Global Economics

Global economic consequence of Russian invasion of Ukraine

Peterson K. Ozili

Abstract

This paper explores the global economic consequence of the Russian-Ukraine war in the month of

invasion. Russia invaded Ukraine on the 24th of February 2022. As a result of the Russia-Ukraine

war, multiple international sanctions were imposed on Russia to compel Russia to de-escalate the

crisis. The sanctions imposed on Russia, although intended to hurt Russia, had spillover effects to

the global economy mainly through global supply chain disruption. Using global data and data

from the Euro Area, Ukraine and Russia, the findings show that there was an increase in the global

PMI and an increase in the world price of food and food ingredients. The index of global stock

markets plunged on the day of invasion. The Euro Area manufacturing purchasing managers’

index (PMI) declined in the month of the invasion. Also, the transportation component of the

consumer price index rose in the month of the invasion due to shortage of energy and fuel supplies

which led to a rise in the price of gasoline for transportation in the Euro Area. Ukraine experienced

a more devastating effect from the invasion than Russia and the entire Euro Area. Core consumer

prices in Ukraine and the Euro Area were highly correlated during the invasion. Food inflation

was highly correlated in the Euro Area and in Russia. Also, there is a positive and high correlation

between world food price index, world oils price index, world diary price index and world cereals

price index during the month of the invasion. The conflict led to a global rise in prices leading to

a rise in global inflation. Although conflict resolution between Russia and Ukraine was brokered

by Israel, the economic effect of the crisis still lingered on in many parts of Europe and beyond

Europe.

Keyword: War, Ukraine, Russia, Conflict, sanction, SWIFT, invasion, economic consequence,

NATO.

JEL code: H56, N44, D74, F51

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1. Introduction

The world witnessed a significant disruption in economic activities due to the lockdown

restrictions during the COVID pandemic (Ozili and Arun, 2020). Global recovery from the COVID

pandemic began in early 2022. Many countries announced plans to remove COVID-era restrictions

due to a significant decline in the number of reported COVID infection and death cases in many

countries. At the start of 2022, there was great optimism about post-COVID economic growth as

many countries intensified efforts to control rising inflation and to spur growth. This led to a

positive outlook for global growth which was predicted to increase to 4.4 or 4.9 percent in 2022

according to the IMF World Economic Outlook (WEO). During the same period, Russia invaded

Ukraine in February of 2022. The invasion led to geopolitical tensions between the West and

Russia, and it diminished global growth forecast due to uncertainty about the effect of the conflict

on global supply chain.

This paper explores the global economic consequence of the Russian-Ukraine war in the month of

invasion. It is important to understand and identify how the invasion affected global business

activities and prices and the implication for the future. I begin by providing some answers to the

question: why do countries fight and go to war in the modern era? The simple answer is that

countries to go war, or engage in conflict, to protect national resources, to maintain one’s regional

influence, to gain more or equal control over shared resources, or to preserve colonial rights,

heritage or values (Averre, 2016; Malyarenko and Wolff, 2018). In the case of Russia, the reason

for going into conflict with Ukraine is to protect its border and to maintain its regional influence

in the east of Europe (Mankoff, 2014).

But how did the Ukraine-Russian crisis start? Since the 2000s, Ukraine has been wavering between

the West and Russia. This means that Ukraine has not been able to fully join a Western alliance

and has not accepted to be fully under Russian influence. In 2008, Ukraine planned to formally

join the North Atlantic Treaty Organization (NATO), a move that was supported by the United

States but was opposed by France and Germany after Russia announced its opposition to Ukraine’s

membership of NATO. Subsequently, the plan to join Ukraine was postponed to a later time. In

February 2010, a new Ukrainian president was elected who promised that Ukraine will be a

‘neutral state’ which will cooperate with Russia and Western alliances like the EU and NATO.

Soon after Crimea was annexed by Russia in 2014. The annexation led to violence in Donbas and

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led to intense fighting and violence along the border regions that separated Russian and

Ukraine to the east of Europe. Since then, Ukrainian public sentiment has been towards the West

with calls for Ukraine to join NATO and the EU to reduce its dependence on Russia. But Russia’s

opposition of Ukraine’s membership of NATO since 2010 has caused escalation between the two

countries.

While the full economic consequences of Russian invasion of Ukraine may not be fully known

until the crisis ends, early economic data shows some significant movement in global economic

data as a result of Russian invasion of Ukraine. The data show evidence of an increase in the global

PMI and an increase in the world price of food and food ingredients. The index of global stock

markets plunged on the day of invasion. The Euro Area manufacturing purchasing managers’

index (PMI) declined in the month of the invasion. Also, the transportation component of the

consumer price index rose in the month of the invasion due to shortage of energy and fuel supplies

which led to a rise in the price of gasoline for transportation in the Euro Area. Ukraine experienced

a more devastating effect from the invasion than Russia and the entire Euro Area. Core consumer

prices in Ukraine and the Euro Area were highly correlated during the invasion. Food inflation

was highly correlated in the Euro Area and in Russia. Also, there is a positive and high correlation

between world food price index, world oils price index, world diary price index and world cereals

price index during the month of the invasion.

This paper contributes to the economic literature that examine the economic consequence of war.

