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The Economic Consequences of the Russian-Ukrainian War

The Economic Consequences of the Russian-Ukrainian War

The Russian invasion in Ukraine marked a new war in Europe, which started four months ago and whose end is not yet in sight. The longer the conflict lasts, the larger the threats to world peace will become. The Western world’s reaction was to apply severe economic sanctions, to impose penalties, mainly as deterrence. Even though it is too early to see the end of this war, some economic consequences are already visible.

When Ukraine was invaded by the Russian army, the world’s economy was already in a huge stagflation, not comparable to the one from 1973-1974. This economic shock was strong enough to impact the demand in different sectors: fossil energy (oil, gas and coal), food (corn), chemical fertilizers (based on potassium and nitrogen) and industrial raw materials (nickel, titanium). Those goods accounted for a good percentage of the exports of Russia and Ukraine, and the war led to an increase in the world prices for those goods.

Before the invasion, some economists announced about the risk of this stagflation, because of the price increase and the volatility of the world economic activity caused by the COVID-19 pandemic, climate change and the major ongoing restructuring in the world economy. Those factors were considered as being temporary, likely to disappear once things stabilized and the production chains returned to normality. The invasion changed everything, because it led to a massive shock on the supply, which led to a multiple channel transmission and to the permanentization of effects.

Thereby, the decrease in the supply of basic raw materials and energy products will lead to a recession in the manufacturing industries, such as the automotive industry or electronic components industry. On the other hand, rising prices reduce consumer purchasing power. This coexistence of the reduction of the economic activity with the acceleration of inflation is called “stagflation” in the economic literature. This term refers to a paradoxical economic situation, characterized by job disappearance, rising prices, declining corporate profits, investment reduction and the widening of budget deficits.

The nature and the extent of the stagflation consequences depend on the duration of the phenomena mentioned before. It is supposed that in other countries, except Ukraine, whose infrastructure has been largely destroyed, and Russia, which we will explain in detail, the return of the economy to the pre-invasion status will only be delayed. Central Banks will continue to face the rise in inflation, but their problem remains the same as before the start of the war: reducing the inflation without preventing the economic recovery. The longer the war lasts and the sanctions applied to Russia will continue, the harder the economies of non-belligerent countries will find to have balanced growth because of the expensive and time-consuming adjustments applied on their production structure.

This analysis is valid for all countries, but in different measures. As an example, Romania has imported fewer raw materials from Russia and Ukraine in recent decades than France or United Kingdom and has exported fewer goods to these countries than Germany or Italy. Therefore, it can be assumed that the Romanian economy will be less affected, all things being equal.

This hypothesis is confirmed by the international financial-monetary institutions, which have a balanced vision regarding the future evolution of the Romanian economy. In the report presented at the April 2022 meeting of the International Monetary Fund (IMF) and the World Bank (WB), it is estimated that Romania’s economic growth will reach 2.2% in 2022 and 3.4% in 2023. Annual inflation forecast is 9% in 2022 and 4% in 2023 and the unemployment rate is 5.6% this year and 5.5% next year. Emphasizing the great uncertainties created by the war, especially those related to the duration of sanctions, the document contains a wealth of important information on the economic situation and the outlook for the world, the Euro Area and Central and Eastern Europe.[1]

Regarding Romania, the impact is the one defined by the indicators mentioned above. It is obviously a massive shock, but incomparably smaller than the one suffered by Romania between the years 1990-2000, when a prolonged economic recession took place.[2]

The problem is that even before the invasion of Ukraine, the economic policy pursued by the Romanian authorities was often populist. Currently, the most terrifying trends are rising budget deficits, government debt and inflation. The measures envisaged by the current government are bizarre, as they are mainly aimed at stopping the decrease in demand and less the increase in supply.[3] This obvious populist orientation questions the correction of these negative trends, because the unsustainable growth in public spending and nominal wages leads to inflation, followed by stagflation, ending with the collapse of the economy, which reduces the real wages to a much smaller lever than before the launch of this populist policy. In addition, the financing of the measures announced by the government will be made mainly from European Funds (9 billion lei, compared to 8.3 billion lei from the state budget), which, knowing the inability of the Romanian authorities to attract European Funds, makes the whole program problematic.

It is about a new manifestation of the economic populism, an outlook more or less shared by all political parties and governments of Romania in the post-communist period. The novelty is that the populism is justified by being a ‘war economy”, even though Romania is not fighting with anyone and enjoys new security guarantees, not possessed in its entire history.

