Like the first shot of the American Revolution, the first shot of the war in Ukraine was heard around the world. Despite ostensibly being a local conflict between two states, the sudden reappearance of an old-style “War of Conquest” has harmed the global economy. The International Monetary Fund says that further escalation could disrupt energy and food markets and cause further fragmentation of the global economy.
“The war is affecting the global economy via higher commodity prices, supply-chain disruptions and Russia’s weaponisation of energy supplies. This situation will persist throughout 2023 (and probably beyond), as we expect the war to become a protracted conflict,” notes a January report by the Economist Intelligence Unit (EIU).
Putin’s invasion is seen to inflict real damage on global macroeconomic performance. The US Federal Reserve (Fed) estimated in May 2022 that geopolitical risks arising from the war would see global GDP fall by 1.5% y-o-y and global inflation rise by 1.3% y-o-y. The OECD projects US$280 trillion ($367 trillion) in lost output due to the War by the end of 2023.
Already significantly disrupted by the US-China rivalry, the conflict has further disrupted global supply chains. Oil disruption arising from Moscow’s wielding of the “oil weapon” in retaliation against Western sanctions has seen significant price hikes. European oil prices rose to more than US$125 per barrel before returning to January 2022 levels.
Ukraine oil and wheat exports in 2022 and 2023 are down 22 million tonnes from the previous season, with disruption to the Black Sea region hurting access to grain and oilseed for the Middle East, Africa, and numerous European and Asian economies. EIU anticipates that oil prices will average more than $85 per barrel in 2023 and sees its food, feedstuffs and beverages index falling by 9%.
“Trade between the EU and Russia will decline sharply, shrinking by $262 billion from 2023 to 2031, as Western sanctions on Russia take effect and Western Europe weans itself from its dependence on Russian oil and gas,” notes a BCG report. The global economy will fragment further as Russia shifts trade away from Europe and towards China and India. For the first time in a quarter-century, trade in the coming decade will grow more slowly (2.3% per annum through 2031) than GDP (2.5%).
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The conflict has most badly hit the EU economy. Coface chief economist Jean-Christophe Caffet is pessimistic about global growth in 2023, citing a projection of below 2% in 2023 vis-a-vis an average of more than 3.0% in the past decade. Europe, he argues, may already be in recession, though he does not anticipate a sharp contraction in economic activity. Relatively high LNG stocks following the warm winter have cushioned the impact of a potential economic downturn.
Asia has not been spared the brunt of the conflict, with grain feed shortages resulting in Singapore experiencing 7.5% food inflation. In the long run, BCG projects that Asia will benefit from supply chain diversion away from Russia (and China too). Asean is expected to see US$1 trillion in new trade through 2031, particularly with Japan, China, the US and the EU.
Priyanka Kishore, economic and forum director at IMA Asia, says that Asia has weathered the economic effects of the war better than its Western counterparts. This has been helped by its distance from the centre of the conflict and relatively weaker trade links with Ukraine and Russia.
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“While inflation increased substantially in many Asian countries due to rising global commodity prices, the situation is not as problematic as in the US or Europe. This is allowing Asian central banks to ease off the tightening cycle ahead of the Fed, Bank of England and European Central Bank,” she tells The Edge Singapore. Bank Negara Malaysia has already begun monetary policy easing, while Bank Indonesia has signalled its intention to do so in due course. Bank of Korea and the Reserve Bank of India will likely follow suit.
Energy revolution
The energy sector, in particular, is seen to be profoundly transformed in the long run by the war. According to British Petroleum (BP), global energy markets will increasingly focus on energy security, weakening economic growth and diversifying the energy mix. BP expects a greater desire among countries to reduce dependency on imported energy — particularly those from Russia — and develop energy self-sufficiency and improve energy efficiency.
Renowned as world leaders in sustainability, European countries are increasingly returning to more pollutive fuels, such as coal, due to higher oil and gas prices. Jason Bordoff, co-founding dean of Columbia Climate School, told The New York Times that India and China would likely accelerate their coal plans to preserve energy security. The temptation to turn to cheap and dirty fuels amid significant energy cost pressures could slow the energy transition for the sake of energy security.
Countries are aware, however, that the energy shock brought about by the Russian invasion arose from their overdependence on fossil fuels as an energy source. “Renewables can reduce geopolitical security risks by contributing to fuel mix diversification. Their risks differ from fossil fuel supply risks, and they can reduce the variability of generation costs. In addition, indigenous renewables reduce import dependency,” said International Energy Agency (IEA) researchers Samantha Ölz, Ralph Sim and Nicolai Kirschner.
Governments are therefore accelerating their shift to clean energy in the long run to reduce vulnerability to shocks triggered by oil-producing states. The International Energy Agency estimates that a record US$1.4 trillion has been invested into clean energy projects (like solar farms and batteries) in 2022. Research firm BloombergNEF said low-carbon energy investments reached parity with fossil fuel investments.
“The continuing rise in carbon emissions and the increasing frequency of extreme weather events in recent years highlight more clearly than ever the importance of a decisive shift towards a net-zero future,” says Spencer Dale, BP’s chief economist. He called on countries to address the “energy trilemma” — developing a source of energy that is secure, affordable and sustainable as the foundation for a lasting energy transition.
Southeast Asian states have been disproportionately exposed to the economic, energy and geopolitical risks of the present energy crisis. Fossil fuels make up 83% of Asean’s energy mix, with policymakers balancing energy security against decarbonisation. With Southeast Asia being the world’s fourth largest energy consumer, the World Economic Forum notes that its decisions in this space could be pivotal to the success of the global energy transition.
As nine of the 10 Asean states commit to net zero by 2050, Asian capital markets appear ripe for environmental, social, and governance (ESG) despite a cooling of interest. Sustainable funding remained strong in Asia in 2022, recording a near-record sum of US$142 billion in Asia-Pacific vis-a-vis a more than 30% decline in total issuance in Europe and the US. Barclays notes that Asia ESG funds have doubled their global market share from 2% in 2020 to 4% in 2022, implying continued investor interest in the ESG theme.