Some studies in this literature include Kang and Meernik (2005), Mazower (1991), Heydemann

(2018), Chassang and Miquel (2009), Koubi (2005), Collier (1999), Nordhaus (2002), Glick and

Taylor (2010), Bluszcz and Valente (2019), Ganegodage and Rambaldi (2014) and Kesternich et

al (2014). There is extensive research on the economic effect of past wars such as the effect of

World War I, World War II and the effect of the Iraq war on the economy. But there is little

research about the economic consequence of war in a modern European society and the likely

spillover effect to other countries. This paper fills this gap in the literature.

The rest of the paper is structured as follows. Section 2 presents the literature review. Section 3

presents a discussion of Russian invasion of Ukraine. It discusses the cause of Russian invasion of

Ukraine in February 2022, the international response to Russia’s invasion during the war, the

multilateral support for Ukraine, and Russia’s response to international sanctions. Section 4

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highlight the potential impact on the global economy. Section 5 presents the methodology. Section

6 presents the empirical analysis. Section 7 concludes.

2. Literature review

2.1. Studies on the economic effects of war

Existing studies on the economic effects of war show that wars have economic consequences. For

instance, Kang and Meernik (2005) showed that there are two schools of thought on the effects of

war. The first school of thought is the ‘war renewal’ school of thought while the second school of

thought is the ‘war ruin’ school of thought. The ‘war renewal’ school of thought argue that wars

can produce beneficial effects as they improve efficiency in the economy by reducing the power

of special interests, bringing technological innovation, and increasing human capital while the ‘war

ruin’ school of thought view wars as destructive events with no benefit on the economy (Kang and

Meernik, 2005). In the context of the great depression, Mazower (1991) states that there is the

belief that the great depression led directly to the collapse of parliamentary democracy in many

countries. Heydemann (2018) argues that the civil wars in the Middle East have not created

conditions conducive to re-conceptualizing sovereignty or decoupling sovereignty and

governance. Rather, parties to conflict compete to capture and monopolize the benefits that flow

from international recognition. Under these conditions, civil wars in the Middle East will not yield

easily to negotiated solutions. Chassang and Miquel (2009) state that poor countries have a higher

propensity to suffer from civil war especially when poor countries suffer from negative income

shocks.

Several studies empirically estimate the economic effects of wars. Koubi (2005) studied the

consequences of interstate wars for economic growth in a large cross section of countries from

1960 to 1989. The study found that cross-country differences in economic growth is systematically

related to the occurrence and the characteristics of war. The study observed that post-war economic

performance is positively related to the severity and the duration of war. But the growth-enhancing

effects vary negatively with a country’s level of economic development. Kang and Meernik (2005)

examined the effects of civil wars on many economies from 1960 to 2002. They find that wars

have a negative effect on economic fundamentals, and that the response by the international

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community to civil wars exert powerful effects on economic growth. Collier (1999) developed a

model to test for the economic effects of all civil wars since 1960. Collier (1999) observed that

after long civil wars the economy recovers rapidly, whereas after short wars the economy continues

to decline. Nordhaus (2002) showed that wars are very costly, and the estimated cost of the Iraq

war to the United States over the decade ranged from $100 billion to $1.9 trillion. Glick and Taylor

(2010) studied the effects of war on bilateral trade with available data extending back to 1870.

They used the gravity model to estimate the effects of wars on international trade while controlling

for other determinants of trade as well as the possible effects of reverse causality. They find a large

and persistent impact of wars on trade, national income and global economic welfare. Bluszcz and

Valente (2019) quantified the short-term causal effects of the Donbass war on Ukraine’s GDP from

1995 to 2017. They find that Ukraine’s per capita GDP declined by 15.1% as a result of the war

from 2013 to 2017. Ganegodage and Rambaldi (2014) find that the war in Sri Lanka had a negative

and significant effect on GDP. They also show that high returns from investment in physical capital

did not translate into sizable positive externalities. Kesternich et al (2014) investigate the long-run

effects of World War II on the socioeconomic status and health of older individuals in Europe.

They analyze data from SHARELIFE, a retrospective survey conducted as part of SHARE in

Europe in 2009. SHARELIFE provides detailed data on events in childhood during and after the

war for over 20,000 individuals in thirteen European countries. They construct several measures

of war exposure: experience of dispossession, persecution, combat in local areas, and hunger

periods. They find that exposure to war and to individual-level shocks caused by the war

significantly predicts economic and health outcomes at older ages.

2.2. Studies on the Ukraine and Russian conflict

Existing studies analyse the effect of the 2014 Ukraine-Russia crisis. Shelest (2015) explained that

the protests in Ukraine in winter 2014 resulted in the annexation of Crimea by Russia. Ukraine

considered the conflict to be a Russian–Ukrainian conflict. Meanwhile, Russia considered the

crisis to be a Russian–West confrontation, claiming that the crisis was provoked by NATO’s desire

to enlarge into the region where Russia has strong interests. Samokhvalov (2015) argued that the

conflict in the EU-Ukraine-Russia triangle is affected by the combination of choices made by the

Ukrainian political class, business elites and broader society in four major dimensions: internal

political practices, economic international politics, and ideological dimension. Hoffmann and

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Neuenkirch (2017) analyzed the impact of the pro‐Russian conflict on stock returns in Russia and

