War in Ukraine: Some disruptions changing the world

The war is devastating lives and roiling markets. Here I track the disruptions that seem likely to shape lives and livelihoods, beyond the immediate crisis.

The invasion of Ukraine is causing a massive humanitarian crisis

The war has displaced the most refugees in Europe since World War II. To date, 5.6 million refugees have fled Ukraine, and another 7.7 million have left home and sought shelter elsewhere in the country.?All told, the war has pushed nearly 30 percent of Ukrainians out of their homes. The war in Ukraine represents the second largest humanitarian crisis since the 1960s in terms of number of people who have fled or been displaced, and fifth in terms of fraction of the population this represents. And it could get worse: the UN estimates that 8.3 million Ukrainians could be refugees by the end of the year.

The vulnerable will suffer the most

The war has sent prices soaring for the essentials. What’s now at risk is the base of the Maslow hierarchy of needs: food, warmth, and shelter. The effects are universal but will be felt most acutely by the poorest, who already struggle to cover the cost of life’s necessities.

Higher prices for food and energy, along with already high costs for rent, can push the poorest into impossible tradeoffs. The invasion of Ukraine has already raised the cost of living, as a spike in natural gas and oil prices have pushed heating bills higher. Similarly, the cost of transportation is moving higher as fuel becomes more expensive. If energy prices spike even higher, the compression of household budgets will get worse before it gets better.

Energy policy is rotating toward secure access and source diversification

Over several decades, Europe has come to depend heavily on Russian energy sources: coal, crude oil, fuel oil, and, especially, natural gas. In 2021, the continent imported about 36 percent of the gas it used from Russia, along with 30 percent of its coal and 10 percent of its crude oil. Germany and Italy are particularly dependent on Russian energy supplies (for example, Germany imports 65 percent of its gas from Russia; the figure is 43 percent for Italy).

Europe is working urgently to increase gas supplies from countries other than Russia, by importing more liquefied natural gas (LNG) and generating more biofuel, among other moves.

Food security is on the agenda

The war in Ukraine has?disrupted the global food production system. The two countries produce roughly a third of the world’s ammonia and potassium exports, essential ingredients in fertilizer. And they are the breadbasket for much of the world, supplying about 30 percent of global exports of wheat and barley, 65 percent of sunflower seed oil, and 15 percent of corn.

Soon after the invasion, prices for fertilizers and several food commodities rose by 20 to 50 percent. For example, wheat futures rose 40 percent from February 1 to April 1. Many countries rely heavily on wheat for their national diet, including imports from Russia and Ukraine. The UN’s World Food Programme will also be affected, as Russia and Ukraine contributed close to 20 percent of the total food commodities it procured in 2020.

The challenge will likely be severe. According to the UN’s latest estimates, 30 to 40 percent of the autumn 2022 harvest in Ukraine is at risk, as farmers have been unable to plant. Global fertilizer shortages may also harm production. Governments are pursuing a range of options, including programs to direct more supplies to the most affected countries, levers to boost regional production, subsidies to consumers, and price controls.

The race for critical materials, equipment, and commodities intensifies

Well before February 2022, industrial materials of all kinds were in demand. Commodities in particular were booming. Many were at ten-year highs, though with considerable price volatility.

Then came the war, which hastened price rises of dozens of commodities that Russia and Ukraine export (for example, coal, steel, nickel); the two countries’ combined shares of these markets range roughly from 10 to 50 percent. For example, the two countries are responsible for 48 percent of global trade in palladium.

These materials are critical in many industries. Given the threats to scarce commodities and price rises to date, automakers are particularly concerned; they’re looking at spot-price increases of 15 to 25 percent due to price increases in key materials such as aluminum, copper, and steel. These are difficult blows to absorb for manufacturers. Car buyers too would find it difficult to pay substantially higher prices.

A new age of supply chain management has arrived

Even before the invasion, resilience was at the top of?supply chain leaders’ agendas. Having faced one problem after another—trade tensions, COVID-19 lockdowns, and the closure of the Suez channel—supply chain managers had begun to shift their focus from optimizing “just in time” delivery to preparing for “just in case” eventualities.

The war in Ukraine and subsequent sanctions are giving leaders yet more reasons to examine their sourcing capabilities. Dual sourcing is set to become even more important, in light of the war. Supply chains are thus being reconfigured yet again, as part of a long journey to resilience. It’s possible that as spending shifts from goods to services, some of the pressure on supply chains will be relieved—but not all.

In the meantime, as stress builds, nearshoring (especially in the high tech and construction industries) and onshoring are back on the table for discussion, joined by a new idea: “friendshoring” (which is, in the words of Janet Yellen, a commitment to work with countries that have a “strong adherence to a set of norms and values about how to operate in the global economy”). The war is accelerating a trend: in 2021, Canada and Mexico eclipsed China to become the largest trading partners of the United States.

Financial-system effects are unpredictable

The direct impact of the war on the financial system seems limited. Markets have withstood the initial shock, though with some losses, to be sure. European banks may be among the most exposed, with about $75 billion of assets at risk in Russia, equivalent to about 6 to 7 percent of their preinvasion market cap. However, financial institutions globally are strongly capitalized and fundamentally prepared to absorb losses.

Defense spending is rising

To date, 15 NATO countries and Sweden have announced increased defense spending following the invasion of Ukraine—and five (including Denmark, Germany, Italy, Spain, and Sweden) will breach the 2 percent target set at the 2014 NATO summit in Wales.

Cyber is a stage for conflict

Cyberattacks continually disrupt societies globally by targeting critical infrastructure. On average, ten significant cyberattacks are recorded every month by the Center for Strategic and International Studies. On February 24, 2022—the day of the invasion—ViaSat’s internet service was disrupted across Europe for several hours, affecting 30,000 customers—including Ukrainian military communications.

Since then, Ukrainian power systems and telecom networks have been taken offline for several hours and other Ukrainian government organizations have been hacked. Attackers have also targeted the public websites of several Russian government ministries.

Some attacks may have spillover effects far beyond their original targets, as the malware spreads. Depending on the trajectory of the war, one could expect the cyberthreat to continue. Companies and governments are staying vigilant about their exposure to cyberattacks, in particular to ransomware attacks and misinformation campaigns.

Volatility, volatility, volatility

The war has increased economic volatility. The US volatility index (VIX) and the economic policy uncertainty (EPU) index have both risen, though not nearly as much as in March 2020, at the onset of the COVID-19 pandemic. This is in line with earlier research findings that economic volatility is surprisingly low during war and periods of conflict, likely because a rise in government spending makes a slice of corporate profits easier to predict.

Over time, this war may prove to be different, however, because of its effects on energy; volatility in energy sources and prices can produce dramatic effects throughout the global economy.

The markets have reacted differently to the war than to the COVID-19 outbreak, a reminder that this crisis requires a particular set of resilience capabilities. Companies need to think through the various aspects of geopolitical risk and their potential effects—on financing operations, organization, technology, reputation, and the business model itself—and build resilience on all these dimensions.

These disruptions are already affecting people’s lives and livelihoods with potent force and should be part of every company’s scenario planning. And the longer the war lasts, the more powerful and unpredictable these disruptions may become.

Gisselle Rohmer, is an emerging markets Investor at the International Finance Corporation, a Member of the World Bank Group.