This report analyzes the first six months of the crisis in Ukraine and the subsequent sanctions on the global economy. The war in Ukraine deeply affects not only the countries involved, but also the entire global economy and financial markets. While precious metals and food prices are on the rise, energy prices are at record highs. On the financial side, the War changes the global risk perceptions; it increases risk premiums, triggers a shift to safe havens and creates an upward pressure on global inflation.

The war in Ukraine has overall become a new testing ground for the global economy. It mitigates the post-pandemic global recovery. Concerns about energy and food security have also reached alarming levels. Globally, prices are testing new highs of the past few decades. Thus, the Ukraine War is exacerbating the negative effects of post-pandemic high inflation, the recent energy crisis and the commodity price increase trend.

On the other hand, considering the course of the war, it also seems like this showdown and strategy game between the West and Russia will continue for a long time. There are also increasing concerns that Russia is considering prolonging the war and the conflict in Ukraine, by using increasing pressures in commodity prices and inflation. The Ukraine War also serves as a shock that increases the costs of foreign dependency in food, energy and finance, and reminds one of the importance of having alternative energy sources.

For all these reasons, an energy crisis and stagflation on a global scale, as in the 1970s, seems inevitable. It is still unclear, though, how much growth and employment can be given up to fight inflation with the conventional methods. This would, indeed, be more difficult to accept, especially for developing countries that need more growth and job creation. As a matter of fact, during market interventions today, there is always a tradeoff between inflation and growth.

On the other hand, the multipolar view is also getting stronger. While China is increasing its influence in the Asia-Pacific; Russia is also trying to strengthen its dominance in Eurasia. To ensure this, China and Russia primarily strive to consolidate their sovereignty in their own spheres of influences. If the USA wants to remain the dominant power in the 21st century, it has to balance China and Russia in Asia. In fact, the West, led by the EU and the USA, is already isolating Russia from the global system. The Ukraine War also negatively affects international trade, especially the grain and energy supply chain. The Belt and Road Initiative (BRI), which China has launched as the project of the century, is also adversely affected by the war. After all, Ukraine is in a critical position on China’s trade routes reaching Europe.

International organizations such as the IMF, World Bank, OECD and UNCTAD have all lowered their global growth forecasts due to the war and post-war sanctions. Global inflation is expected to increase by a few percentage points this year, while global growth is expected to decline by at least one percent. The cost of the war to the global economy is already expected to exceed several trillion dollars. The Russian economy is expected to contract by 8-20 percent in 2022, according to the calculations of international institutions. The total cost of the war to the Ukrainian economy is estimated to be somewhere around 600 billion to 1 trillion dollars. As a matter of fact, as of May 3 this year, the physical damage (such as buildings and infrastructure) of the war alone is over $92 billion.

Another potential critical consequence is the effects of war and the resulting sanctions on neighboring countries such as Türkiye, with whom trade relations are intense. The repercussions of the war on the global economy and financial markets, especially on food and energy, may also have negative effects on Türkiye which is a close neighbor and one of the major commercial partners. However, Türkiye is also becoming an increasingly critical partner with its strategic location and increasing importance on the energy supply chain.

This report analyzes all these various aspects and potential negative effects of the crisis in Ukraine and the subsequent sanctions, during the first six months of the conflict.

Link of the report:
Pages: 1-70
ISBN: 978-625-8322-09-5
Issued in July, 2022