By Alexander Wylie
The invasion of Ukraine orchestrated by Putin’s Russia is a war that many believed wasn’t possible in today’s Europe. Easily Europe’s largest conflict since the second world war, the use of military force has caused a humanitarian crisis across Ukraine. Putin stated this invasion is an attempt to “demilititarise and denazify Ukraine.” It must not be overlooked that parts of the country have struggled with extremism, however it is evident that the invasion has predominantly been an effort to annex more Ukrainian land. In this modern age of conflict, many European allies have been quick to support the defence efforts of Zelensky. However, they are only willing to send unmanned military aid and financial backing for ammunition and machinery. Attempts have also been made to raise money for post war humanitarian efforts, an example of economic aid. However, perhaps thought to be a more powerful weapon are the economic sanctions that Europe and the West have imposed on Russia. These sanctions were viewed as the main deterrent to the invasion. This article will outline why Putin invaded Ukraine and the Economic implications of the war and its sanctions.
Ever since Euromaidan (when Viktor Yanukovych was ousted as President of Ukraine after his decision to refute the ‘European Union – Ukraine Association Agreement’) the subsequent rise in pro-Russian organisations within Ukraine caused a divide within the country. Within the year, Russia, fearful of Ukraine’s growing connection to the EU, annexed Crimea and held a referendum in which the province voted to join Russia. Crimea is considered a critical access point to support the trade to Russia, and it gave them a self-regulated access point to the Black Sea, a port which remained unfrozen year-round, along with access to natural gas fields – largely ’s move towards the Eurozone, Russian officials were heavily against having an easily accessible EU controlled route right to the Russian border and saw Ukraine as a buffer state to maintain the divide between the EU and Russia. This would be a much weaker strategic position geographically for Russia compared to that held by the Soviet Union.
Since the economic collapse and the subsequent dissolution of the Soviet Union, the Post-Soviet states haven’t held much economic power compared to Russia. However, since the annexation of Crimea and the decline in oil prices during the period of 2014-15, which caused a recession of around 50% in both Ukraine’s and Russia’s GDP, Ukraine’s economy has grown 70.8% compared Russia’s 8.8%. This disparity, raising Ukraine’s GDP per capita to over a third of Russia’s GDP per capita, along with the increase in infrastructure brought by oil giants Shell and BP, was seen as a threat to Russia’s monopoly of oil and gas exports to the EU. Therefore, a key reason for this invasion was to prevent extraction and remove the infrastructure necessary for the wealth of oil and gas in Ukraine. The goal was to keep Russia’s importance to the EU and ensure the upkeep of the reliance that they had for Russian oil and gas. Before the more recent invasion of Ukraine, the European Union’s reliance on this industry was vast, where ‘Russia accounted for about two-fifths of the EU’s gas needs’ with Germany especially vulnerable. It was clear that the invasion would cause trade barriers to be set by both sides.
Initially the EU, in an attempt to prevent any further invasion of Ukraine, targeted individuals of power in hope that would repeal the invasion and sanctioned ‘115 entities and 1236 individuals’. Along with other trade restrictions, this saw the collapse of the Russian Ruble. The response from Russia was to impose sanctions of their own, such as switching off gas pipelines. This measure caused a much more significant economic crisis as opposed to the sanctions of the EU due to the heavy reliance on Russian gas, with inflation levels in the Eurozone hitting “a record 8.6% in June”, and rising to 10.9% in the EU as of September 22nd. Even with this drastic level of inflation, it is possible the effects on consumers have not yet been fully displayed with winter approaching and temperature falling. Overall, this inflation and uncertainty has caused the Euro to struggle against the dollar, while surprisingly, the Ruble has hit a 7 year high, partly due to Europe’s shortage of oil and gas increasing the commodities’ prices and the increase in energy exports to China. Wholesale prices of gas and electricity have risen 109% and 138% respectively since the 23rd of February (the day before the conflict) to the 27th of September. Despite this, the strong Ruble is noted to be farcical by many given the difficulty in exchanging it. Trade barriers are thought to lead to inefficiency in production. With the supply chain barriers imposed, the graph below predicts the impact on GDP for some European Nations.
With both sides of the sanctions reluctant to budge, the upcoming winter will play a key part in the war. With European energy prices soaring, there is pressure to become less reliant on Russian energy or for NATO to come up with a solution to this conflict. However, with Putin’s aggressive military use, a war is in no one’s best interest. Putin’s war will damage the lives of the poorest, with millions of refugees fleeing, lead to soaring energy prices in Europe and slow Russian grain exports (the largest exporters of wheat). With no sign of either side backing down, future growth prospects have been harmed, and Europe must find a way to become more self-sufficient in the energy sector. Putin’s war will have economic implications for years to come.
The views expressed in this article are the author’s own, and may not reflect the opinions of The St Andrews Economist.
Image Source: Illustration by Ziniu Chen, University Communications; photo courtesy U.S. Department of State