War In Ukraine: Impact On Global & Indian Economy

The sharp rise in global oil prices represents a significant trade shock with macro-economic implications. It will lead to higher inflation and higher current account deficit. India's macroeconomic fundamentals remain strong, but the unfolding global developments pose additional risks from the spillover, RBI noted in its recent monthly bulletin.

- Shri V.P.Nandakumar MD & CEO Manappuram Finance Ltd

On 24 February 2022, Russia began a military invasion of Ukraine in a major escalation of the Russo-Ukrainian conflict that has been simmering since 2014. Denounced by the US and its allies as a war of aggression, it is the biggest military conflict in Europe since World War II. Russia's economy is only the world's 11th largest with a GDP of about $1.5 trillion but its vast oil and gas resources and its status as a leading producer and exporter of metals and other commodities makes it an important player in world trade. As Western sanctions on Russia tightened in response to its invasion of Ukraine, it disrupted the country’s oil sales. Crude prices surged to over $139 a barrel in March 2022, the highest levels since 2008, aggravating global inflation already running hot after the pandemic-induced disruptions to the global supply chain. In Europe, the price of wholesale natural gas spiked to new highs which will further exacerbate inflation and slow down growth to give rise to fears of stagflation. It also makes the task of global central banks trying to cool inflation a lot more difficult. The crisis is also putting more stress on the already stretched global supply chains. And should the war continue for much longer, things could get a lot worse.

The sanctions imposed on Russia

Russia’s invasion of Ukraine has drawn a harsh response from the US, the UK, the European Union, Canada, Japan, Australia and some other countries. Severe sanctions have been imposed by the western powers on Russian companies, banks, oil and gas sector etc., that have drastically altered the rules of the game for the global economy. The effect has been to isolate Russia from global financial and trade networks, thereby bringing about a collapse in the value of its currency and financial assets, and sending energy, metals and food prices soaring.