Government Affairs During a Global Crisis: Understanding the Impacts of the War in Ukraine

The negative social and economic impact of the war against Ukraine continues to ravage the country and the world. The war is leaving the people of Ukraine vulnerable and unable to meet basic needs. With waves of migrant outflows and high levels of internally displaced people, Ukraine would require unprecedented levels of financing to support the country in the upcoming months.

The World Bank has already issued two rounds of financing for Ukraine — $200 million and $723 million respectively — to alleviate human suffering. Even with this additional financing, the economic and humanitarian outlook for the country is stark and the Ukrainian economy is expected to shrink by around 45.1 percent this year. The predicted contraction can be attributed to the declines in their imports and exports due to trade disruptions and a large drop in household spending due to the displacement of people.

In 2022, the global economy was originally expected to experience high levels of inflationary pressures, debt sustainability concerns, and rising interest rates due to the COVID-19 pandemic — particularly in Europe and Central Asia. Now, due to the war in Ukraine, the United Nations Conference on Trade and Development has downgraded its global economic growth projection for 2022 from 3.6 percent to 2.6 percent.

With the war, the economic implication of these issues will be compounded. Navigating inflation and skyrocketing prices — especially for food, fertilizer, and energy — is the newest challenge for policymakers and industries worldwide.

Global Food Crisis

The war in Ukraine and the subsequent trade disruptions continue to create new unintended repercussions in the global food supply due to soaring international prices for fertilizers and essential food commodities. Industry officials are warning that the conflict could lead to a prolonged global supply shortage in agricultural fertilizer as Russia and Belarus are the second-and third-largest producers of a key ingredient used for potassium-rich fertilizers in the world.

Food prices were already high sitting at 133.2 on the FAO Food Price Index – a nearly 30.3 point increase from early 2020 to 2022 – before the start of the conflict due to changes in global demand, drought, and the continuing impacts of the COVID-19 pandemic, and are likely to continue to rise due to the ongoing conflict in Ukraine. The FAO Food Price Index averaged 159.3 points, or 12.6 percent increase, in March 2022. The recent increase makes it the highest price hike since the creation of the index in the 1990s.

As crops rely on different types of fertilizers to achieve optimal yields, farmers generally choose to plant crops based on expected profitability. Historically, farmers have demonstrated sensitivity to changes in fertilizer price and often responded by planting fewer total acres during a price hike. Since the start of the conflict, the Green Market Fertilizer Price Index rose sharply from the end of January to March, showing a nearly 56 percent increase, or 811.7 points.

When combined with the preexisting vulnerabilities in global food security, experts are raising the alarm that the skyrocketing food commodities and raw materials prices could spiral into a global food crisis.

Through a Policy Lens

As prices in essential food commodities continue to rise due to the conflict and trade flow disruptions, policymakers and industry leaders should closely monitor world trade barriers, and push to ensure that the international markets can play a mitigating role in the looming global food crisis. Moreover, the rise in food insecurity will significantly lead to increased world hunger. Emerging markets are particularly at risk given the already high rate of hunger and the more prominent role the agricultural sectors play in developing countries' economies. Thus, policymakers should continue to support essential humanitarian activities to ensure the availability of critical food supply and agricultural commodities.

Energy

The war in Ukraine has urged world leaders to minimize their reliance on Russian energy exports. The existing dependence has resulted in a sharp climb in global oil prices due to supply disruptions exacerbated by oil embargoes.

Russia is currently tied for first, with the United States and Saudi Arabia, as the biggest producer of crude oil, and the country is also the second largest producer of natural gas. In 2019, the EU imported 40 percent of its natural gas, approximately 25 percent of its crude oil, and about 50 percent of its coal from Russia. In March alone, Europe spent $24 billion on Russian energy — a full month after Russia waged its invasion of Ukraine.

The United States is significantly less dependent on Russian energy than Europe, with 3 percent of its crude oil and 20 percent of its petroleum products imported from that country. Consequently, Russia has significantly less leverage over the U.S. energy market and economy.

Nevertheless, debates within the U.S. on whether to accelerate the transition to clean energy or to expand fracking activities domestically have been at the forefront of conversations. Although President Biden is an ardent supporter of clean energy, the Ukraine-Russia conflict has created a blip in his policy direction, as he calls for big oil executives to send 15 billion cubic meters of liquified natural gas (LNG) to Europe this year, with a goal of exporting 50 billion cubic meters a year by 2030. Simultaneously, Biden has banned all imports of Russian coal, LNG, and oil while using both unilateral and multilateral methods to urge global leaders to shift toward alternative energy sources. Despite the sudden focus on American non-renewables, Biden has been adamant that the administration remains steadfast to a clean energy transition.

Through a Policy Lens

Due to volatility in the energy market, policymakers have been compelled to reevaluate their energy mixes and balances of trade. Considering the scope and scale of this situation, and with a long-term outlook in mind, organizations in the global energy sector and industries requiring vast inputs of energy must expedite shifts in their portfolios to renewable sources. Simultaneously, green financing and investments in energy-efficient infrastructure must occur at a larger scale and a faster rate, with more resilient and purpose-driven public-private partnerships spearheading this effort.

Navigating energy policy will require massive levels of cross-industry and international collaboration considering the compromise needed to achieve green energy goals. Efficient energy policy is one of the biggest challenges of our time and the war on Ukraine and subsequent supply disruptions have laid bare the exigency of the situation, making this a crossroads moment for policymakers and business leaders alike.