Meetanshi Gaba

Report on Russia-Ukraine Conflict

EY Internship 2022

This year is currently seeing the biggest war since the Second World War in the form of
Russia’s invasion of Ukraine. Russia’s invasion of Ukraine has led to large-scale
humanitarian, economic and socio-political crises in the region, and is causing spill over
effects globally. It is extremely likely to hamper the global and national economic recoveries
from the ill effects of the pandemic. The total impact will be determined by the duration and
aftermath of the conflict and sanctions, as well as governmental responses. Trade
interruptions, inflationary pressures, and security worries have begun to weigh on consumer
and investor morale, lowering real earnings and lowering global demand for imports. If the
conflict continues, it might cause a more widespread regional—and even global—economic
downturn, as well as increase the possibility of social upheaval in both developed and
emerging nations. The threats and challenges brought by the conflict will worsen those
already present as a result of the Covid-19 Pandemic.

To start off, the war has had a grave impact on the lives of the people in Ukraine and its
economy. Many portions of the country's urban centres have been seriously damaged-
marine, road, and rail travel have been significantly disrupted, and important economic and
social service infrastructure, including electricity production, digital infrastructure, bridges,
and ports, has been destroyed or left inoperable. Approximately 6 million Ukrainians lacked
access to safe drinking water as of the end of March. As of mid-April, an estimated 12
million people had been displaced, and a similar number of people, particularly the elderly,
sick and disabled, urgently require humanitarian aid (UNHCR 2022). The conflict is also
destroying human capital significantly. It is anticipated to have an especially severe impact
on children, increasing hunger and stunting, shortening school years, and hurting labour-
market results.

Ukraine enacted emergency financial measures (including capital controls and banking sector
limitations) and announced tax deferrals to assist the economy and relieve strains on FX
reserves and banks, while fully honouring domestic and foreign debt commitments. These
methods have aided in the prevention of financial disasters. In certain locations, economic
activity in Ukraine has been virtually impossible, with the war damaging essential producing
infrastructure and forcing firms to close. Goods traffic has ground to a standstill as damaged
transit routes restrict land transport, while denial of access to the Black Sea cuts off all
seaborne trade, which accounts for half of Ukraine's exports. According to the World Bank's
recently issued Europe and Central Asia Update, the conflict is anticipated to decrease
production by half in 2022, with GDP falling by about 45 per cent. The estimate anticipates
that the conflict will continue for several months but will be limited to the geographical areas
where it is now taking place. To enable a vigorous rebuilding and recovery, as well as to
anchor budgetary sustainability, Ukraine will require extra 7 external financial assistance, and
its debt will most likely need to be restructured.

Russia’s economy is also being negatively impacted and it is likely to remain vulnerable to
financial upheaval for the foreseeable future. Financial asset values in Russia have suffered
significant losses. Russian dollar-denominated debt yields have risen, while trading on the
Moscow Stock Exchange was halted between February 25th and March 24th due to severe
drops in share prices. Many overseas exchanges have also banned trading in Russian assets.
The value of the Ruble dropped by up to 40% in the two weeks following the start of the war
but has since recovered significantly as capital controls were imposed, with Russian
authorities taking numerous steps to prevent foreigners from selling Ruble-denominated
assets or hard currency from leaving the country. To assist curb the Ruble's devaluation and
consequent inflation, the CBR hiked its policy interest rate by 10.5 percentage points in late
February, to 20%; it then cut it to 17% on April 8th when Ruble pressures eased. The Russian
government declared in late March that it would compel European energy imports to be billed
in Rubles. European nations have fought the planned change in payment arrangements, but
the future remains uncertain.

Russia has been granted a credit rating of "selected default," and credit default swap pricing
implies a high likelihood of future government failure. In April, Russia sought to service
foreign debt in Rubles rather than dollars, after steps by the US government to prevent
Russian debt service payments made through dollar accounts maintained with US financial
institutions. S&P Global Ratings then awarded Russia a "selected default" rating, meaning
that it was doubtful that the Ruble payments would be converted to dollars during a 30-day
grace period beginning April 4th, 2022 (Govind 2022). On April 11th, a creditor committee
decided that Russian Railways was in arrears on participation notes in a Swiss franc-
denominated loan, establishing the first international default by a Russian entity since the
conflict began (Strohecker and Do Rosario 2022).

