In this month’s instalment of our visual series on topical themes, we look at the far-reaching human and economic consequences of the Ukraine-Russian war.

Read this article to understand:

  • The human impact of the war
  • The consequences for consumers
  • How financial markets have reacted

Conflict has dominated the world’s attention since Vladimir Putin ordered a full-scale attack by Russia on Ukraine on February 24. Almost immediately, the war became a humanitarian crisis, with thousands of people killed and millions more displaced from their homes. Given the critical role both Russia and Ukraine play in global supply chains, it has also had significant consequences on economies and markets.

In this article, we illustrate some of those consequences. In doing so, it is important to repeat our public position on the conflict: First and foremost, we are extremely concerned at the events unfolding in Ukraine and our thoughts are with all Ukrainians at this time. Further details on Aviva Investors’ position can be found here.

The human cost

The Office of the United Nations High Commissioner for Human Rights (OHCHR) verified a total of 1,932 civilian deaths during Russia's military attack on Ukraine as of April 12, including 157 children (Figure 1). Furthermore, 2,589 people were reported to have been injured. However, OHCHR suggested the real number of casualties could be much higher.

Figure 1: Civilian casualties in Ukraine
Source: Aviva Investors, 2022. Data from Statista, April 13, 20221

Meanwhile, over 4.5 million people have fled Ukraine since the invasion began, as Figure 2 shows. This number – around one tenth of Ukraine’s population – does not account for people who have been displaced internally within the country. According to the UN Refugee Agency (UNHCR), the war has uprooted over a quarter of the Ukraine population from their homes.2

Figure 2: Cumulative number of Ukrainian refugees
Source: Aviva Investors, 2022. Data from Operational Data Portal, as of April 13, 20223

Poland has taken in the highest number of refugees – followed by Romania, Moldavia and Hungary (Figure 3).

Figure 3: Arrivals from Ukraine
Arrivals from Ukraine
Note: Includes people crossing the border between Romania and Moldova. Source: Aviva Investors, 2022. Data from UNHCR, April 13, 20224

The impact on consumers

On top of the tragic loss of life and human suffering, the crisis has had a sizeable impact on inflation due to Russia and Ukraine’s central role as commodity exporters. As Figure 4 shows, this has exacerbated pressure on consumers and highlighting the fragility of food security.

Figure 4: Ukraine and Russia, share of global markets by volume (2018-2020, per cent)
Source: Aviva Investors, 2022. Bruegel, 20205

Ukraine is a major wheat producer and exporter: Figure 5 shows prices have risen this year by over 40 per cent.

Figure 5: YTD wheat price
Source: Aviva Investors, 2022. Data from Markets Insider, as of April 13, 20226

In turn, the prices of items such as pasta, bread and beer are also increasing. Egypt, which fixes the price of bread, is a useful case study of a country’s dependence on Ukraine and Russia. Egypt is the world’s biggest wheat importer, bringing in about 60 per cent of its grain from overseas. Russia and Ukraine accounted for 80 per cent of the country’s imports last year.7

The Food Price Index hit an all-time record high in March 2022

According to the Food Agriculture Organisation (FAO), the Food Price Index hit an all-time record high in March8 (Figure 6), with rising transportation costs and supply chain disruptions adding to the pressure caused by higher commodity prices.

Figure 6: FAO Food Price Index
Source: Aviva Investors, 2022. Data from the Food and Agriculture Organization, as of April 8, 20229

To pick out one commodity in particular, vegetable oil has seen the biggest price rise. The war has trapped millions of tonnes of sunflower oil earmarked for foreign buyers in Ukraine, causing a major shortage. The cost had already increased before Vladimir Putin’s invasion, but now vegetable oil goes for £1.30 a litre at the supermarket, up 23p, or 22 per cent, compared to a year ago.

Energy supply

Russia is the world’s second highest exporter of crude oil after Saudi Arabia. In 2020, 48 countries bought Russian crude oil worth $74.4 billion (Figure 7).

Figure 7: How countries rely on Russian oil ($bn)

Note: Africa = South Africa; North America = United States. For Asia, Europe and Oceania see details below.

Source: OEC. Data as of 202010

The Biden administration banned imports of Russian oil, liquefied natural gas and coal. According to a factsheet produced by the White House, last year the US imported nearly 700,000 barrels per day of crude oil and refined petroleum products from Russia and this step will deprive Russia of billions of dollars in revenues.11

Sanctions and boycotts on Russian oil are heaping more pressure on global diesel markets

Meanwhile, sanctions and boycotts on Russian oil are heaping more pressure on global diesel markets. As traders scramble to find alternative supplies, diesel cracks have soared to record highs, far outpacing price rises for gasoline and other fuels.12

Also, Russia supplies about one third of Europe’s natural gas. Germany froze its participation in Nord Stream 2, the natural gas pipeline running through the Baltic Sea that was completed last September at a cost of $11 billion.13

Market impact

Figure 9 shows how the Russian stock market became almost uninvestable overnight after its invasion of Ukraine, with a far bigger impact on the MSCI Russia index than the global financial crisis, COVID-19 and the Crimea crisis.

Figure 8: MSCI Russia (percentage changes)
Source: Aviva Investors, Eikon. Data as of April 14, 2022

Unsurprisingly, given the moves to freeze Russia out of the international financial system, the cost of buying protection against a Russia default has hit extreme levels (Figure 9).

Figure 9: Russia five-year credit default swap spread (basis points)
Source: Aviva Investors, Eikon. Data as of April 13, 2022

Elsewhere, the conventional flight to safety trade – developed market bonds – that has characterised markets since the financial crisis has not been so reliable during the current crisis, with central banks needing to raise interest rates as they struggle to keep a lid on inflationary pressures. 

As Figure 11 shows, unlike the collapse in US Treasury yields that occurred at the onset of COVID-19, the reaction to the Ukraine-Russia war has been an appreciable upwards move.

Figure 10: US 10-year Treasury yields
Source: Aviva Investors, Eikon. Data as of April 13, 2022

Perhaps surprisingly, the reaction in the global stock market overall has been remarkably muted (Figure 11), with price movements more sector specific.

Figure 11: MSCI World index
Source: Aviva Investors, Eikon. Data as of April 13, 2022

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