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What might be the macroeconomic cost of the war in Ukraine?

Russia’s economy looks likely to experience a deep recession following the country’s invasion of Ukraine. Increased spending on defence and refugees may limit the adverse effects of the conflict on Western European GDP, but it will to add to pressure on resources and drive up inflation.

The war in Ukraine will have a significant impact on the global economy. The main effects of the conflict are likely to be higher energy prices and weaker confidence in the economy and financial markets. Strong international sanctions imposed on Russia will also have a substantial effect, with global GDP likely to fall as a result (see Figure 1).

Figure 1: The GDP cost of the war for the global economy

Source: National Institute Global Econometric Model (NiGEM) simulations

These costs are going to be felt acutely in Europe. This is partly because the conflict poses a direct security threat in Ukraine’s immediate neighbourhood. European countries will need to ramp up public spending to support the flow of refugees from Ukraine, as well as investing heavily in their militaries to ease security concerns.

While this increased spending could limit the adverse effects on European GDP, it is likely to add to pressure on resources and will drive up inflation (see Figure 2).

Figure 2: The inflation cost of the war

Source: NiGEM simulations

While Ukraine is not a significant trading partner for any major economy, Russia has a great exposure to the European Union (EU). Russia and Ukraine are important suppliers of certain commodities, including titanium, palladium, wheat and corn. There are growing concerns around supply chain problems for users of these materials, including car, smartphone and aircraft manufacturers.

The impact of the conflict on commodity prices, and thus household expenditure, is more relevant than the risk of contagion from other countries' trade links. In NIESR’s Spring 2022 Global Economic Outlook, we quantified these transmission channels using the National Institute Global Econometric Model (NiGEM).

According to the model, Russian GDP will contract by more than 10% in 2022, compared with our Winter (pre-conflict) 2022 baseline. The war is also expected to shrink the Ukrainian economy by more than 30% and reduce global GDP by about 1% in 2022. Europe is still going to be the region affected most, given trade links and reliance on energy and food supplies, as well as its proximity to Ukraine. GDP in Europe is expected to shrink by more than 1% in 2022 compared with the forecast base (Figure 1).

The war will contribute to a deep Russian economic recession, with GDP set to shrink by 12 percentage points in 2022 compared with the Winter 2022 estimates (that is, -9.1% in 2022 compared with +3.2% forecast in February for the same year), and contracting by a further 11% in 2023. The overall effect on Russia’s GDP will not be cushioned entirely by the country’s higher revenues from energy exports.

We continue to expect higher commodity prices because of the disruption to food and other exports from Ukraine, and the sanctions imposed on exports from Russia. Our modelling assumptions suggest that the war has led to a 30% increase in oil prices, a 90% increase in European gas prices and a 17% increase in food prices. Figure 2 suggests the war will raise global inflation by about 2% in 2022 and 1% in 2023, compared with the February 2022 forecast.

Russian inflation will approach 20% in the second quarter of 2022 due to higher import prices. The adverse effects will result in lower confidence, weaker real incomes and disrupted trade. If sanctions were to be extended to Russian energy exports, the implications for the Russian economy would be much more severe, but the cost to the West would be still higher energy prices and a bigger growth hit, increasing the chances of recession accompanying significantly stronger inflation.

Which sectors are most at risk?


According to the US Department of Agriculture, Russian and Ukrainian wheat exports are about a quarter of the global total. There are also significant exports of corn and other coarse grains, with Ukraine and Russia accounting for nearly a fifth of global exports. Around 80% of global sunflower oil exports are from Ukraine and Russia.

Sanctions and disrupted supplies could lead to higher prices for wheat and other grains, adding to already strong inflationary pressures in the global economy. There could also be adverse political implications in some emerging economies that rely on imported grain and where food represents a high share of household spending.

In the UK, bread and cereals have a weight of 2.1% in the consumer price index (CPI). While flour prices move closely with wheat prices, this is less true for bread (where the cost of production, ingredients, packaging and advertising mean that flour is a relatively small proportion of the cost of a loaf).

