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Ukraine war at six months: A global economy in growing danger

Six months after Russia launched its war against Ukraine, the conflict’s ripple effect is hitting governments, businesses and families across the globe and many fear worse is to come.


August 21, 2022
By Paul Wiseman and David McHugh
21 August 2022

Martin Kopf needs natural gas to run his family’s company, Zinkpower GmbH, which rustproofs steel components in western Germany.

Zinkpower’s facility outside Bonn uses gas to keep 600 tonnes of zinc worth 2.5 million euros ($2.5 million) in a molten state every day. The metal will harden otherwise, wrecking the tank where steel parts are dipped before they end up in car suspensions, buildings, solar panels and wind turbines.

Six months after Russia invaded Ukraine, the consequences are posing a devastating threat to the global economy, including companies like Zinkpower, which employs 2800 people.

Gas is not only much more costly, it might not be available at all if Russia completely cuts off supplies to Europe to avenge Western sanctions, or if utilities can’t store enough for winter.

Governments, businesses and families worldwide are feeling the war’s economic effects just two years after the coronavirus pandemic ravaged global trade. Inflation is soaring, and rocketing energy costs have raised the prospect of a cold, dark winter. Europe stands at the brink of recession.

Firefighters work to extinguish a fire at a house after a Russian attack in Kharkiv, Ukraine in the first few months of Russia’s attack on Ukraine. The economic impact of the war has been felt around the world. (Felipe Dana/AP)

Outside Uganda’s capital of Kampala, Rachel Gamisha said Russia’s war in faraway Ukraine has hurt her grocery business. She has felt it in surging prices for necessities like gasoline, selling for $6.90 a gallon. Something that’s about $16.70 this week may cost $25 next week.

“You have to limit yourself,’’ she said. “You have to buy a few things that move fast.’’

Gamisha has noticed something else, too — a phenomenon called “shrinkflation”: A price may not change, but a doughnut that used to weigh 45 grams may now be only 35 grams. Bread that weighed 1 kilogram is now 850 grams.

Russia’s war led the International Monetary Fund last month to downgrade its outlook for the global economy for the fourth time in under a year. The lending agency expects 3.2 per cent growth this year, down from the 4.9 per cent it forecast in July 2021 and well below a vigorous 6.1 per cent last year.

Metal pieces are galvanized in a galvanizing company in Meckenheim, Germany. Germany might have to impose gas rationing that could cripple industries from steelmaking to pharmaceuticals to commercial laundries. (Michael Probst/AP)

“The world may soon be teetering on the edge of a global recession, only two years after the last one,” Pierre-Olivier Gourinchas, the IMF’s chief economist, said.

The UN Development Program said rising food and energy prices threw 71 million people worldwide into poverty in the first three months of the war. Countries in the Balkans and sub-Saharan Africa were hit hardest. Up to 181 million people in 41 countries could suffer a hunger crisis this year, the UN Food and Agriculture Organization has projected.

In Bangkok, rising costs for pork, vegetables and oil have forced Warunee Deejai, a street-food vendor, to raise prices, cut staff and work longer hours.

“I don’t know how long I can keep my lunch price affordable,’’ she said. “Coming out from Covid lockdowns and having to face this is tough. Worse is, I don’t see the end of it.’’

Even before Russian President Vladimir Putin ordered the invasion of Ukraine, the global economy was under pressure.

Inflation had skyrocketed as a stronger-than-expected recovery from the pandemic recession overwhelmed factories, ports and freight yards, causing delays, shortages and higher prices. In response, central banks began raising interest rates to try to cool economic growth and tame spiking prices.

Street food vendor Warunee Deejai cooks lunch for customers in Bangkok earlier this month. In Bangkok, rising costs for pork, vegetables and oil have forced Warunee Deejai to raise prices, cut staff and work longer hours. (Sakchai Lalit/AP)

“We’ve all got all these different things going on,’’ said Robin Brooks, chief economist at the International Institute of Finance. “The volatility of inflation went up. The volatility of growth went up. And therefore, it’s become infinitely harder for central banks to steer the ship.’’

