Ukraine crisis adds to global economic woes

Ideas & Debate

Ukraine crisis adds to global economic woes


Smoke rises from a Russian tank destroyed by Ukrainian forces at the side of a road in the Lugansk region on February 26, 2022. PHOTO | AFP

The Russian-Ukrainian war is now in its third month, and it continues to impact many countries on many fronts: energy security, food security, climate change mitigation and even geopolitics.

It should be noted that when Russia invaded Ukraine on February 24 this year, the world was already grappling with high prices for goods, including energy and food, as the world struggled to restore supply chains interrupted by two years of the Covid pandemic.

When the war in Ukraine broke out, oil prices were already above $100 and food prices were on the rise. The war specifically disrupted huge grain and oilseed supplies from the vast agricultural lands of Ukraine and Russia, which aggravated the global food crisis.

Indeed, the Ukraine crisis has recently become a credible scapegoat for many emerging economic issues around the world.

This is how the Ukrainian crisis is impacting global oil and gas supply chains: the war has forced Europe to reshape its energy supply and use strategies to reduce European Union demands for Russian gas by two-thirds by the end of this year and completely by the end of the year. the end of this decade.

As for oil, Europe plans to stop imports from Russia within the next two years, having already stopped coal imports.

These changes are driven by Europe’s need to reduce the real risks of Russia using oil and gas exports as a political weapon.

Indeed, last week Russia cut off gas supplies to Poland and Bulgaria in a bid to impose payment for gas imports in Russian rubles, an attempt by Russia to hit back at the EU by regarding the economic sanctions imposed on Russia by the West.

From a climate change mitigation perspective, the Russia-Ukraine crisis has become a blessing in disguise as Europe accelerates its energy transition plans to renewables (wind, solar, nuclear) to replace fuel imports fossils from Russia.

There is of course an associated climate flow since some European countries are increasing the use of local coal to replace Russian gas.

When it comes to global energy security (availability and accessibility), the Russian-Ukrainian war has become one of many global factors keeping oil prices just above $100 a barrel.

The other factor driving prices down is the ongoing Covid pandemic shutdown in China, which has reduced oil demand and price pressure.

While Western countries are avoiding Russian oil, some Eastern countries are increasing their imports of heavily discounted Russian oil.

Essentially, these countries extract less oil from the Middle East, which in turn becomes available to European countries that have chosen to boycott Russian oil. A balancing logistics game that can balance the overall availability of oil around the world and stabilize prices just above $100.

Piped gas supplies from Russia are less flexible than oil to be replaced with supplies from alternative sources. Investments in infrastructure have already started to increase the capacity of LNG (liquefied natural gas) reception facilities in Europe.

The United States is bundling LNG supplies to Europe and has become the biggest beneficiary of Europe’s ongoing boycott of Russian gas.

In response to the Russian invasion of Ukraine, major Western oil companies (Exxon, Shell, BP, Total Energies) are withdrawing their capital from the Russian oil and gas industry, a development which has important implications for the future position of Russia as the world’s largest oil and gas producer. .

This is also another climate change mitigation measure, as global fossil fuel production will decline. Unless of course there is equivalent replacement production capital from China.

Perhaps the most sinister consequence of the ongoing Russian-Ukrainian crisis is the return of polarized geopolitical alliances, with loyalties in the West (US and Europe) or East (Russia and China), which means a return to the geopolitical model of the “cold war”. .

This can divide and damage the economic globalization that has facilitated global trade and investment over the past three decades. If new geopolitical animosities emerge and persist, maintaining neutrality by various nations will become difficult diplomacy.

Like the rest of the world, Kenya is already treading tough economic ground with high prices for oil, food and medicine, especially with a depreciating shilling and a scarce dollar.

The government will certainly have to come up with effective solutions that could lead to reduced taxes on certain items, including petroleum fuels. This may contravene IMF conditionalities, but it is essential to protect the economy and reduce stress on Kenyan households.

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