The Russian economy is about to enter a recession. High-frequency indications suggest a

dramatic drop in economic activity in March as sanctions cause a collapse in domestic
demand. Inflation skyrocketed alongside the Ruble's initial fall and supply constraints,
jumping from 9.2 per cent in February to 16.7 per cent in March. Russia's GDP is expected to
drop by around 11% this year, contrary to prior predictions of a 2.4 per cent rise (World Bank
2022b). Withdrawal of many foreign firms from Russia and a significantly worsening outlook
will dampen investment, while pressure on families from rapidly rising prices and shrinking
wages will weigh heavily on consumption; fiscal policy support will only partially counteract
this. External financing will be improved as a result of import compression caused by a drop
in demand and export sanctions to Russia. However, import disruption has already disrupted
local output, especially in the automotive and aerospace sectors. The announced prohibitions
and cutbacks in Russian oil and gas imports are projected to result in a slight drop in exports
this year. Exports of crucial high-tech commodities to Russia, including software and
semiconductors, have been prohibited, depriving the economy of critical inputs and
exacerbating supply chain insecurities.

Globally, the impacts will be channelled through three major pathways. One, increased
commodity costs, such as food and energy, will drive up inflation more, diminishing the
value of income and impacting demand. Two, particularly adjacent economies, will face
interrupted commerce, supply linkages, and remittances, as well as an unprecedented rise in
refugee movements. Third, lower company confidence and more investor uncertainty would
put downward pressure on asset values, tightening financial conditions and perhaps
stimulating capital outflows from developing nations. Countries with direct trade, tourism,
and financial exposure will face extra pressures in addition to global spill overs. Oil-
importing economies will suffer larger fiscal and trade deficits, as well as increased inflation
pressure, however, certain exporters, such as those in the Middle East and Africa, may gain
from higher prices. Food and fuel price hikes may enhance the likelihood of instability in
several countries, ranging from Sub-Saharan Africa and Latin America to the Caucasus and
Central Asia, while food insecurity is projected to worsen in parts of Africa and the Middle
East.
Impact on different continents

EUROPE AND CENTRAL ASIA

Because Russia is a significant supplier of natural gas imports, energy is the main spill over
conduit for Europe. Wider supply-chain disruptions may also have an impact. These
repercussions will fuel inflation and impede the pandemic's recovery. Rising finance
expenses and an influx of refugees will affect Eastern Europe. According to UN estimates, it
has taken in the majority of the 3 million refugees who have lately fled Ukraine. European
governments may also face economic difficulties as a result of increased expenditure on
energy security and defence budgets.

While foreign exposure to falling Russian assets is small by global standards, pressures on
developing economies may increase as investors seek safer havens. Similarly, the majority of
European banks have limited and manageable direct exposures to Russia.

Europe's reliance on Russia for energy puts its economy at risk. Since January 2021, the
eurozone has seen a 400% surge in gas costs and a doubling in oil prices. Energy price
increases contribute to approximately two-thirds of the 7.5 per cent increase in eurozone
annual inflation in March 2022, putting pressure on eurozone production costs and buying
power. Should Russia restrict crude oil and/or natural gas shipments to Europe, regional
prices would rise even further—Russian exports account for more than 35 per cent of the
eurozone's natural gas imports, more than 20 per cent of oil imports, and 40 per cent of coal
imports (Bachmann et al. 2022).

The influx of Ukrainian refugees will have an impact on the Central European economy. It
will put their ability to deploy resources to fulfil immediate needs to the test. Some host
nations' health, education, and social protection systems already had issues in reaching out to
more rural areas and including disadvantaged populations. This might have an influence on
host nations' ability to offer basic amenities as well as refugees. To prevent overburdening
local public services, both refugees and host communities will require assistance.
Volatility in the stock market has increased significantly, particularly in Europe. The
European VSTOXX index temporarily surpassed 50 in early March and remains extremely
high. Equity volatility in the United States rose significantly in the month after the
commencement of the conflict, but it has since fallen slightly. Global stock prices plummeted
sharply in early March, but have since rebounded significantly.

Beyond Europe, Central Asia and Caucasus will bear the brunt of Russia's recession and
sanctions. Close trade and payment-system linkages will stifle commerce, remittances,
investment, and tourism, harming economic growth, inflation, and the external and fiscal
accounts. While commodities exporters should gain from higher international prices, they
fear restricted energy exports if restrictions are extended to pipelines passing through Russia.

Russia's recession will have an impact on Central Asian economy. Furthermore, hundreds of
thousands of Russians are said to have departed their nation, and many foreign workers in
Russia are likely to face wage losses or be compelled to return home. This will cause
economic hardship for households, but it will also have a negative impact on the reserves of
several Central Asian nations that rely largely on remittances. Other vulnerabilities are being
exacerbated by the war, including substantial debt distress risks in Kyrgyzstan and Tajikistan.
Both nations are anticipated to have production declines, larger deficits, and rapid exchange
rate depreciation this year.

