(Photo - Wheat harvesting in the Novovodolazhsky region of the Kharkiv region of Ukraine)
Russia and Ukraine rank 11th and 55th respectively for their national economies, but together they account for a much larger share of the global supply of key resources such as energy, food and minerals. The threat and reality of resource flows has pushed up global prices due to their reduction.
The world is already facing cost-of-living pressures from the COVID-19 pandemic, so further price spikes or supply constraints have the potential to seriously undermine food and energy security, equitable access to essential goods and services, and social stability around the world – potentially posing systemic risks to economies and societies.
The global impact of the conflict in Ukraine is only just beginning to be fully explored, but the direct impact of the crisis on global markets is already well documented. In the first days of the military operation, energy prices soared, triggering further increases in fertilizer prices – because fertilizer production is highly energy intensive – which in turn led to higher food prices, as fertilizer costs are an important factor in food production.
Further price spikes or supply constraints have the potential to seriously undermine food and energy security, equitable access to essential goods and services, and social stability around the world
Shipping disruptions around Ukraine and around the world have hampered the flow of goods, pushing prices further, while economic sanctions on cross-border goods and financial flows have further increased market pressures. But this is just the beginning – these effects will have a knock-on effect that goes far beyond their point of origin, the so-called "cascading risk".
Risk is a combination of hazards, exposures and vulnerabilities — in the case of an invasion in Ukraine, hazards are the conflict and its direct impact on Ukrainian and Russian societies and economies, while exposure to the extent to which other countries might be affected depends on the extent of their integration into the global economy or the "timely" nature of their supply chains.
Vulnerability is linked to societies' ability to mitigate the harmful effects of conflict, such as controlling borders, procuring alternative goods from suppliers or preventing price or supply shocks.
Cascading risks – primary hazards and secondary and tertiary effects in response to that hazard – can interact across sectoral boundaries – such as energy and food – and their compounding effects can lead to overall systemic risks to society.
Predicting this potential is crucial to understanding the nature and scale of the global impact of the conflict in Ukraine. Recent work in the UK to assess the level of cascading risks resulting from climate change – the UK Climate Change Risk Assessment – provides a valuable framework for thinking about this area.
It examines the key avenues by which risk cascades through the global system – and when applied to the case of Ukraine, these pathways and their interaction provide a sign that the scale of the crisis facing citizens extends far beyond the borders of Ukraine and Russia.
Disruption of the flow of goods and energy
In a globalized trade network, local disruptions in supply chains can quickly have wide-ranging international implications – particularly concerned about the immediate availability of food, as most countries rely on lean supply chains, while some may only have a few days of food supply within their borders.
Experience with past food price crises has shown that even small trade disruptions can lead to market runs and rapid price increases. In the event of this conflict, trade disruptions will be far from small, as between them, Russia and Ukraine export about a quarter of the traded wheat, more than three-quarters of the traded sunflower oil, and one-sixth of the trading volume of corn.
Given that many people are fleeing the conflict understandably, other countries may struggle to cope as the cost-of-living crisis and urgent efforts to strengthen national security infrastructure could squeeze available public funding.
Energy markets are also a problem, as many countries use more energy than they produce and therefore rely on imported energy or fuel for domestic use. Russia produces about 10% of the world's commercial energy, with sales concentrated in major regions such as the European Union (EU) and China.
As with food, energy supply shortages can lead to market runs and rapid inflation as participants compete in tight spaces and countries try to ensure their own security by misdesigning policy interventions that further increase global supply pressures and exacerbate price increases. In addition, the closely related nature of the energy market means that disruption to one fuel (such as natural gas in this case) affects the global price of other forms of energy.
The impact of moving and moving money
As the past decade has amply demonstrated, the movement of people across borders affects societies that absorb them – for example, by fuelling nationalism – and increases the cost of providing basic resources. Given that many are fleeing this conflict, it is understandable that other countries may struggle to cope because the cost of living crisis and urgent efforts to strengthen national security infrastructure could squeeze available public funding.
Financial flows are critical to the functioning of the global economy, whether for inward investment or insurance, and — as Russian citizens may soon find — restrictions on global financial flows have a serious impact on households. In addition to Russia, money flowing out of major financial centres such as London to meet insurance claims or reinvest in infrastructure after conflict could also have serious knock-on economic implications.
Impact on governance and health
These supply chain disruptions have led to soaring global energy and food prices, which will put many countries in the grip of increased food and energy insecurity and rising inequality. Taken together, these conditions have created many problems that go beyond immigration pressures and related politics, including rising inequality and civil strife.
This could destabilize governments and thus have an impact on stability throughout the region, such as supply chain disruptions, the need to deploy peacekeeping forces or large aid flows — all of which have global implications far beyond those of the countries concerned.
The war in Ukraine affects the mental health of people, whether it's being forced to leave home to escape the trauma of conflict, anxiety about the well-being and safety of family and friends involved, or the more pervasive anxiety that arises from the perception of living in an unstable world.
The conflict in Ukraine is just one of the potential triggers for all these effects, and the damaging potential of triggering cascading risks through these avenues is rapidly emerging. Where this conflict coincides with the cascading risks of climate change – such as unprecedented deficiencies affected by extreme rainfall and disruptions in exports from Ukraine and Russia – the risks to societies around the world will be greatly magnified.
As the impact of the conflict in Ukraine on food markets, energy markets, logistics and the movement of people emerges, policymakers and commentators must not lose sight of how these effects are superimposed and cascaded simultaneously, across sectoral and national borders, and affect populations in many ways.
The real risk lies not in disruptions to specific sectors or supply chains, but in the potential for these disruptions to interact in a globalized world to create broader systemic chaos.
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