War in Ukraine is economic catastrophe, warns World Bank

The war in Ukraine is a “world catastrophe” that will cut off global economic growth, the World Bank president told the BBC.

“As inflation was already rising, the war in Ukraine comes at a bad time for the world,” said David Malpass. He emphasized that his biggest concern is “about the sheer loss of human life” that is taking place.

Thousands of civilians and soldiers are believed to have been killed in the fighting.

Malpass said the war’s economic impact extends beyond Ukraine’s borders, and increases in global energy prices in particular “hit the poor hardest, as does inflation.”

Food prices were also boosted by the war and “are a very real consideration and problem for people in poor countries”.

food bottleneck

Malpass points out that both Russia and Ukraine are major food producers. Ukraine is the world’s largest producer of sunflower oil, with Russia in second place, according to S&P Global Platts. Between them, they account for 60% of global production.

The two countries also account for 28.9% of global wheat exports, according to financial services firm JP Morgan. Wheat prices on the Chicago futures exchange are trading at 14-year highs.

Russian supplies of these commodities are being restricted because of widespread sanctions that make it difficult for the rest of the world to buy their products. Ukrainian supplies were cut short as fighting closed the country’s ports.

“There’s no way to adjust quickly enough to the loss of supply from Ukraine and Russia, and that drives up prices,” Malpass said.

He says the same goes for Russian energy supplies, and is particularly damaging to Western Europe, where governments “have neglected other aspects of how to have enough electricity”.

Around 39% of the EU’s electricity comes from power plants that burn fossil fuels, and Russia is the biggest source of this oil and gas.

As the European Union seeks to accelerate its transition to other energy sources, Vladimir Putin’s government “may permanently lose some of its markets,” Malpass said. This loss of income is just one way in which this war will affect living standards in Russia, as will the fall in the value of the ruble and the inflation it brings.

The World Bank has committed $7.9 billion to help develop Ukraine’s economy since the 2014 revolution. That money has helped the country institute sweeping economic reforms, including privatization in the energy and banking sectors, as well as efforts to make its more productive farmland.

‘Catastrophic’

Less than a month before the Russian invasion, Ukraine’s independent central bank predicted that the $180 billion economy would grow by 3.4% this year after the difficulties of the pandemic.

However, the war means “a catastrophic impact for our economy, for the region in general”, according to Alexander Rodnyansky, who is an economic adviser to President Zelensky.

He adds: “We’ve already seen massive destruction of roads, bridges and infrastructure. It’s hard to put a number on this now, but we can already see that we’ve given up on percentages and GDP growth just because of what’s already happened.”

With hundreds of thousands of Ukrainians fleeing the country or joining the fight against Russia, the workforce has shrunk dramatically, which is making it difficult to maintain the war economy.

“Production is collapsing,” says Rodnyansky, who says there are disruptions to vital supplies of food and energy.

Major Western companies such as food maker Nestle and brewery Carlsberg have had their operations in Ukraine disrupted by the war.

A surge in foreign investment in recent years has helped reshape the Ukrainian economy amid a crackdown on corruption that was part of a development support agreement by the International Monetary Fund and the World Bank.

Rodnyansky said the move “absolutely reflects the desire of the people in Ukraine to join the European Union, be part of the European family and have only one democratic, strong and economically free country that flourishes.”

He says there has been a push towards digitization that has made it easier to do business in the country: “This is in stark contrast to what happens in Russia… And perhaps that’s another reason why the Russian leader blatantly hates everything about Ukraine and what Ukraine represents.”

Malpass is concerned that the war will do long-term damage to the changes that Ukraine’s economy and people have benefited from.

The desire to stop them from unraveling is one reason the World Bank is in the process of putting together a $350 million aid package for Ukraine, which is expected to be approved in the coming days.

“This will help finance Ukraine’s budget,” Malpass said. With tax revenues collapsing because of the war, this will help pay for things like government wages, welfare and emergency supplies.

He is aware that, in addition to risking the lives of millions of Ukrainians, the war could “create a setback [econômico] lasting, where Russia pulls them towards Russia, under the ideas, the goals of an individual leader”.

“Their per capita income has fallen below China’s because, in part, because of economic mismanagement, and because they actually maintain a centralized decision-making system under Putin for now, since 2000.”

He adds: “The risk is that Ukraine will be controlled by this.”

Malpass’s warnings came as the British Chambers of Commerce (BCC) cut its growth forecast for the UK economy, amid rising inflation, tax increases and global shocks, including Russia’s invasion of Ukraine.

The BCC predicts the UK will grow 3.6% this year, down from its previous forecast of 4.2%, with consumer spending expected to slow as household incomes come under pressure from rising inflation.

The new estimate is less than half the 7.5% growth rate seen last year as the UK economy recovered from the Covid-induced slump in 2020.

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