Russo Ukrainian Conflict:
On the 24th of February, 2022, Russia launched a wide-ranged military attack on Ukraine. Russia announced that it had carried on a “special military operation” in eastern Ukraine to protect the people in the predominantly Russian-speaking region of Donbas. Russian military has carried military action along with air and missile strikes far into western Ukraine, have approached or besieged a number of key settlements such as Chernihiv, Kharkiv, Kherson, Kyiv, Mariupol, and Sumy but has met stiff Ukrainian resistance. This conflict is the largest military conflict after WW2 in Europe.
Western countries have imposed severe sanctions on Russia, which include freezing half of Russia’s foreign exchange reserves and removing Russian banks from Swift, the global payment system. Russian Ruble has crashed more than 40% since start of the conflict and has recovered to be at around 25% discount against USD. Moscow stock markets are closed from Feb 25 from order of Russian central bank. There were also concerns that Russia may default on its foreign sovereign debt for the first time and its country rating was downgraded by Fitch and Moody’s to junk.
Impact on Global & Indian Economy:
The immediate impact of Russo Ukrainian conflict on global economy is multifold. Oil prices surged immediately with Brent touching high of $113 before coming down to $100 as Russia is key exporter of Oil & Gas. Russia and Ukraine are large suppliers of wheat and edible oil, prices of which are going to increase further. The Industrial Metal prices, like steel prices, which were already very bullish have sharply increased with prices of nickel, zinc, palladium etc. exploding. Global supply chain which had just started to recover from Covid, will experience further disruptions. This conflict has only magnified threats of inflation and supply chain disruptions.
This war has impact on India also. Moody’s has lowered 2022 growth forecast of India by 0.4% to 9.1% against 9.5% earlier. Indian economy will be vulnerable to higher oil, gas and metal prices. The CPI inflation is also 8 month high at 6.07% in February 2022 while WPI inflation is over 13.11%. Inflation was already a major concern for RBI from last number of months.
Impact of war on Economy:
Institute of Economics and Peace (IEP) tries to measure economic cost of violence and war. Its research report on economic consequences of war on U.S. economy concluded that heightened military spending of U.S. in WW2 and subsequent wars had several adverse macroeconomic effects. These effects occurred as a direct consequence of the funding requirements of increased military spending. The U.S. has paid for its wars either through debt (World War II, Cold War, Afghanistan/Iraq), taxation (Korean War) or inflation (Vietnam). In each case, taxpayers were burdened, and private sector consumption and investment were constrained as a result. Other negative effects included larger budget deficits, higher taxes, and growth above trend leading to inflation pressure. These effects can run concurrent with major conflict or via lagging effects into the future. Regardless of the way a war is financed, the overall macroeconomic effect on the economy tends to be negative.
Adverse effects of wars on economy are of course over and above the loss of lives and destruction of physical and human capital. Some wars could be necessary to fight as negative effects of not fighting these wars can outweigh the costs of fighting but if there are other prudent options, they must be exercised first.
IEP says that peace brings prosperity, lower inflation and more jobs. When peace increases, the money that was spent on dealing with violence decreases and the same can be used on Investments and other activities that are productive. In 2020, the economic impact of violence was around $14.96 trillion in purchasing power parity terms, equivalent to 11.6 per cent of global GDP or $1,942 per person. In authoritarian regimes the cost of violence was much higher while it was just 4% of GDP in full democracies.
RBI Bulletin (www.bulletin.rbi.org.in), SEBI (www.sebi.gov.in), NSE (www.nseindia.com), BSE (www.bseindia.com)
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