Ukraine from November 21, 2013 to September 29, 2014. They find that the conflict reduced

Russian and Ukrainian stock returns. Stukalo and Simakhova (2018) argued that Ukraine needs an

integrated approach in order to solve all economic and social problems in the country. Wang (2015)

showed that the 2014 Ukraine crisis and Russia’s Crimea annexation have pushed Russian-

Western relations to near the freezing point, and despite the international sanctions imposed on

Russia led by the US and Europe, Russia remained politically stable, diplomatically stable, and its

population is united. Liefert et al (2019) examined how Russia’s economic crisis and ban on

agricultural imports from the United States and other Western countries that began in 2014 affected

its agricultural and food sector. They document that the import ban affected Russian consumers

by reducing Russia’s imports of agricultural and food products, substantially raising food prices,

and lowering consumption. But the import ban did not affect Russia’s basic food availability.

Rather, the import ban stimulated agricultural production within Russia thereby ensuring food

sufficiency during the ban. Dreger et al (2016) showed that, during the aftermath of the 2014

conflict between Russia and Ukraine, the Russian ruble lost 50% of its value against the US dollar.

Havlik (2014) showed that the cost of the conflict for Russia were estimated to be in the tune of

1% of Russia’s GDP from 2014 to 2016 as a result of increased investment risks.

3. Understanding the Russian invasion of Ukraine

3.1. The cause of Russia’s invasion of Ukraine in 2022

There are different accounts of what caused the Russian invasion of Ukraine. There is the Pro-

Russian account of what caused the invasion. There is also the pro-West or Western account of

what caused the invasion. The pro-Russian reason for invading Ukraine is that Ukraine is being

controlled by Western powers, and that Ukraine was using its military to oppress citizens in

separatist regions who are loyal to Russian government and is committing genocide against its

own people1. The Russian government also claimed that Ukraine’s ambition to join a military

alliance with NATO poses an existential threat to Russia’s national security, and such ambition

will expand NATO eastward and bring NATO closer to Russia’s border thereby posing an

1 Many western commentators say that this claim by the Russia government is false and baseless.

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existential threat to Russia. It will allow the West to infiltrate Russia and undermine Russia’s

national security. Russia claims that these two issues gave it a motivation to act militarily against

Ukraine. Russia also claimed that it considered many options to resolve the issue including

negotiation or invasion. But with Ukraine refusing to negotiate before the invasion, the Russian

government said that it chose the least dangerous option which was to invade Ukraine in order to

remove the pro-West government in Kyiv, install a new government and sign a peace deal with

the newly installed government. The peace deal will include a ban from joining the NATO and the

European Union.

The pro-West or Western account of what caused the invasion, as reported by multiple Western

media2, is that Russia feels threatened that Ukraine wants to be a democratic nation, free from

Russian influence, and seek collaboration with the West in politics, security and trade which

includes the possibility of joining NATO and the European Union. The pro-West media reports

that Russia opposes Ukraine’s decision to adopt Western democracy and alliance because

Ukraine’s western alliance with the European Union and NATO could threaten the national

security of Russia. Western media believes that this is the reason why Russia launched a ‘special

military operation’ in Ukraine so that it can remove the Ukrainian president and the incumbent

government in Kyiv and install a new pro-Russian government in Ukraine.

3.2. Sanctions: International response to Russia’s invasion during the war

Many countries in the West opposed Russian invasion of Ukraine. Many countries reacted by

openly condemning Russia for invading Ukraine. Other countries reacted by imposing sanctions

on Russia such as the United States, United Kingdom, European Union, France Japan, Australia,

Canada, New Zealand and Taiwan. Some of the sanctions imposed on Russia during the 2022

invasion include:

 Blocking some Russian banks from using the SWIFT global payments system. SWIFT is

a high security network that facilitates payments among 11,000 financial institutions in 200

countries.

2 Al Jazeera - https://www.aljazeera.com/news/2022/2/24/explainer-russias-invasion-of-ukraine-what-we-know-so-

far

Reuters - https://www.reuters.com/world/europe/events-leading-up-russias-invasion-ukraine-2022-02-28/

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 Germany halted the certification of Russia’s Nord Stream 2 gas pipeline project intended

to distribute energy to Europe.

 New Zealand prohibited the export of goods to Russian military and security forces in

response to the invasion of Ukraine.

 The United states banned the export of war technology to Russia to severely limit Russia's

ability to advance its military and aerospace sector. The ban will limit US export of

semiconductors, telecommunication, encryption security, lasers, sensors, navigation,

avionics and maritime technologies to Russia. The United States also barred Russian

financial institutions and the Russian Central Bank from accessing their dollar external

reserves held in the United States. This means that Russian financial institutions and the

Russian Central Bank cannot make transactions in American dollars. The US also banned

all Russian oil and gas imports.

 The European union imposed financial sanctions on Russia, targeting 70% of the Russian

banking market and key state owned companies. It banned Russian deposits above

€100,000 in EU banks, on Russian accounts held by EU central securities depositories and

on selling euro-denominated securities to Russian clients. The EU banned the listing of the

shares of Russian state-owned entities on EU trading venues. The EU banned the sale,

supply, transfer or export of technologies in oil refining to Russia. The EU imposed an

export ban on all aircraft, spare parts and equipment to Russian airlines, as well as to the

Russian space industry. The EU halted visa agreements with notable Russian persons. This

means that diplomats, Russian officials and businesspeople will no longer be able to benefit

from visa facilitation provisions which allow privileged access to the EU3. The EU

removed Russia from all cultural events and sporting events such as the Eurovision and the

UEFA champions league.

