Fourteen months on from Russia’s invasion of Ukraine, signs of an end to the war remain distant. Sanctions are hurting the Russian economy, though so far in a more limited way than originally expected. Risks of conflict elsewhere in the world may be rising, in part as a consequence of the pandemic.
This week, Russia launched a series of missile strikes against Kyiv and other Ukrainian cities, including Uman where at least 19 people were killed in a single apartment block. Over four hundred days since the invasion began, there is little indication that the conflict is receding.
Indeed, both sides have vowed to continue fighting despite the current situation in Ukraine being referred to as ‘a very bloody stalemate’ by Anatol Lieven, a former war correspondent and director of the Quincy Institute’s Eurasia Program. Unless either Russia or Ukraine are able to secure a significant military advantage – which they have, as yet, been unable to do – calls for a negotiated end to the war are likely to grow.
But ‘diplomacy can succeed only where and when other tools cannot’, as Richard Haass, former US Special Envoy for Northern Ireland and president of the Council on Foreign Relations, highlights in a recent article on lessons for Ukraine from the Northern Ireland conflict. The economic effects of the Troubles and its aftermath have been examined in a number of pieces on the Economics Observatory, including one earlier this month to mark the 25th anniversary of the Good Friday Agreement.
Negotiated settlements involve accepting conditions short of outright victory, and often ‘less than full peace’. Any diplomatic resolution between Russia and Ukraine will require decisions around the form of settlement, red lines and acceptable outcomes, particularly related to the future of Donbas and Crimea.
Yet, thus far, negotiations between Moscow and Kyiv have gained little traction. One exception is the Black Sea Grain Initiative to allow safe passage of Ukrainian grain exports through three ports, which was signed by the two governments along with Turkey and the United Nations in July 2022. We will have an article on the Observatory next week discussing the effects of this agreement on global food security.
Sanctions and the Russian economy
The continuing conflict means that Russia remains subject to a series of economic sanctions. The impact of these on the Russian economy is the focus of two new articles by Richard Disney (University of Sussex) on the Observatory this week.
The first highlights that initial forecasts may have been too optimistic in their predictions of sanctions’ effects. The World Bank and the National Institute of Economic and Social Research (NIESR) estimated that Russia’s GDP would be 11-12% lower by the end of 2022. In reality, by early 2023, real GDP in Russia was 7-10% below what it would have been without the application of sanctions.
While lower than initial forecasts, this still indicates a significant impact on the Russian economy. Richard points out that limiting the effects of sanctions has required ‘highly pro-active polices by the Russian government and central bank, with a major fiscal support package for companies and active monetary policies to maintain the value of the rouble and the balance sheets of Russian-based enterprises’.
Russian oil and gas exports have also been affected by sanctions – both an oil embargo implemented by European Union countries and a price cap agreed by G7 nations. While these have led to a drop in exports and income, Richard points out that the oil and gas market has shored up the Russian economy.
In particular, Moscow has been able to redirect energy exports to other markets, notably in Asia. But this has been costly, both for Russia and importing countries, which makes the future of these deals uncertain. The latter have ‘strong incentives to purchase oil from less risky sources’.
The longer-term effects on the war on Russia’s economy are likely to depend on the country’s ability to re-orient towards other markets and on the willingness of Western countries to keep sanctions in place.
Refugees
Over eight million refugees have now fled from Ukraine since Russia invaded, according to the United Nations High Commissioner for Refugees. Just over five million of these individuals have registered for temporary protection (or similar schemes) in European countries.
History tells us that in addition to the immediate needs of shelter and safety, access to education – for both adults and children – is crucial for refugees. This is the focus of an Observatory article by Sascha Becker (Monash University and University of Warwick), which was originally published in March 2022.
Sascha points out that early access to education can bring benefits for refugee children that last well into their adult lives. Indeed, evidence from during and after the Second World War shows that ‘Polish people with a family history of forced migration as a result of the war are significantly more educated today than any comparison group’. This points to a preference for investing in education and training (human capital) rather than physical capital.
Rising risks of conflict
These lessons are particularly important given new research indicating that Covid-19 may have increased the risk of conflict globally. In another new Observatory article this week, Mohammad Reza Farzanegan (Philipps-University of Marburg) and Hassan Gholipour Fereidouni (Western Sydney University) write that countries with higher mortality rates during the pandemic also saw their internal conflict risk score go up. This trend was seen around the world – from Brazil and Peru to France, Bulgaria and Tunisia.
It appears that this pattern results from a breakdown in trust between governments and their citizens. But crucially, the link is weaker in countries where there was higher government spending during the pandemic.
While this is promising and may offer a path to reducing the risk of civil disorder, Mohammad and Hassan stress that many low-income developing countries lack the resources to implement such economic measures and that international support may be required.
Conflicts, beyond their most immediate horrors, risk spilling over to neighbours, increase the number of refugees around the world and affect global supply chains. Thus, such international support – whether to rebuild Ukraine or to help those fleeing the conflict in Sudan – has benefits far beyond those directly affected.