NORTH AFRICA AND THE MIDDLE EAST

Higher food and energy costs, as well as tighter global financial circumstances, are expected
to have significant repercussions. For example, Egypt imports over 80% of its wheat from
Russia and Ukraine. And, as a favourite tourist location for both, visitor spending will fall.

Inflation-fighting policies, such as increasing government subsidies, may put further strain on
already strained fiscal balances. Furthermore, worsening external financing conditions may
encourage capital outflows and add to growth challenges for nations with high debt levels and
significant financing requirements.
In certain nations, such as those with inadequate social safety nets, few employment
possibilities, limited budgetary headroom, and unpopular administrations, rising prices may
exacerbate social tensions.

SUB-SAHARAN AFRICA

Just as the region was beginning to heal from the epidemic, this catastrophe jeopardises that
progress. Many nations in the area are especially vulnerable to the consequences of the
conflict, owing to rising energy and food costs, decreased tourism, and probable difficulties
accessing international finance markets.

The war occurs at a time when most governments have little policy room to counteract the
impacts of the shock. This is expected to exacerbate socioeconomic strains, vulnerability to
public debt, and scarring from the virus, which was already affecting millions of homes and
companies.

Record wheat prices are especially troubling for an area that imports around 85 per cent of its
supplies, with one-third coming from Russia or Ukraine.

AMERICAS

Food and energy costs are the primary sources of spill overs, which will be significant in
some circumstances. High commodity prices are projected to accelerate inflation in Latin
America and the Caribbean, which currently has an annual rate of 8% in five of its main
economies: Brazil, Mexico, Chile, Colombia, and Peru. Central banks may have to defend
their credibility in battling inflation further.

The growth consequences of expensive goods differ. Higher oil prices damage Central
American and Caribbean importers, but exporters of oil, copper, iron ore, corn, wheat, and
metals may charge more and offset the impact on GDP.

Financial circumstances remain generally good, but escalating conflict may trigger global
financial instability, weighing on GDP in tandem with tighter domestic monetary policy.
Although the US has little linkages to Ukraine and Russia, which dilutes direct effects,
inflation was already at a four-decade high before the war lifted commodities prices. When a
result, prices may continue to rise as the Federal Reserve raises interest rates.

SOUTH AND SOUTH EAST ASIA

Because of the absence of direct economic linkages, spill overs from Russia are expected to
be modest, but slower development in Europe and the global economy will take a significant
toll on key exporters. The most significant implications on current accounts will be felt in
ASEAN nations, India, and frontier economies, including several Pacific Islands. This might
be exacerbated by a drop in tourism for countries that rely on Russian visitors. Because fiscal
stimulus will support this year's 5.5 per cent growth target and Russia buys a very modest
portion of China's exports, the immediate consequences should be lower. Nonetheless,
commodity prices and falling demand in major export markets complicate matters.

Spill over effects are comparable in Japan and Korea, where additional oil subsidies may
mitigate the effects. Higher energy costs would drive up India's inflation, which is already
beyond the central bank's goal range. Local production and greater dependence on rice rather
than wheat might alleviate Asia's food-price challenges. Imports of expensive food and
energy will raise consumer prices, however, subsidies and price controls for fuel, food, and
fertiliser may mitigate the immediate impact—at a cost.
Some EMDEs rely largely on food and fertiliser from Russia and Ukraine. Russia and
Ukraine account for more than 75 per cent of wheat imports in numerous countries,
particularly in the ECA, MNA, and SSA. Similarly, for corn and seed oils, Ukraine
contributes a significant portion of other nations' imports. Ukraine's wheat production is
concentrated in the country's south and east, where the violence is most violent, and the
spring planting season for other critical crops like corn, barley, and sunflowers is anticipated
to be interrupted. Crop logistics continue to be an issue; over 90% of Ukraine's grain
commerce goes via Black Sea ports that are now closed. Russia has advised fertiliser makers
to suspend fertiliser exports, which may impede food production in some regions of the
world, because Russia is the largest supplier of fertilisers, accounting for 13% of worldwide
exports.

The conflict has significantly weakened near-term global economic prospects, indicating that
bad times are ahead. The conflict has an impact on global activity in a variety of ways,
including commodities and financial markets, commerce, migratory linkages, and confidence.
As a result, established economies and many emerging markets developing economies
(EMDEs) face bleaker economic prospects. Commodity-importing EMDEs are projected to
experience significant negative effects as a result of deteriorating terms of trade, a slowing of
advanced-economy development, a slowing in trade, and a significant tightening of financial
conditions due to increasing inflation and increased borrowing rates. Conversely, several
commodity-exporting EMDEs (particularly the 13 energy exporters) may profit in the long
run from strong rises in commodity prices if they translate into sustainable improvements in
their individual terms of trade.