 Canada cancelled all valid export permits associated with Russia.

 Switzerland and Japan freeze the assets of certain Russian individuals held in Swiss and

Japanese banks.

 Australia imposed travel bans and financial sanctions on eight members of the Security

Council of the Russian Federation.

3 According to a report by the Financial Times https://www.ft.com/content/6f3ce193-ab7d-4449-ac1b-751d49b1aaf8

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 Japan suspended visas for individuals from the “Donetsk People’s Republic” and the

“Luhansk People’s Republic”. Japan also prohibited the issuance and transaction of new

Russian sovereign debt in the primary and secondary market.

 Switzerland partially suspended a visa agreement that made it easier for Russians to enter

Switzerland since 2009, including for diplomats. It also imposed travel bans for five

unnamed oligarchs close to Putin who have ties with Switzerland.

 The United Kingdom imposed financial sanctions on Russian banks by freezing the assets

of Russian oligarchs held in UK banks. The UK also barred Russia's largest bank

‘Sberbank’ from clearing payments in Pound Sterling. The UK announced that it will phase

out Russian oil by the end of 2022. The UK banned Russian airline ‘Aeroflot’ from

operating in the UK airspace.

 Finland, Belgium, Latvia, Ireland, Estonia, Lithuania, Poland, Bulgaria, Moldova,

Romania, Slovenia and Czech Republic also banned Russian planes from flying into their

airspace.

3.3. Support to Ukraine

The US offered over $1billion aid in security assistance to Ukraine to enable Ukraine resist Russia.

The aid was used to purchase stinger anti-aircraft systems, military javelin, light anti-armor

weapons, anti-armor systems; tactical unmanned aerial systems, grenade launchers, rifles, pistols,

machine guns, shotguns; grenade launcher, body armor, and helmets. Other countries offered

military assistance to Ukraine such as Australia, Belgium, Canada, Czech Republic, Denmark,

Estonia, Finland Germany, Italy, etc. Some countries such as Argentina, Hungary, India, Pakistan

and Thailand offered humanitarian aid such as food, clothing and emergency medical supplies.

3.4. Russia’s response to the international sanctions

Many economists anticipated Russia’s reaction to the international sanctions and warned that it

could start a global economic war. Russia reacted to the international sanctions by taking some

countermeasures which includes:

 banning exports of more than 200 products until the end of 2022. The banned exports

include telecoms, medical, vehicle, agricultural, electrical equipment and timber.

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 increasing key interest rate to stop the decline of the value of the rouble which is the

Russian currency.

 barred the payment of interest to foreign investors who hold Russian government bonds

 banned Russian firms from paying overseas shareholders.

 banned foreign investors who hold billions of dollars worth of Russian stocks and bonds

from selling them.

 These sanctions imposed on Russia are severe and could affect Russia’s economy in many

ways even though Russia vowed to impose retaliatory sanctions on all countries that

sanctioned Russia4

4. Potential impact on the global economy

 Global supply chain disruption

Military operations during Russian invasion of Ukraine will affect operations in multiple sectors

through global supply chain disruption. The ban on Russian exports and a retaliatory ban on foreign

imports by Russia, including Russia’s refusal to allow foreign cargoes to pass through its

waterways and airspace during the conflict, can disrupt global supply chain. It can create scarcity,

and lead to an increase in the price of imported goods. Companies have anticipated that the

disruption caused by cross-border blockades and cross-trade bans will lead to the hoarding of

supplies thereby leading to high prices. Furthermore, restrictions to commercial flights around the

Ukraine-Russian border as well as increased security checks at refugee camps in neighbouring

countries means that there will be a disruption in cargo flow and border operations as cross-border

goods and supplies may be halted or delayed due to border officials processing refugees before

attending to cross-border goods. This will further worsen the disruption in global supply chain and

increase the price of imports.

4 Moscow Times Media - https://www.themoscowtimes.com/2022/02/23/russia-promises-strong-response-to-us-

sanctions-over-ukraine-a76539

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 Rising oil and gas prices

Prior to Russian invasion of Ukraine, energy prices have been rising due to multiple factors such

as the COVID pandemic, limited energy supplies and growing tensions between Russia and

Ukraine. During this time, oil prices were stable within the price band of US$80 to US$95 before

the invasion. After the invasion, oil prices exceeded USD$100 a barrel. A potential consequence

of the invasion is that European oil marketers and oil companies will experience difficulty in

receiving energy supplies from Russia, as Russia is the world’s second-largest oil producer and

sells most of its crude to European refineries. Russia is also the largest supplier of natural gas

to Europe, providing about two-fifths of its supply. Due to Russia’s large share of oil export, the

Russian invasion of Ukraine is likely to lead to energy supply shocks and a sustained rise in energy

prices. This effect may worsen if Russia places a retaliatory export ban on energy supplies to

Europe and the rest of the world. A retaliatory energy export ban by Russia will lead to a major

disruption in global energy supply, thereby increasing energy prices. The Russia-Ukraine war

could make oil price exceed $140 a barrel and can significantly reduce global economic growth

forecast, and plunge some European and non-European countries into a recession. Gas prices for

household use may also increase due to fears of a disruption to global energy supplies. Although

the United States can release its energy reserves to meet energy shortages in World energy markets,

it will take a long time to meet growing energy demand due to energy trade negotiations as global

energy prices continue to rise.

