Russia’s ongoing invasion of Ukraine is the latest and most significant in a series of major disruptions to global supply chains and economic activity. The World Bank estimates that the war will cause global income to drop by 0.7 per cent, hitting low-income countries particularly hard. Pre-war, Russia and Ukraine were major exporters of key products, including energy, fertilizers, food and minerals. However, they were comparatively less important for foreign direct investment (FDI).
The conflict has led to unprecedented sanctions on Russian companies and individuals, to the retreat of Western businesses from Russia and to military equipment being sent to Ukraine, as well as prompting a large influx of refugees into neighbouring European countries. It has exacerbated already high prices for energy and increased food insecurity, affecting household budgets across the world.
The UK has played an important role in providing military equipment to Ukraine and helping to coordinate a unified Western response to Russia’s invasion. It has introduced sanctions on Russian economic interests in the UK while supporting international efforts to counter Moscow, including on trade. In March 2022, G7 leaders issued a joint statement of their intention to withdraw Russia’s most favoured nation (MFN) tariff status, after which the UK introduced its own additional measures. Britain has also played a key role in formulating NATO’s robust response to the conflict.
Events in Ukraine follow closely after other global challenges, including not least the COVID-19 pandemic, from which developed countries are only just beginning to recover. A combination of pent-up consumer demand, supply-chain blockages (particularly due to continued lockdowns in China) and the green energy transition have put further pressure on prices and consumer budgets. For the UK, Brexit is another ongoing challenge that has led to a significant reduction in overall UK trade, caused by increased cross-border supply frictions and labour shortages.
While the UK government has prioritized new trade deals with countries outside the EU, and an ‘Indo-Pacific tilt’ away from Europe towards increased ties with the Asia-Pacific region, these efforts have so far failed to plug the economic and trade gap resulting from Brexit, and are unlikely to do so in future. Furthermore, the global trading system is not functioning as well as it used to: the WTO dispute resolution system has suffered various setbacks, and US–China tensions have discouraged global trade flows in favour of ‘decoupling’ and ‘reshoring’. Russia’s war on Ukraine therefore comes at an already unstable and fractured time for global trade.
The UK is less exposed to the direct effects of the war than its European neighbours. It relies less on Russia for energy than other European countries, mainly due to domestic renewable energy production, North Sea oil production and gas supplied via pipeline from Norway. As a mostly services-based economy, the UK is also comparatively less dependent on Russia for key commodities and inputs in industrial production processes, such as nickel and cobalt, which are essential components in electric vehicle batteries and other manufactured goods. However, the UK imports many consumer goods, which have risen in price due to the increased cost of those inputs.
The UK relies less on Russia for energy than other European countries, mainly due to domestic renewable energy production, North Sea oil and gas supplied via pipeline from Norway.
The UK also has a high level of food security. Prior to the war, the UK ranked third in the world on The Economist’s Global Food Security Index, due to domestic cereals production and relatively diversified imports of fresh products. As with other European countries, the UK has been, and will continue to be, affected by fertilizer shortages, but it remains in a comparatively strong position.
Despite these apparent strengths, the war could still have a significant impact on UK trade. This paper explores the four main effects, of which the first two are more immediate, with the latter two dependent on how the conflict develops in the long term:
- Rising prices that exacerbate the cost-of-living crisis;
- The effects of UK and international sanctions against Russia;
- Ukraine’s future relationship with the EU; and
- The impact of war in Europe on the UK’s Indo-Pacific tilt and on its wider foreign policy.