While forecasts of the economic impact are based on limited data and certain assumptions,
many analysts believe that the conflict will reduce global economic growth in the short term.
According to preliminary World Bank forecasts, the Ukrainian and Russian economies might
decline by 45 per cent and 11 per cent, respectively, in 2022. While Russia and Ukraine have
relatively small shares of the global economy, the Organisation for Economic Cooperation
and Development (OECD) and World Trade Organization (WTO) estimate that the war will
reduce global economic growth by 0.7 to 1.3 percentage points, raise global prices and slow
global trade growth. In Europe, the economic effect is projected to be more severe and long-
lasting.
Socio-political Implications

Other than the immediate economic impacts, it also has socio-political impacts that need to
be accounted for. The invasion of Ukraine has resulted in a tremendous humanitarian
disaster. In addition to the anguish and suffering felt by individuals inside Ukraine, there are
currently over three million people seeking asylum in neighbouring countries, with a
comparable number internally displaced. As with past significant conflicts and refugee crises,
such as those in Syria and Yemen, assisting, sheltering, and hosting these poor individuals
will be a monumental effort for the international community.

Since the beginning of the war, half of all Ukrainians have lost their work. Only 2% were
able to secure temporary employment. Investment in re-education and skill development is
critical to improving this situation. Those who have fled to other countries are eager to return
whenever it is safe to do so. Meanwhile, if they could invest in their know-how and a
stronger sense of corporate culture, they might help Ukraine's economy recover after the
conflict.

Long-Term Implications of the War

Given the assumption that the war does not go nuclear, there are several long-term
implications of the war. Even if it is allowed, Western companies will not engage in Russian
projects or joint ventures. Long-term agreements would be hampered by fears of new
confrontation, either with the Baltic nations or somewhere along Russia's southern border.

Russia's oil output will continue to decline in the absence of Western technical investment.
Russia, like most other countries, began by pumping oil from the most accessible sites. The
strongest chances for replacing failing oil assets now exist in challenging terrain such as
Siberia and shale reserves. In both circumstances, oil production necessitates technology that
is beyond Russia's indigenous capabilities. Oil output will fall in the future years unless
western joint ventures are established.

Within Russia, enterprises selling to the Russian market will view foreign suppliers of
products and services as untrustworthy, resulting in higher costs and a narrower range of
accessible goods and services. Despite the fact that Russian agricultural output and sales
should be relatively safe, the entire economy will decline, and the Russian people will be
impoverished for a decade or longer.

Europe will suffer as well. First, all European countries will opt to increase defence spending.
Military spending will rise without a corresponding growth in industrial capacity in Europe.
As a result, economic development will slow, as will European individuals' standard of life.
The majority of Europeans will pay more for electricity. Europe will seek energy from non-
Russian countries at a greater cost than it has been paying. Out of humanitarian concern for
Ukrainians inside its borders and nearby, Europe will also pay for some of the refugee
expenditures.

The United States and the rest of the world economy will suffer, mostly as a result of
increasing oil costs. Long-term Russian oil production will cost the globe as we shift to oil
produced in more expensive regions. As more corporations opt to cut their supply chains, the
global economy will suffer.

NATO-Ukraine Relations

The North Atlantic Treaty Organization, also known as NATO, is Europe's only really
successful collective security organisation. At a time when the Russian Federation has
invaded Ukraine and the Russian political leadership denies our right to self-determination,
Ukraine's membership to NATO is critical for ensuring its sovereignty and regional stability.

NATO has 30 nations as of 2022. NATO is a defence alliance that defends its members
against external assault. In this case, Article 5 of the Washington Treaty, which established
the concept of collective defence, is critical: an assault on one member state is considered an
attack on all. As a result, the threat of employing force against a NATO member state is
greatly reduced: no one wants to cope with 30 countries' combined troops all at once.