 Effect on the global banking system

The direct effect of Russian invasion of Ukraine on the global banking system is minimal. The

most notable effect is the international financial sanctions imposed on Russian banks. The

sanctions, including the ban of selected Russian banks from SWIFT, is unlikely to have a

significant effect on global banking system. The only banking segments that have been severely

affected by the sanctions are foreign banks with large operations in Russia. These foreign banks

were affected after several countries imposed financial sanctions on Russian banks and Russian

wealthy individuals. The most affected banks were Austria’s Raiffeisenbank, Italy’s Unicredit and

France’s Société Générale. However, the global banking system may suffer from the indirect

consequence of the war if pro-Russian groups retaliate against Western financial sanctions by

launching a significant cyber-attack on the global payment system. The potential global loss that

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could arise from an attack on the global payment system could amount to a daily loss of US$50m

daily.

 Decline in economic output and growth

Western interference into Russia’s struggle for regional control could pressure Russia to place a

ban on oil export as a retaliatory measure to the sanctions imposed on Russia by the West. This

could lead to higher oil prices and could affect economic growth. This is because businesses will

have to spend more to import raw materials and also spend more to produce goods and services.

This will lead to higher input and output prices, and people may not be able to pay for goods and

services at a high price. This will lead to fewer purchases by consumers, and could lead to a

reduction in the supply of goods and services, thereby leading to a fall in economic output.

Consumption expenditure will also be affected as households will spend more on oil and gas for

cooking and to heat up their homes. This will lead to a fall in household’s disposable income after

tax, thereby dampening consumer spending. This will affect the consumption expenditure

component of GDP.

 Rising global inflation and cost of living

If the invasion persists, most European countries including, Germany and the United Kingdom,

will face rising cost of living. In the UK, for instance, inflation is already high at 5.5%.5 This means

that consumers are already spending more money on fewer goods. The conflict will lead to a

further hike in the price of oil, gas, food and food ingredients. This will increase the cost of living

as the cost of mortgage deductibles, cars and lighting may increase significantly. There will be

spillover effects to developing countries that rely on energy import. Developing countries will pay

a higher price for energy imports which could translate to a rise in the local pump price of fuel, a

rise in food prices and a general rise in merchandise imports despite income levels remaining

unchanged. This will lead to an increase inflation and a rise in the cost of living in developing

countries. The combined effect for developed countries and developing countries is that it can lead

to a rise in global inflation and high cost of living.

5 According to the UK Office for National Statistics

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5. Methodology

To assess the global economic effects of the invasion, global data, Euro Area data and country-

specific data were collected from the Food and Agriculture Organization, Markit Economics and

other sources (see table 1). The data was collected for a three-month period which covers

December 2021, January 2022 and February 2022. February 2022 was the month of Russian

invasion of Ukraine. The methodology used to analyse the correlation between the relevant

macroeconomic variables during the period is the Pearson correlation method. The correlation

result is reported in section 6. I also compare the pre-invasion data and the data for the month of

invasion in section 6. Stock market data was also analyzed in section 6.

Table 1. Variables and data source

Variables Source

Global Composite PMI Markit Economics

Global Manufacturing PMI Markit Economics

World Food Price Index Food and Agriculture Organization database

World Cereals Price Index Food and Agriculture Organization database

World Oils Price Index Food and Agriculture Organization database

World Dairy Price Index Food and Agriculture Organization database

Services PMI for the Euro Area Markit Economics

Manufacturing PMI for the Euro Area Markit Economics

Composite PMI for the Euro Area Markit Economics

Transportation CPI for the Euro Area Europena central Bank

Inflation rate (MoM) for Russia and Ukraine Trading economics

Inflation rate (YoY) for Russia and Ukraine Trading economics

Core consumer prices for Russia and Ukraine Trading economics

Food inflation rate for Russia and Ukraine Trading economics

CPI=Consumer price index. PMI = Purchasing Managers' Index (PMI). YoY=Year-on-year.

MoM = Month-on-month

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6. Empirical Results

This section reports the empirical results based on the business performance and price data

collected in section 5.

6.1. Correlation analysis

6.1.1. Global prices and business performance analysis

The correlation of the global prices and business performance indicators is reported in table 2

below. Table 2 shows that the global manufacturing PMI and the global composite PMI are

positively correlated and have a high correlation at 93.6%. This suggests that the global

manufacturing PMI contributed positively to the global composite PMI during the period. Also,

there is a high positive correlation between world food price index, world oils price index, world

diary price index and world cereals price index during the period. This suggests that Russian

invasion of Ukraine led to an increase in the world price of food, dairy products, cereal and oils.

More importantly, the correlation between world food price index and diary price index is

statistically significant. Also, the correlation between world oils price index and diary price index

is statistically significant.

