Cascading Economic Consequences of the War in Ukraine

Shortages, stagflation, danger of recession, increased volatility, mounting debt… The economic consequences of the war will not be limited to the countries that wage it.

The Russian invasion of Ukraine and the overall sanctions against it have four types of economic consequences: short-term and long-term for the belligerents, for the non-affiliated countries, and systemic consequences. To limit long-term economic disruption, we now need to work on recovery plans

Mohamed El-Erian.

Evidently, Russia and Ukraine will be most affected† Ukraine’s economy is expected to shrink by a third or more this year, contributing to an increasingly severe humanitarian crisis. The war has already claimed more than 750 civilian deaths and led to 1.5 million Ukrainians seeking refuge in neighboring countries, while millions have fled their homes without leaving their country.

The Russia, on the other hand, does not tolerate human suffering or large-scale physical destruction. Anyway, its economy will also shrink by about a third, because of the unprecedented severity of the sanctions aimed at it. In particular, it will face serious currency problemshuge deficits, the collapse of the ruble, growing backlogs and the projections of a population that expects its situation to deteriorate.

Russia will take a long time to recover

Even if the war ends tomorrow, it will take years for Russia and Ukraine to recover† And the longer the war drags on, the greater the damage, the greater the risk of harmful interactions and adverse cycles, and the more severe the consequences.

In Ukraine, the physical and human infrastructure has been hit very hard. For the reconstruction the country can expect massive external support, which would allow it to remedy its weaknesses, renovate the economy and create a better system of interactions, both internally and externally. But it will take time and there will be bumps along the way.

For his part, Russia will find it very difficult to restore economic, financial and institutional ties with the outside worldespecially with the West, which will hinder its recovery.

The United States will do better

The economic consequences of war will not be limited to the countries waging war. The West is starting to feel the effects of “stagflation”. Rising commodity prices, especially energy and wheat, will exacerbate the already ongoing inflation. In addition, a new set of supply chain challenges, while the cost of goods rises again. And disruption to trade routes is likely to put further pressure on growth.



The United States should outperform Europe, which is in danger of sinking into recession.

The extent of the damage caused by this situation varies greatly from country to country. In the absence of a timely policy response, advanced countries can expect less growth and greater inequality between and within countries. The slowdown the Fed has taken to respond to inflation last year will reduce its room for maneuver. Due to the greater resilience and flexibility of their economies, The US should do better than Europewhich threatens to sink into a recession.

On both sides of the Atlantic, we can increased and sometimes worrying market volatility† In Europe, financial losses will be greater, especially as banks and the energy sector, among others, will be hit hard.

Economic and financial differences will widen also elsewhere in the world. Some commodity-producing countries should benefit from an increase in export prices, which could offset losses from the slowdown in global growth. But many countries will face difficultiesbe it a reduction in global demand, a stronger dollar and more generally unfavorable exchange rates, financial market instability or migratory flows.



We must certainly continue to unite to counter the illegal invasion of Ukraine, but it is also crucial to intervene in time to deal with the economic consequences of the conflict.

Commodity importers will struggle to cope with a sudden and widespread price increase that is difficult to subsidize or pass on to consumers. There could be more then debt restructuring† If political leaders do not react quickly, food riots could break out in the most troubled countries.

Systemic Consequences

We also need to look to the future of multilateralism. In the short term, the West is confirming its dominance over the international system that emerged from World War II. But this dominance can be challenged by China building an alternative economic and financial system step by step.

It is often said that the most serious crises offer the greatest opportunities. We must certainly continue to unite to counter the illegal invasion of Ukraine, but it is also crucial to act in time to deal with the economic consequences of the conflictand to lay the groundwork for the resilience and collaboration that will be needed.

Mohamed A. El-Erian
President of Queen’s College at the University of Cambridge and professor at the Wharton School of the University of Pennsylvania

Copyright: Project Syndicate, 2022.

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