China, pursuing a zero-Covid policy, imposed lockdowns that have severely weakened the world’s second-biggest economy. At the time, many developing countries still grappled with the pandemic and the heavy debts they had taken on to protect their populations from economic disaster.

All those challenges might have been manageable. But when Russia invaded Ukraine on February 24, the West responded with heavy sanctions. Both actions disrupted trade in food and energy. Russia is the world’s third-biggest petroleum producer and a leading exporter of natural gas, fertilizer and wheat. Farms in Ukraine feed millions globally.

The resulting inflation has rippled out to the world.

Feeling the prices pinch

Near Johannesburg, South Africa, Stephanie Muller has been comparing prices online and checking different grocery stores to find the best deals.

“I have three children who are all in school, so I have been feeling the difference,’’ she said.

A fruit vender sells pineapples in a market in Hanoi last weekend. (Hau Dinh/AP)

Shopping at a market in Vietnam’s capital of Hanoi, Bui Thu Huong said she’s been limiting her spending and cutting back on weekend dinners out. At least there’s one advantage to cooking at home with her children: “We can bond with them more in the kitchen, while saving money at the same time.’’

Syahrul Yasin Limpo, Indonesia’s agriculture minister, warned this month that the price of instant noodles, a staple in the Southeast Asian nation, might triple because of inflated wheat prices. In neighboring Malaysia, vegetable farmer Jimmy Tan laments that fertilizer prices are up 50 per cent. He’s also paying more for supplies like plastic sheets, bags and hoses.

In Karachi, Pakistan, far from the battlefields of Ukraine, Kamran Arif has taken a second, part-time job to supplement his wages.

“Because we have no control on prices, we can only try to increase our income,’’ he said.

A woman carries shopping bags after shopping for food at a market in Jakarta, Indonesia last week. (Achmad Ibrahim/AP)

A vast majority of people live in poverty in Pakistan, whose currency has lost up to 30 per cent of its value against the dollar and the government has increased electricity prices 50 per cent.

Muhammad Shakil, an importer and exporter, says he can no longer get wheat, white chickpeas and yellow peas from Ukraine.

“Now that we have to import from other countries, we have to buy at higher prices” – sometimes 10-15 per cent more, Shakil said.

Interest rate crush

As the war fuels inflation, central banks are raising interest rates to try to slow price increases without derailing economic growth.

The resulting increase in loan rates is punishing FlooringStores, a New York company that helps customers find flooring material and contractors. Sales are down because fewer homeowners are borrowing to pay for home improvements.

“A huge percentage of our customers finance their projects with home-equity loans and similar products, meaning that the hike in interest rates really killed our business,’’ CEO Todd Saunders said. “Inflation wasn’t helping, but the interest rates had a bigger effect.’’

US Federal Reserve chairman Jerome Powell, who has already had to shift interest rates to try to put the brakes on inflation. (Manuel Balce Ceneta/AP)

Europe, which for years depended on Russian oil and natural gas for its industrial economy, has absorbed a gut punch. It faces the growing threat of recession as the Kremlin throttles back flows of natural gas used to heat homes, generate electricity and fire up factories. Prices are 15 times what they were before Russia massed troops on the Ukrainian border in March 2021.

“There’s a lot more recessionary risk and pressure in Europe than in the rest of the high-income economies,” said Adam Posen, president of the Peterson Institute for International Economics and a former Bank of England policymaker.

The damage has hardly spared Russia, whose economy the IMF expects to contract 6 per cent this year. Sergey Aleksashenko, a Russian economist now living in the US, noted that the country’s retail sales tumbled 10 per cent in the second quarter compared with a year earlier as consumers cut back.

“They have no money to spend,” he said.

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