The Economic Effects of the War in Ukraine

The most recent expert prognosis from the National Bank of Romania estimated inflation for April to be 11.2%

Corina Cristea, 01.04.2022, 02:37

The most recent expert prognosis from the National Bank of Romania estimated inflation for April to be 11.2%, taking into account the situation in late 2021. Meanwhile, the war in Ukraine has upset the boat in a major way, and the inflationary cycle we find ourselves in, the worst in four decades, experts say, is sweeping the entire world. The geopolitical crisis in the area could not be without effects, and estimates are that it will worsen the acceleration of inflation. In Romania, political decision makers came up with new measures to set a ceiling and subsidize energy prices, in an attempt to curb inflation. Even so, at least for the next few months, this will be increasing. That is because, in this equation with many unknowns, the defining factor is Ukraine, and it poses a high level of uncertainty. The democratic world has imposed sanctions on Russia in order to get it to stop this so-called special operation, as the Kremlin refers to the aggression against neighboring Ukraine. Moscow, in turn, has its own levers to apply pressure, and the most handy is natural gas. We asked financial analyst Dragos Cabat what are the possible economic effects for Romania in case there are disruptions in gas supplies at the European level, in the context of the Ukraine conflict:

“The economic effects will be large scale, because there will be pressure on the price of gas, first of all, and also on crude oil and other raw materials produced by Russia which Ukraine also produces, and this will lead to a rise in prices in the EU. It will also lead to stunted growth in the EU. Why is that of interest to us Romanians? Because our most important trade partners are in the EU, especially Germany, France, Italy, Spain. Some of these countries will be affected very strongly, some less, by the lack of gas from Russia, and consequently by a smaller economic growth. Because gas is not used just for heating of homes, it are used by manufacturing industries, and if the manufacture and demand of sub-components from Romania will go down, this will impact Romanian companies. The other strong impact we all already feel is that of inflation, by the rise in prices, which is in part due to the rise in price of Russian gas and oil.

Speaking on Radio Romania, economic science professor Mircea Cosea also commented on the impact of the Ukraine war on the Romanian economy. Professor Cosea said that any war has collateral effects, and Romania definitely qualifies as a collateral victim:

“Of course, some say that it is not so terrible, because we don’t import wheat, we have our own wheat, and we import only a little gas. Yes, but these are not our most important problems. What is important is that Romania is now in a zone that, economically, is called a ‘waiting zone’. It means that we are on the border of a very serious conflict, and unpredictable one, we don’t know what is going to happen. This economic area means that foreign investment is in waiting. The appetite to invest in Romania won’t disappear, but will reduce, because investors are waiting to see what happens, to see how big the risk is. Another effect I believe is negative is the fact that we are a small economy, and an economy which, from my point of view, has a huge vulnerability: the food we eat is 70% imported. Which means that this rise in global food prices will arrive here by contagion, by imports. We are in a global economy, so anything that happens somewhere will surely be felt to some extent somewhere else.

At the same time, all these reductions in exports from Russia and Ukraine have to be compensated for somehow, and the very structure of the EU’s agricultural production will have to be redesigned fast, according to Professor Cosea:

“They are already discussing in Brussels the way to solve the grain crisis by resizing the grain production in Europe. Because Europe has somewhat given up in its developed countries on producing grain, introducing better priced crops than the usual grains, such as wheat or rye. Of course, we also have to talk about opportunities. In any crisis there is opportunity. Right now we have an excess of wheat. A political decision must be made whether to export or store. Obviously, if we exported now this excess, we would earn a lot, but we don’t know what the future is. Right now I don’t think we would be able to walk back this decision or analysis made by experts. For now, the year 2022 is not a good crop year.

What is known with certainty is that the situation in Ukraine has forced the authorities in Bucharest to seek solutions to reduce or even eliminate gas imports from Russia, which are fortunately at a pretty small level. What could solve this problem would be resuming coal-fired power plant electricity production, speeding up extraction of gas from the Black Sea, or finding a way for LNG from the Mediterranean to reach Romania.