Table 2. Pearson correlation: Global prices and business performance analysis

Variables

Composite

PMI

Manufacturing

PMI

World Food

Price index

World Cereal

Price Index

World Oil

Price Index

World Dairy

Price Index

Composite PMI 1.000

-----

Manufacturing PMI 0.936 1.000

(0.22) -----

World Food Price

index 0.008 -0.342 1.000

(0.99) (0.77) -----

World Cereal Price

Index 0.220 -0.134 0.977 1.000

(0.85) (0.91) (0.13) -----

World Oil Price Index -0.075 -0.420 0.996 0.955 1.000

(0.95) (0.72) (0.05) (0.19) -----

World Dairy Price

Index -0.051 -0.397 0.998** 0.962 0.999** 1.000

(0.96) (0.73) (0.03) (0.17) (0.02) -----

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** denote statistical significance at the 5% level. P-values are reported in parenthesis

6.1.2. Euro area analysis

The Euro Area correlation result in reported in table 3. The correlation result shows that the Euro

Area services PMI is positive and highly correlated with the Euro Area composite PMI and

transportation prices (CPI transportation). The services PMI has a negative correlation with the

manufacturing PMI during the period. There is also a negative correlation between the Euro Area

manufacturing PMI and the Euro Area composite PMI during the period. This suggests that

increases in the composite PMI of the Euro Area was not driven by increase in the Euro Area

manufacturing PMI during the period.

Table 3. Pearson correlation: Euro Area business performance

Variables

Services

PMI

Manufacturing

PMI Composite PMI CPI Transportation

Services PMI 1.000

-----

Manufacturing PMI -0.654 1.000

(0.54) -----

Composite PMI 0.987 -0.525 1.000

(0.10) (0.64) -----

CPI Transportation 0.735 0.031 0.834 1.000

(0.47) (0.98) (0.37) -----

P-values are reported in parenthesis

6.1.3. Core consumer prices correlation

The correlation result in table 4 shows that core consumer prices in Russia and the Euro-Area are

negative and weakly correlated at -40.8%. Also, core consumer prices in Russia and Ukraine are

positive and averagely correlated at 50%. Meanwhile, Ukraine and the Euro Area have the highest

core consumer price correlation at 58.6%. This average correlation is attributed to each country

shielding their economies from the effect of inflation as a result of Russian invasion of Ukraine.

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Table 4. Pearson correlation: Core consumer prices

Variables Euro Area Russia Ukraine

Euro Area 1.000

-----

Russia -0.408 1.000

(0.73) -----

Ukraine 0.586 0.500 1.000

(0.60) (0.67) -----

P-values are reported in parenthesis

6.1.4. Inflation rate (MoM) correlation

The correlation result in table 5 shows that the month-on-month inflation rate in Russia and the

Euro-Area is positive and highly correlated at 79.6%. The correlation is higher than the month-on-

month inflation rate correlation between Ukraine and the Euro-Area at 61.6%. Meanwhile, Ukraine

and Russia have the highest month-on-month inflation rate correlation at 96.7%. The high

correlation is attributed to the war which disrupted global supply chains and led a rise in the general

price level during Russian invasion of Ukraine.

Table 5. Pearson correlation: Inflation rate (m-o-m)

Country Russia Ukraine Euro Area

Russia 1.000

-----

Ukraine 0.967 1.000

(0.16) -----

Euro Area 0.796 0.616 1.000

(0.41) (0.57) -----

P-values are reported in parenthesis

6.1.5. Food inflation correlation

The correlation result in table 6 shows that the food inflation rate in Russia and Ukraine is positive

and highly correlated at 96.2%. The correlation is higher than the food inflation rate correlation

between Ukraine and the Euro-Area at 85.9%. Meanwhile, the Euro Area and Russia have the

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highest food inflation rate correlation at 96.7%. The high correlation is due to the war which

disrupted food supply chains in Russia and Europe, thereby increasing the price of food during

Russian invasion of Ukraine.

Table 6. Pearson Correlation: Food inflation

Country Russia Ukraine Euro Area

Russia 1.000

-----

Ukraine 0.961 1.000

(0.17) -----

Euro Area 0.966 0.859 1.000

(0.16) (0.34) -----

P-values are reported in parenthesis

6.1.6. Inflation rate (YoY) correlation

The correlation result in table 7 shows that the year-on-year inflation rate in Russia and the Euro-

Area is positive and strongly correlated at 96.6%. The correlation is higher than the year-on-year

inflation rate correlation between Ukraine and Russia at 90%. Meanwhile, Ukraine and the Euro

Area have the highest year-on-year inflation rate correlation at 98%. The high correlation is due

to the war which disrupted global supply chains and led a rise in the general price level during

Russian invasion of Ukraine during Russian invasion of Ukraine.

Table 7. Pearson correlation: Inflation rate(YoY) correlation

Country Russia Ukraine Euro

Russia 1.000

-----

Ukraine 0.901 1.000

(0.28) -----

Euro 0.966 0.982 1.000

(0.16) (0.12) -----

P-values are reported in parenthesis

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6.2. Comparing the invasion period with the pre-invasion period

Finally, in this section, I compare the changes in economic data in the invasion month (February

2022) and in the month before the invasion (January 2022). Figure 1 shows that the world price of

food, cereals, oils and dairy products increased in the month of the invasion compared to the pre-

invasion months. This suggests that the Russian-Ukraine war contributed to the increase in the

world price of food and food ingredients. Meanwhile, the global composite purchasing managers’

index (PMI) increased in February compared to January. This indicates that there was a positive

business performance in the global economy in the month of the invasion.

