Russia’s invasion of Ukraine has been the defining issue of 2022. As the world slowly edged out of the pandemic, another significant crisis began. The war in Ukraine is highly problematic not just for neighbours in the region but nations across the globe. Aside from their political relevance, Russia and Ukraine are of crucial importance to the global economy, particularly to agriculture. Combined, they account for 12 percent (Wired) of all the food calories traded in the world. Their contribution to the global food supply is enormous and the war is impacting a range of countries.
Some commentators have argued that the West supporting Ukraine is prolonging an unwinnable war. Russia invaded Ukraine with an army over twice as large as Ukraine’s total military force. Furthermore, Russia has missiles, a navy and air force far superior to anything in Ukraine’s arsenal. Nonetheless, Western powers including the UK, US and EU have pledged well over $50 billion in military and humanitarian aid to Ukraine. There are significant geopolitical reasons why the Western powers are so interested in Ukraine but there are also key economic ones. This article will be focusing on the main economic reasons why Western powers cannot let Ukraine be annexed, either wholly or partially, by Russia.
In order to understand why Ukraine’s sovereignty is important to the global economy, we must look at what it contributes. Ukraine has been dubbed the breadbasket of Europe. It has some of the most fertile lands in the region and was the agricultural powerhouse of the former Soviet Union. Today, Ukraine is the fourth largest grain exporter in the world. It produces 42% of the world’s sunflower oil and 9% of the world’s wheat. (BBC News) The war has meant that up to 30% of the grain produced will not be harvested, driving up global prices. This is contributing to rising food costs both in the West and in other economies. Such inflation has been catastrophic for crisis stricken areas like Syria and Yemen. Yemen is the fifth largest importer of Ukrainian wheat in the world, while Syria also imports substantial amounts from Ukraine. Ukraine alone supplies 40% of Africa’s wheat. Both Yemen and Syria have seen the price of flour and bread skyrocket. In July 2022 however, Russia and Ukraine handed a lifeline to importers. The countries agreed an important deal which will allow for the export of grain from Black Sea ports (See previous top 10). This will help mitigate the risk of a food crisis or worsening food crises in countries reliant on Ukrainian imports. The war itself however, is contributing heavily towards rising inflation. This led the OECD to slash global growth for 2022 from 4.5% down to 3% (Al Jazeera) and warnings that it could get worse. Ukraine has profound global economic importance so Western powers evidently have an interest in maintaining Ukraine’s independence. Given the strength of Ukraine’s agricultural sector, a Russian annexation would significantly boost Russia’s export revenues and consequently their military might.
Western powers are keen to avoid a Russian annexation of Ukraine as it would provide them with another significant economic leverage over the world. Russia is not afraid to use its leverage to coerce trading partners to follow its political will. This has been evident throughout the war so far with regards to oil and gas. Russia is Europe’s only petrostate where around 50% of the government’s budget derives from oil and gas exports. Sanctions introduced by the EU, UK and US were supposed to cripple Russia’s economy and cut the funds to Vladimir Putin’s military. Sanctions were initially somewhat effective as the ruble plunged a record 40% against the dollar, Western businesses flooded out of Russian markets and Russian financial markets collapsed. Since then however, the Russian Central Bank focused on stabilising the currency and was successful. The ruble has returned to pre-war levels as has Russian banking liquidity.
One of the key reasons sanctions could not have a lasting impact was because oil and gas exports kept flowing out of Russia. China and India are among Russia’s largest trading partners and continue to provide crucial oil and gas export revenue. Furthermore, Europe’s reliance on Russian gas meant that the engine of Russia’s economy could not be significantly damaged, in spite of any sanctions. Russia supplies Europe with roughly 40% of its gas and holds significant power over Eastern European nations. The EU were unable to agree on a total ban on Russian oil as all of Slovakia’s oil, 86% of Hungary’s and 97% of Czech Republic’s oil respectively is delivered through Russia’s Druzhba pipelines. In the two months after the war began, Russia’s revenues from oil and gas exports to the EU doubled to €62 billion.
Russia has demonstrated its willingness to use its levers to hold countries to ransom and there is fear this could be replicated with Ukrainian agricultural produce. Since the start of the war, Russia has already cut off gas to EU countries including Poland, Bulgaria, Finland, Denmark and the Netherlands. This was because they refused to adhere to Russia’s new requirement for energy buyers to pay their bills in Russian rubles. By contrast, Germany and Italy, the EU’s largest Russian gas importers by volume, made allowances for their energy companies to pay for Russian gas in rubles. If Russia were to cut off all gas in Europe, Goldman Sachs estimates that European household energy costs up by about 65% to around €500 per month. Russia’s willingness to exercise its leverage over oil and gas has raised fears that a Russian controlled Ukraine could restrict exports of key agricultural produce.
The war in Ukraine has left Western powers gridlocked. They cannot engage militarily with Russia without escalating the conflict to a global all-out war. If they stop supporting Ukraine with money and arms then Russia could swiftly gain control of Ukraine. This would have untold geopolitical implications which are arguably the most important reason for Western powers. But economically, this could see Russia’s weaponisation of its control over Ukraine’s vast agricultural output. Furthermore, the revenue generated from such exports would bolster Russia’s economy and make it an even greater military threat to those in the region. The main levers left to pull for Western powers are to end reliance on Russian imports and issue harder hitting sanctions. Regardless, Europe accounts for just 30% of Russia’s oil and gas revenue and countries like India and China will continue to provide the lionshare of income. A resolution to the conflict in Ukraine is difficult to come by. Crucially however, the war in Ukraine has raised valid questions about supply chain security. Many have questioned why the West had not looked sooner for alternative sources for oil and gas given the history of tension between themselves and Russia. These are questions which will need to be addressed soon.