The Economic Impact of the Crisis in Ukraine

Summary

Russia’s decision to recognize the independence of the breakaway regions of Donetsk and Luhansk in eastern Ukraine, and to send Russian military forces into those territories, has raised geopolitical tensions dramatically. That said, if Russia halts its operations here, the potential geopolitical fallout is likely to be limited, as many countries recognize the desire of many of the citizens of Donetsk and Luhansk to be separate from Ukraine.

However, there are still major concerns that Russia might decide to launch operations in other parts of Ukraine, including potential operations in southern Ukraine and against the country’s capital, Kiev. If this were to occur, the geopolitical and economic fallout from this crisis would be much more severe. Geopolitically, it would completely sever relations between Russia and the West, leading to a situation akin to that of the Cold War, only with the border between East and West this time lying much further east than during the Cold War.

Meanwhile, the economic fallout from this crisis is likely to be limited for much of the world apart from Russia and Ukraine. Sure, energy and grain prices will rise over the near-term, and could soar if Russia launches a full-scale invasion of Ukraine. This would largely impact Europe and those parts of the world that are dependent upon Russian grain exports (Egypt, for example) in the form of higher inflationary pressures over the near-term. In contrast, the impact on the already-struggling Russian and Ukrainian economies would be immense, with both likely to both into deep recessions if this conflict worsens.

Takeaways

The further severing of economic ties between Russia and the West will have a major impact on the Russian economy and will leave Russia increasingly dependent upon China for export markets and for foreign investment in the years ahead.