Figure 1.

Figure 2 shows that the Euro Area composite purchasing managers’ index (PMI) and the Euro

Area services purchasing managers’ index (PMI) increased in February compared to January 2022.

This indicates that the services sector in Europe witnessed a positive performance in the month of

the invasion. Meanwhile, the Euro Area manufacturing purchasing managers’ index (PMI)

declined in the month of the invasion. This was due to the shortage of input inventory and supply

chain disruption during the 2022 Russian-Ukraine war. Also, the transportation component of the

consumer price index rose in February compared to January. This was due to shortage of energy

and fuel supplies which led to a rise in the price of gasoline for transportation in the Euro Area.

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Figure 2

Figure 3 shows that core consumer prices were relatively higher in Ukraine and in the Euro Area

during in the month of the invasion. Consumer prices were relatively lower in Russia. Figure 4

shows that the annual inflation rate was relatively higher in Ukraine than in Russia and the Euro

Area in the month of the invasion. Figure 5 shows that the month-on-month inflation rate was

relatively higher in Ukraine than in Russia and the Euro Area in the month of the invasion. Figure

6 shows that the food inflation rate was relatively higher in Ukraine than in Russia and the Euro

Area in the month of the invasion. These data show that Ukraine’s economy experienced a more

devastating effect from the invasion than Russia and the entire Euro Area.

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Figure 3

Figure 4

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Figure 5

Figure 6

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6.3. Effect on global stock markets

Share prices plunged in value across global stock markets after Russian invasion of Ukraine.

Investors fled for safety upon announcement of the invasion of Russia into Ukraine. Table 8 shows

the lowest price at which stock were traded in major stock exchanges during the invasion window.

It shows that the lowest drop in share prices within a 5-day period (from February 18 to Febraury

25) was on the day of the invasion on 24th February 2022. The Dow-Jones industrial average fell

by more than 100 points. The S&P500 index fell by more than 250 points. The EuropeNext 100

index fell by more than 400 points. The Shanghai composite index fell by more than 150 points as

shown table 8 below. However, stocks rebounded the day after the invasion following the

announcement of severe sanctions on Russia by multiple countries.

Table 8. Global stock markets (the lowest price at which stocks were traded during the time period)

United States United States Australia Europe United

Kingdom

South Africa China

Dow Jones

Industrial

Average

S&P 500

Index

S&P/ASX

200

Index

Europe Next

100 Index

FTSE

100 Index

JSE SSE

Composite

Index

Lowest price Lowest price Lowest price Lowest price Lowest price Lowest price Lowest price

Year

2022

% change

(Basis points)

% change

(Basis points)

% change

(Basis points)

% change

(Basis points)

% change

(Basis points)

% change

(Basis points)

% change

(Basis points)

Feb 25 3.11

(311)

4.18

(418)

2.242

(224.2)

1.12

(112)

1.12

(112)

1.27

(127)

1.20

(120)

Feb 24 -1.08

(108)

-2.53

(-253)

-2.604

(-260.4)

-4.27

(-427)

-4.45

(-445)

-1.69

(-169)

-1.68

(-168)

Feb 23 -0.84

(-84)

-1.07

(-107)

0.515

(51.5)

1.93

(193)

2.42

(242)

1.74

(174)

0.597

(59.7)

Feb 22 -1.80

(-180)

-1.38

(-138)

-0.664

(-66.4)

-1.55

(-155)

-1.73

(-173)

-0.403

(-40.3)

-0.979

(-97.9)

Feb 21 - - -0.633

(-63.3)

-2.19

(-219)

-2.15

(-215)

-1.63

(-163)

0.715

(71.5)

Feb 18 -0.79

(-79)

-1.07

(-107)

-1.104

(-110.4)

-0.63

(63)

-1.70

(-170)

0.817

(81.7)

-0.209

(-20.9)

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6.4. Other economic effects

Table 9 shows the changes in other economic indices in February which is the month of the

invasion compared to the previous month of January including central bank actions in response to

Russian invasion of Ukraine while table 10 shows the effect of invasion on global commodity

prices.

Table 9. Country-specific economic consequences after the invasion in February

Selected

countries

Some economic indicators Direction

Netherlands Business confidence fell to 8.5 points in February 2022 from 9.0

points on January 2022.

Negative

Turkey Economic confidence index dropped to 98.2 points in February of

2022 from 100.8 points in January 2022. Also, manufacturing PMI

fell to 50.4 points in February of 2022 from 50.5 points in January

2022

Negative

Denmark Manufacturing confidence index fell to -2 point in February 2022

from -1 point in January 2022

Negative

France Annual inflation rate expected to rise to 3.6% in February of 2022

from 2.9% in January of 2022.

Negative

Ukraine The PFTS stock exchange remained closed due to the Ukraine-

Russian conflict

Negative

Italy Manufacturing confidence index dropped to 113.4 points in February

of 2022 from 113.7 points in January.