But higher energy costs mean that the cost of baking and transporting bread has risen, and with global supplies already tight, retail prices are likely to increase too. Higher food prices could have a much more serious effect on emerging markets such as Egypt and Bangladesh, where food is a much larger share of the CPI basket.


Russia is a major producer of palladium, used in engine exhausts to reduce emissions. Russia produces 40% of global mine production, and controls about 10% of global platinum supply. Russia and Ukraine also produce about 15% of the global supply of titanium sponge, used in aircraft. Russia accounts for about 13% of global fertiliser supplies.

Disruptions to global supplies of these commodities, together with existing supply chain problems after the pandemic, have the potential to cause heavy disruptions to specific industries and prolong shortages, keeping retail prices high.


Russia is one of the world’s largest oil producers and energy exporters. As the war continues, the West may soon target Russia’s ability to export oil and gas. Such sanctions will lead to an escalation on energy prices. We have already seen the Brent oil price surge to over $120 per barrel, the highest since 2014 (see Figure 3). Changes in crude oil value represent about 40% of the changes in the cost of fuel at the pump in the United States, but far less in Europe (where the tax is significantly higher).

Figure 3: Brent oil price

Source: Refinitiv Datastream

Financial markets and expectations

Share prices have been adversely affected by uncertainty over Ukraine, knocking billions off the value of the FTSE 100 and prompting a run to safe-haven assets like the dollar and US government bonds.

The war is causing an increase in uncertainty and country-specific risk, particularly in countries close to the conflict. This depresses demand further by deterring investment. Inflation expectations are likely to increase as the result of new supply side disruptions and increasing energy costs.

What are the main risks associated with the war?

Trade restrictions and technological bans on Russia

More than 80% of Russia's daily foreign exchange transactions and half of its commerce are in dollars. The United States, the EU, the UK, Australia, Canada and Japan have all begun to target banks and rich individuals, while Germany has put a stop to a major Russian gas pipeline project.

Russian central bank reserves abroad have been frozen, and its commercial banks have limited access to the international payments system SWIFT (although energy transactions and payment of gas bills will still be allowed).

These sanctions are more severe than those imposed in 2014 following the Russian annexation of Crimea. They have been deployed in a first tranche, targeting some of Russia’s state-owned banks and blocking Russia from trading in its debt on US, European and Japanese markets.

The EU is also restricting access to European capital markets, preventing access to funds stored by EU banks, and prohibiting commerce between the EU and the two rebel-controlled territories. A partial closure of SWIFT to some Russian banks and the freezing of Russian central bank assets highlight the importance of Western banks’ claims on Russian entities, which are concentrated in Austrian, French and Italian banks, according to the Bank for International Settlements (BIS). Russian bank subsidiaries outside Russia are facing severe stress, according to the European Central Bank (ECB), and may be forced to close.

Russia might face a prohibition on financial transactions involving dollars, as well as a restriction on hi-tech commerce with the United States and Europe. The United States, for example, could prevent corporations from selling semiconductor microchips to Russia. This would not only affect Russia's defence and aerospace sectors (accounting for $6.25 million worth of Russia’s imports), but its whole economy.

Overall, economic sanctions could result in a curtailment of Russian imports of up to 50% from Europe and the United States, although the extent of circumvention of restrictions through increased trade conducted through third countries makes this difficult to gauge.


Significantly higher energy prices will feed into inflation. In the United States, for example, energy accounts for 7.6% of the CPI, with energy commodities, such as fuel, accounting for 4% and energy services such as electricity and piped gas 3.3%. In the UK, electricity, gas and other fuels account for 3.3% of CPI, with fuels and lubricants accounting for a further 2.7%.

Because many of the world's largest economies (such as China, Japan and Europe) are net energy importers, increased oil costs will limit global growth. The US is self-sufficient, but higher oil prices through higher bills and fuel costs will squeeze real household incomes, affecting demand in the economy.

