Financial Impact of the Russia & Ukraine Conflicts

History of Russia and Ukraine

A democratic referendum in 1991 led Ukraine to vote overwhelmingly in favour of independence, which proved to be a death knell for the Soviet Union. NATO expanded eastward after the Soviet Union collapsed, bringing most of the former Communist nations into its fold. Estonia, Latvia, and Lithuania were added to NATO in 2004, and it declared its intention to someday offer membership to Ukraine, crossing a red line for Russia. Vladimir Putin has indicated that he views the Western military alliance’s expansion as an existential threat, and calls joining NATO a “hostile act.” Russia has opposed any move towards the EU and NATO by Ukraine. Putin has repeatedly demanded that Ukraine never join NATO. As part of its attempts to provoke a conflict, Russia sent troops and weapons to annex Crimea in 2014, a primarily Russian-speaking region of Ukraine, to provoke a separatist uprising in Ukraine’s South-Eastern region. Both sides were expected to make concessions under a 2015 peace agreement. Since then, there have been low-level battles along the front, and both sides have accused each other of violating the agreement.

Global Impact 

With the global economy and financial markets being intertwined, the economic implications of a full-fledged conflict between Russia and Ukraine would be felt by millions of households, even though the problem is hundreds of miles distant. 

So far, Western leaders have condemned Putin’s conduct, but are unwilling to send their own soldiers into Ukraine to fight. With the invasion, Western allies, particularly in Europe, have promised huge sanctions, but their effectiveness as a deterrent is debatable. Russia’s economy will very certainly be crippled as a result of these sanctions. Putin has also established special autonomous districts within Russia as economic havens that are “sanctions-proof.” Many of the country’s wealthiest residents have been given notice and will have had time to adapt their funds in the event that access to western institutions is cut off. These sanctions will wreak havoc on more than just Russia. Back in the United States and the European Union, there will be some collateral damage, and the sanctions would have a significant impact on several European banks.

Germany has chosen to postpone final permission for Nord Stream 2, a 1,200-kilometer pipeline beneath the Baltic Sea that will deliver natural gas from Russia to Germany. The pipeline is complete, and Gazprom has put up roughly €5 billion, with the remainder coming from Western firms like Shell and ENGIE. To transport natural gas from Russia to the European Union, all they need is a final sign of approval. With the sanctions in place, that may not be the case. Russia can afford to wait because pipeline gas accounts for only 11% of its exports. However, it would have an impact on its longer-term aims of tying Germany in a more codependent relationship, at least until net-zero energy standards are more attainable. Even if American and Qatari gas supplies save the day in the meantime, this is critical to both Russia’s strategic ambitions and German energy stability. If Nord Stream 2 is not permitted, Europe will be forced to import gas from overseas, raising overall oil prices. A sharp increase in oil costs might have ramifications for a variety of businesses. Prices may rise, and inflation may become a major worry not only in Russia, but also in the US, EU, and around the world. This isn’t a one-off occurrence; it impacts all of us.

The Russian invasion of Ukraine will undoubtedly frighten global markets, particularly European stocks, and hike gas, electricity, and oil prices. While Europe is doing everything it can to deal with the economic consequences of COVID, which saw several nations take on large sums of debt that must now be repaid in order to comply with EU fiscal standards, a full-scale Russian invasion of Ukraine will cause worldwide economic disruption. The global economy and markets are unprepared to deal with the strong stagflationary winds that may accompany such a battle.

Impact on the Indian Economy

On one hand, India would be hemmed in by trustworthy old friends, Russia, and on the other, a newly acquired strategic partner, the United States. The war will not only sour relations between the two opposing blocs, but it will also isolate India in the international community. As a result, India would become a “Strategic Infirm,” putting a strain on its desire to be a global participant.

The Ukraine crisis would have a serious effect on India’s security and defense, and sanctions on Russian exports could pose a challenge for India’s military needs. According to a factsheet published by the Stockholm International Peace Research Institute (SIPRI) in March 2021, Russia was the world’s second largest arms exporter in 2016-2020, with India accounting for 23% of Russian defense exports. Russia may refuse to deliver additional accessories for armed systems it has previously purchased. Even France and the United States would be upset by India’s neutrality and stop further supply of weapons imported from them. Military capabilities would surely be harmed if reserve supplies were unavailable. While the United States and the rest of the world are focused on Russia and Ukraine, China and Pakistan may wish to exploit the situation. Due to its limited military capabilities, India could be severely disadvantaged in a two-front war.