long-term stalemate, which might last months, or years;
- A ceasefire, involving territorial concessions by Ukraine;
- Ukraine’s collapse, as a consequence of Russia’s victory;
- Russia’s declaration of victory and withdrawal – with the objectives claimed to have been met;
- Russia’s collapse, and a change of regime.
Despite uncertainty over how the war may develop, the Ukrainian population is firmly united (a survey conducted in mid-March by Ukraine’s Rating Group revealed that 93 per cent of respondents believed that Ukraine would win, and 98 per cent saw Russia as a hostile country). Were it to achieve victory, Ukraine’s post-war future may be bolstered by generous amounts of support and aid from the West and the potential acceleration of the process to join the European Union (EU). Meanwhile, the long-term future of Russia in terms of the international economy is uncertain. The invasion of Ukraine, ordered by Russian President Vladimir Putin, has brought to the fore certain challenges that Russia’s economy has faced for some time (notably its carbon- and mineral-dependent economy and an ongoing ‘brain drain’). In addition, many (though not all) countries and institutions are turning away from transactions with Russia, as the repercussions of the invasion and the manner in which the war is being conducted become increasingly apparent. In short, Russia has become somewhat of a pariah.
The geopolitical backdrop
The world has experienced a number of destabilizing events over the last decade and a half. Among these have been the 2007–08 financial and food price crises; the 2010–11 food price crisis and the ‘Arab Spring’ popular uprisings, in which soaring food prices played a significant role; the war in Syria; increased migration and growing populations of displaced peoples; the rise of populism across the world, exemplified by the election of Donald Trump as US president in 2016; significant trade disruptions, including the US–China trade ‘war’; the UK’s exit from the EU; the COVID-19 pandemic; and, in 2021, the disordered withdrawal of US troops from Afghanistan. Throughout this period, multilateral processes have been weakened, political leadership has often been lacking, and global unity has appeared low.
The invasion of Ukraine by Russia in February 2022 marked a return to state-on-state warfare – something Europe had not experienced since 1945 – and has demonstrated the complete disrespect of the Russian leadership for international law.
The current global crisis brings new challenges. The invasion of Ukraine by Russia in February 2022 marked a return to state-on-state warfare – something Europe had not experienced since 1945 – and has demonstrated the complete disrespect of the Russian leadership for international law; it is an event of major historical consequence. From a security perspective, the immediate effect, beyond the suffering of the population of Ukraine, has been to strengthen the commitment of Western nations to multilateral institutions, in particular NATO and the EU. To prevent further aggression and respond to the enhanced threat to NATO and EU nations that border Russia, there is a requirement for effective deterrence, both conventional and nuclear, delivered through defence forces that are strong in terms of both capability and scale. Germany has already pledged to spend €100 billion of its 2022 budget on national defence, and there have long been calls (notably from France) for the establishment of a pan-European defence force to deter future aggression on the part of Putin or other leaders with similar aspirations. Collectively, NATO and the EU will need to make it clear that, if necessary, they would be prepared to use these forces. However, there is no certainty of such a commitment from all NATO and EU members; already there are signs that resolve is weakening in some quarters, with the UK chancellor of the exchequer reported in late March to be resisting additional increases in defence spending.
In addition to such hard security implications, the conflict raises the possibility of a restructuring of international trade. It is not known when the significant number of sanctions against Russia may be lifted and if, or when, others may be deployed. Russia may move to impose counter-sanctions or export bans, and other countries may do the same if they feel their interests are harmed by sanctions on Russia – China, for example, has threatened such action.
Even if the war ended today, these sanctions will continue to interrupt the flow of goods from Russia into global markets to a significant extent. As unity strengthens within the Euro-Atlantic community, and as China looks likely to align more closely with Russia, the conflict – and the responses it has triggered among governments and industry worldwide – have the potential to prompt significant reconfigurations in markets to which Russia has to date been a major supplier: namely, energy, food and fertilizers.
The role of Ukraine and Russia in global resource markets
The war in Ukraine has very serious implications for global food and energy markets, which in turn have the potential to yield cascading impacts on economies and societies around the world.
Russia and Ukraine are both significant players in global energy, food and fertilizer markets. Russia is the world’s third largest producer and exporter of oil; the second largest producer and the largest exporter of natural gas; and the third largest exporter of coal (thermal and coking). Russia is also the world’s largest exporter of wheat and the second largest exporter of sunflower oil. Ukraine is equally significant to global food markets, as the largest exporter of sunflower oil, the fourth largest exporter of maize and the fifth largest exporter of wheat. Russia also dominates global trade in fertilizers: it is the largest exporter of fertilizers overall, the second largest exporter of nitrogenous fertilizers and the third largest exporter of potassic (those containing potassium) fertilizers.
Russia is also an important supplier of metals and minerals, particularly of nickel, palladium, platinum and titanium, as well as aluminium, copper and uranium. While disruptions to mineral and metal supply chains will almost certainly affect production in a number of industrial sectors in the coming months, any changes to the prices or availability of food and energy will have more immediate impacts on the day-to-day experience of people and businesses around the world.
The potential for cascading risks
With the conflict in Ukraine unlikely to be resolved in the short term, its impact on global resource markets will continue to strengthen, and with it the probability of very serious ‘ripple effects’ on economies and societies around the world. These ripple effects are often referred to as ‘risk cascades’, and they can very quickly have negative impacts in geographies and sectors far removed from the original event.
Past situations can provide an indication of the potential for cascading risks. Prior to the current crisis, the most dramatic food price ‘spike’ on record occurred in 2010–11. This was driven by an extreme heatwave affecting agricultural production in Ukraine and western Russia. Yields fell by 30 per cent in some regions, with a significant impact on export volumes. The resulting market runs, accelerated by export restrictions from producer countries nervous about their own food security, drove rapid food price inflation that affected families around the world, necessitating food aid for the economically marginalized (in the UK, for example, emergency demand at food banks run by the Trussell Trust more than doubled in 2012–13 compared with the previous year). The food price crisis also led to food riots in many countries and was a contributory factor to the Arab Spring, the geopolitical reconfiguration of the Middle East and the ‘migrant crisis’ in Europe. This in turn gave rise to increasing nationalist and populist sentiment in a number of countries, and had political consequences for European unity over the following decade.
The current conflict in Ukraine may bring even more severe and far-reaching cascading risks. The potential scale of physical and economic disruptions to food and energy markets increases with every week the war continues, as Russia becomes increasingly disengaged from the global community and governments around the world respond. And, unlike the 2010–11 food price spikes, this conflict is playing out against a backdrop of existing and exceptional upheaval to global supply chains in the wake of the COVID-19 pandemic and an already severe global cost-of-living crisis.
The scope of this paper
This paper begins by discussing the socio-economic and resource pressures facing the international community prior to Russia’s invasion of Ukraine on 24 February 2022 (Chapter 2), before examining the direct impacts of the conflict on the complex and interconnected energy, food and fertilizer markets (Chapter 3). It then considers the potential for cascading economic, social and security risks around the world (Chapter 4). Finally, it discusses the ways in which policy and market responses witnessed to date – and those that might follow in the coming weeks and months – may mitigate or exacerbate cascading risks from the conflict, and explores the possible ramifications for international cooperation and security in the longer term (Chapter 5).