While higher oil prices will increase the income of energy producers, this might not be spent immediately. It will not be enough to offset the negative effect on demand through lower consumption and investment, meaning that global GDP will remain subdued for some time.

Higher European public expenditure on refugees

The United Nations High Commissioner for Refugees (UNHCR) estimates that approximately six million people have fled Ukraine since the start of the war.

In the shorter term, there is likely to be considerable further migration from Ukraine into Western Europe, with Poland among the most important recipients in the first instance. Depending on what border controls are erected in Ukraine, how long the conflict lasts and how the economy settles down after the war, large scale emigration seems likely. This will present substantial challenges, mainly for Western Europe, in terms of their public finances, as well finding homes, providing jobs and school places, and promoting integration.

Higher European public expenditure on defence

The conflict is also expected to lead to an increase in spending on defence. This will present considerable fiscal problems. For example, NATO EU countries that are particularly exposed to the crisis, such as Germany, have already boosted military spending to 2% of GDP.

There is a strong likelihood that defence spending will increase in NATO over the next few years, particularly in Western Europe, where most countries do not meet the NATO target of a spend of 2% of GDP, with the average being 1.6%. There is also a chance that NATO’s membership will increase, with both Finland and Sweden recently applying to join, following long periods of historical military neutrality.

Political risk and uncertainty

The Russian invasion has challenged many Western assumptions about the post-Cold War order. Many argue that the invasion symbolises a shift in global power and a move away from the unipolar world that emerged following the collapse of the Soviet Union. This shift has led to increased uncertainty, which may drive up savings ratios and make firms more reluctant to invest.

The crisis can also be seen as another potential challenge to globalisation, coming after trade disputes and Covid-19. This might mean that manufacturers are tempted to reshore some facilities, reducing their reliance on international networks.

Exchange rate risk (the lack of)

Increasing announcements of Western corporate withdrawals from Russia are leading to outflows of capital. While officially the rouble has regained its value since the end of March, thanks partly to capital controls and the government only accepting roubles for European gas instead of euros and dollars, the unprecedented actions against the Russian central bank have hurt the Russian banking system. These effects remain difficult to quantify, but they suggest that the risks to our Russian GDP growth outlook are on the downside and on inflation on the upside.

What next?

Vladimir Putin’s demands in recent weeks have extended beyond Ukraine. It should be expected that he will use any military victory to pressure NATO for concessions elsewhere in Eastern Europe, with the clear threat that if it does not get what it wants, further aggression is likely.

This suggests that the world is now likely to face an extended period of high tension, where Russia repeatedly tries to strong-arm the West. Those tensions will increase if, after a potentially successful occupation of Ukraine, arms flow to Ukrainian resistance groups from neighbouring countries.

The war represents a challenge for the global economy. It calls into question monetary policy-makers’ strategies since it will simultaneously harm growth and put upward pressure on inflation, which is already at high levels.

In the short run, higher interest rates cannot mute the higher prices resulting from the war and could exacerbate any fall in confidence and activity. Longer term, lower demand will help to mute the second-round effects on higher prices.

The first Gulf War contributed to a recession in the early 1990s and its end helped the recovery. So, for policy-relevant horizons, interest rates will need to rise to keep inflation under control, but perhaps not so much as to induce a recession in economic activity.

The dilemma for monetary policy will intensify if inflation remains higher but recession threats mount, risking a return to the stagflation seen in earlier decades. Shares and cryptocurrencies have already shown distress and high-yield markets are under strain. The risk of a global recession might become acute if financial markets, which have priced in a very different scenario from that which is currently unwinding, were to dislocate.

Where can I find out more?

Who are experts on this question?

  • Erkal Ersoy
  • Iana Liadze
  • Corrado Macchiarelli
  • Stephen Millard
  • Paul Mortimer-Lee
  • Patricia Sanchez-Juanino
  • Pascal Seiler
Author: Corrado Macchiarelli
Photo by Evgenii Emelianov from iStock
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