Currently, the clear majority of Ukrainians support the country's membership to NATO.
According to a Rating Group study done on March 1, 76 percent of Ukrainians favour this
choice. This is the highest figure since Ukraine gained independence in 1991. It is imperative
for Ukraine to become a member of NATO to ensure its independence and sovereignty.
International Sanctions and Peace Talks

With the start of the assaults on February 24, a huge number of other countries began
imposing sanctions with the goal of damaging Russia's economy. Individuals, banks,
enterprises, monetary exchanges, bank transfers, exports, and imports were all targeted by the
sanctions. The restrictions included cutting key Russian banks off from SWIFT, the global
messaging network for international payments, albeit there would still be restricted access to
guarantee that gas supplies could continue. Asset freezes were also imposed on the Russian
Central Bank, which owns $630 billion in foreign-exchange reserves, to prevent it from
countering the impact of sanctions. It also involved the Nord Stream 2 gas pipeline. By 1
March, the total amount of Russian assets being frozen by sanctions amounted to $1 trillion.

Apple, IKEA, ExxonMobil, and General Motors have opted to impose sanctions on Russia on
their own, acting as international law enforcers on behalf of governments. Ukrainian and
Western governments have specifically requested the worldwide commercial sector to assist
in the enforcement of international law, and the EU, the United Kingdom, and Australia have
also urged global digital platforms to remove pro-Russian propaganda. Multinational
corporations have withdrawn from Russia not just to comply with domestic sanctions and
trade restrictions, but also to avoid the economic and social dangers involved with
maintaining commercial connections with Russia.

Since 1969, Germany has pursued an Ostpolitik, relying on Russian energy to preserve good
ties with Russia and incorporate it into Europe while allowing defence spending to decrease.
In reaction to the invasion, Germany's new chancellor, Olaf Scholz, suspended the Nord
Stream 2 pipeline and proclaimed a new energy independence strategy from Russia,
conceding that Ostpolitik had failed. Furthermore, Germany sent armament supplies to
Ukraine, the first time it had done so since the conclusion of World War II.

The present sanctions package will have a long-term detrimental impact on Russia by
reducing oil output owing to the withdrawal of international oil corporations, a drop in
investment, and less access to foreign technologies.
Since the start of the Russia-Ukraine armed war, both countries have had multiple rounds of
negotiations to try to find a solution to the issue. Following the most recent meeting on
March 29, Russian President Vladimir Putin declared that peace talks had come to a halt
because the Ukrainian side failed to comply with Russia's fundamental requests.

It seems unlikely that Ukraine will comply with Russia’s demands. It seeks legal assurances
that Ukraine would never be admitted to NATO, the Western military alliance, and has
recently stated that it wants Ukraine to sign a neutrality pact and amend its constitution to that
end.

Moscow has urged that Ukraine recognise the independence of the so-called Peoples
Republics of Donetsk and Lugansk, two separatists, pro-Russian republics in eastern Ukraine.
It has also insisted that Ukraine acknowledge Crimea as Russian territory, which it annexed
in 2014. It has also demanded that Ukraine suspend all military activities.

Mykhailo Podolyak, Adviser to the Head of the Ukraine President's Office, indicated that
Kyiv would not sign any "treaty of friendship or peace" with the Russian Federation, but
instead wants a formal document outlining a total army withdrawal from Ukrainian land.
"The paper will describe the logic of departure from the war: a ceasefire throughout Ukraine,
the evacuation of Russian soldiers from Ukraine, the handover of prisoners," Podolyak said in
an interview with Radio Svoboda.

Possible Futures?

According to the Atlantic Council, there are three possible scenarios.

Number one is where Ukraine is slowly, completely annexed.

Russia strengthens its land connection to the Kremlin-controlled Crimean Peninsula and,
without gaining total control of the remainder of Ukraine's Black Sea coast, destroys or
blocks the port city of Odesa, essentially stranding the country. Putin continues to attack
infrastructure across Ukraine and gains control over sections of the south and east, severely
weakening the country's ability to function as a fully functional state. He announces
"winning" while effectively repressing domestic dissent.

Number two is where Russia gains nothing.

Russia is driven back to pre-February 24 areas of jurisdiction (retaining Crimea and

separatist-occupied parts of Donetsk and Luhansk) by early 2023, kudos to progressively
proficient Ukrainian strategies- continuation of those demonstrated during Kyiv's capital
defence, plus a successful counteroffensive in the eastern Donbas region. However,
additional Ukrainian successes are hampered by strong Russian and separatist defences.
Despite Western deliveries of more modern weapons, Ukrainian soldiers make little progress.

Number three is where Ukraine reclaims everything.

Russia has been pushed completely out of Ukraine except for Crimea as a result of markedly
elevated Western weapons shipments to Ukraine, a breakdown in Russian unit cohesion at
both the operational and strategic levels, and Moscow's inability to substitute military gear at
the levels needed (due to Western sanctions), but Kyiv is preparing to retake the peninsula.

Regardless of the possible future scenarios, the war has had a deep, long-lasting impact on
the social, political, and economic environments across the Globe.