Negative

European

Union

Consumer confidence index in the EU decreased to -10.20 points in

February from -10 points in January of 2022.

Negative

Slovakia Consumer confidence index fell by 0.9 points to -22.3 in February of

2022 from 21.4 in January.

Negative

Iceland The annual inflation rate in Iceland rose to 6.2 percent in February of

2022 from 5.7 percent in January.

Negative

Sweden Business confidence index rose to 114.8 points in February of 2022

from 109.9 points in January

Negative

Russia The IHS Markit Russia manufacturing PMI declined to 48.6 points in

February of 2022 from 51.8 points in January

Negative

Kyrgyzstan Central bank raises rate by 150 points to 10% on February 28th 2022

in response to ongoing COVID-19 infections, inflationary pressures,

and rising geopolitical risk in eastern Europe.

Negative

Taiwan Consumer confidence index in Taiwan dropped to 73.19 points in

February 2022 from 73.67 points in January 2022

Negative

Myanmar The IHS Markit Myanmar Manufacturing PMI fell to 47.3 points in

February 2022 from 48.5 points in January

Negative

Ireland The AIB Ireland Manufacturing PMI declined to 57.8 points in

February 2022 from 59.4 points in January.

Negative

Indonesia The IHS Markit Indonesia Manufacturing PMI fell to 51.2 points in

February 2022 from 53.7 points in January.

Negative

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Japan The au Jibun Bank Japan Manufacturing PMI fell to 52.7 points in

February 2022 from 55.4 points in January

Negative

Belgium Annual inflation rate climbed to 8% in February of 2022 from 7.6% in

January

Negative

Sri Lanka Annual inflation climbed to 15.1% in February of 2022 from 14.2% in

January

Negative

Belarus The Central bank raised refinancing rate by 275bps to 12% on

February 28th 2022, to maintain financial stability and limit risks of

rising inflation arising from the sanctions imposed against its

neigbouring Russia.

Negative

Source: Trading economics

.

Table 10. Effect on global commodity

Commodity Economic effect

Natural gas EU natural gas prices reached close to €100 per megawatt-hour.

Oil Brent crude futures rose close to $100 a barrel on 28th February. Also, WTI crude oil

rose to above $96 a barrel on 28th February after Western nations imposed fresh

sanctions on Russia, raising fears of supply disruptions.

Gold The price of gold almost reached $1,900 an ounce on 28th February

Palm oil Palm oil increased to an all-time high of 6291 MYR/T

Uranium Uranium futures traded at a high price above $46 per pound amid Russia’s threat of

using nuclear energy following the Western sanctions on Russia for invading Ukraine.

Mineral Palladium futures rose to $1834 an ounce due to the ongoing conflict in Ukraine.

Silver Silver futures traded above $24 per troy ounce on February 24th, due to rising demand

for precious metals following the Ukraine conflict

Cocoa Cocoa futures traded at around $2527 an ounce on 28th February due to lower global

demand and supply constraints caused by Russia’s invasion of Ukraine. Border

closures placed curbs on travel which in turn prevent the sale of chocolate and coffee

Coal Newcastle coal futures traded at a high price of $274.5 per tonne on February 28 due

to soaring demand for electricity and power, particularly from European countries

affected by the ongoing Russia-Ukraine war.

Source: Trading economics

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7. Conclusion

This paper explored the global economic consequence of the Russian-Ukraine war in the month of

invasion. The global economic consequence of the invasion was a global supply chain disruption.

This manifested through rising consumer prices including rising energy prices and commodity

prices and a rise in food prices, thereby leading to a rise in global inflation in many countries

especially in Euro Area countries.

The empirical analysis in the paper showed that there was an increase in the global PMI and an

increase in the world price of food and food ingredients. The index of global stock markets plunged

on the day of invasion. The Euro Area manufacturing purchasing managers’ index (PMI) declined

in the month of the invasion. Also, the transportation component of the consumer price index rose

in the month of the invasion due to shortage of energy and fuel supplies which led to a rise in the

price of gasoline for transportation in the Euro Area. Ukraine experienced a more devastating

effect from the invasion than Russia and the entire Euro Area. Core consumer prices in Ukraine

and the Euro Area were highly correlated during the invasion. Food inflation was highly correlated

in the Euro Area and in Russia. Also, there is a positive and high correlation between world food

price index, world oils price index, world diary price index and world cereals price index during

the month of the invasion.

The implication of the results is that geopolitical conflicts, such as the Russia-Ukraine conflict,

have wide-reaching economic effects to other countries. Imposing sanctions to force Russia to

withdraw its military operations in Ukraine was a necessary action. But the sanctions did not have

isolated effects on the sanctioned country such as Russia. Rather, it affected other countries

through economic spillovers. The Russian-Ukraine invasion has shown that sanctions against a

warring country is not an optimal solution because it has spillover effects to other countries who

are not part of the conflict, especially when the warring countries are trade partners of other

countries who are not involved in the war. Political leaders should put in effort to discourage

conflicts like the Ukraine-Russia conflict. They should use negotiation as a conflict resolution

option.

Future studies can assess whether conflict resolution through negotiations are very effective in

pacifying countries that go to war to protect their regional influence. Future studies can also

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examine whether the economic consequence of war during a pandemic year is more severe than

the economic consequence of war in a non-pandemic year.

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