UNCTAD prepared an assessment of the impact of war in Ukraine on trade and development, and interrelated issues in the areas of finance, technology, investment and sustainable development.

The results confirm a rapidly worsening outlook for the world economy, underpinned by rising food, fuel and fertilizer prices, heightened financial volatility, sustainable development divestment, complex global supply chain reconfigurations and mounting trade costs.

This rapidly evolving situation is alarming for developing countries, and especially for African and least developed countries, some of which are particularly exposed to the war in Ukraine and its effect on trade costs, commodity prices and financial markets.

The risk of civil unrest, food shortages and inflation-induced recessions cannot be discounted, particularly given the fragile state of the global economy and the developing world as a result of the COVID-19 pandemic.

Impact on transport
It is unclear to what extent the war will reduce commodity supplies from the Russian Federation and Ukraine, but initial assessments point to a substantive reduction despite some efforts from the West to not disrupt commodity supplies.

Most economic restrictive measures have explicitly avoided commodities. However, restrictive measures on airspace, contractor uncertainty and security concerns are complicating all trade routes going through the Russian Federation and Ukraine.

While Russian airspace is closed to 36 countries and vice versa, some freight forwarders currently recommend not booking overland shipments between Asia and Europe. The war will have a negative impact on global air freight capacity and raise air cargo prices as carriers are forced to take longer routes and spend more money on fuel.

On top of this, already expensive and overstretched maritime trade will find it difficult to replace these suddenly unviable land and air routes.

Key issues related to finance, investment and sustained energy transition

The significant increase in oil and gas prices may shift investment back into extractive industries and fossil fuel-based energy generation, running the risk of reversing the trend towards renewables documented over the past 5–10 years.

"Taken together, these shifts in investment and asset positions imply a serious risk of divestment from greenfield and international project finance in countries in conflict as well as other economies and towards downward pressure on investment in developing countries, especially in infrastructure and sectors relevant for the Sustainable Development Goals", said UNCTAD.

In addition, the war in Ukraine puts macroeconomic policymakers in advanced economies in a difficult situation. Higher inflation raises the pressure to tighten monetary policy by increasing interest rates.

However, the short run dislocations caused by the war and the potential for financial disorder could lead central banks to postpone tightening and instead further increase provision of liquidity.

A “dual strategy” of liquidity provision in the form of bond purchases alongside higher interest rates could emerge in this scenario. Mounting debt burdens, rising climate change costs and ongoing pandemic effects and the commodity price shocks clearly increase the risk of a debt crisis in developing countries.

Moreover, rate hikes alongside financial disorder would be a double blow for developing economies, of “taper-tantrumlike” effects through interest rate rises and greater volatility in commodity futures and bond markets, leading to increased risk premiums on top of exchange rate pressures.

"The combination of very high prices of food and fuel and macroeconomic tightening will place severe pressure on households in developing countries: real incomes will be squeezed, and economic growth will be constrained. Even in the absence of disorderly moves in financial markets, developing economies will face severe constraints on growth and development", UNCTAD concludes.

Source: Safety4sea