Let us move our focus now to Russia. By excluding itself from the international community, Russia is now on the verge of destroying the modern and outward-looking part of its economy. Excluded from the international financial system and subject to an embargo on the export of goods from the United States and Europe, ranging from high-tech to aircraft components, the country has entered a recessionary and inflationary spiral. The Kremlin Regime still benefits from the revenues obtained from the exports of oil and natural gas to Europe, which continues for now, despite the atrocities committed in Ukraine. It should be noted that the European Parliament recently adopted a resolution that asks for a total and immediate embargo on Russian oil and gas imports, as well as a substantial extension of the list of sanctions.[4]

The future for Russia is unclear: if there will be a peace agreement quickly, the sanctions could be lifted. In this case, the shock will be transient and the economy will be able to recover. On the other hand, if this attack will be prolonged, the Russian economy will shrink permanently. Thus, based on the sanctions imposed by the Western countries, the IMF estimates Russia’s GDP will decline by 8.5% in 2022.[5] This seems ridiculous compared with the gravity of the sanctions, but it reflects the economic growth achieved in the first months of 2022, before they were adopted and began to take effect. Measured as the difference between the end of 2021 and the end of 2022, not as annual average, the decline in GDP is likely to be higher than was estimated by the Fund. This is not the most important thing. What is serious is that Putin’s policy is leading Russia intro a lasting economic recession, with a 15%-20% permanent reduction in GDP per year and a corresponding decrease in the real income of the population. Putin’s reorientation towards the Asian space is an illusion: detached from the West, Russia will only be a vassal of Chinese power.

The outbreak of a war started by an authoritarian regime on the borders of the European Union, declaring itself an opponent of the values of Western civilization, trying to influence the votes of democratic countries, which supports Eurosceptic and Europhobic political parties, which has the largest number of nuclear warheads on planet and drastically represses any form of opposition has profoundly changed the conditions for the development and implementation of economic policies in all countries of the world. Germany’s decision to (temporarily) triple its military budget is the clearest sign in this regard.

Regarding the budgetary policies of the Euro area countries, we are likely to see greater laxity in the European Commission’s budget deficits. The impact of the inflationary shock, rising military expenditures, the cost of receiving refugees (which should not be considered an investment) and accelerating investments in energy infrastructure to reduce the dependence on Russian oil and gas are all factors in the same direction: rising public spending. As a result, a new plan of the same kind, this time imposed on the war economy, financed by loans from the capital markets contracted on behalf of the EU is not ruled out following the NextGenerationEU program.

The long-term issue is the financing of these increased public expenditures. Raising taxes and fees in the midst of an inflationary shock would be counterproductive; the recourse to loans remains. However, the possibility of contracting mutual loans such as those used to finance the NextGenerationEU program arose in special conditions, for example, as a result of the decrease in real interest rates, which in fact was caused by inflation expectations.

The US Federal Reserve (FED) recently raised the key interest rate by 0.25 percentage points, although the five-year US government bond interest rate rose to 2.63% for the first time since 2006, higher than the interest rate on government bonds with a maturity of three years (2.6%), which is higher that the interest rate at the maturity of thirty years. This is also a paradox, which contradicts the usual financial logic. Usually, the shorter an investment is, the lower its return. On the other way around, the longer the money invested is blocked, the higher the interest rate must be in order to offset the risks involved in a long-term investment. The interest rate by maturity is therefore normally increasing.[6] This is what the phrase ‘war economy” means!

In this context, the European Central Bank (ECB) confirmed on the 14th of April 2022 the intention to discontinue bond purchases on the financial markets, but did not provide any new guidance on the timing of the tightening of its monetary policy, highlighting only the uncertainties surrounding the war in Ukraine. This is to say that the ECB is more cautious that the Fed and does not rule out launching a new government bond purchase program in the event of a prolonged shock. The inflation target below 2% will then be postponed for better times. 

(Translation from Romanian by Luiza-Maria Constantin.) 


[1] IMF, World Economic Outlook: War Sets Back the Global Recovery, Washington, DC, April, 2022.

[2] PIB-ul României: Evoluţia Produsului Intern Brut – INS, Ziarul Financiar,

Pentru o analiză a cauzelor acestei recesiuni, a se vedea și lucrările autorului: Criza, statul şi piaţa, Œconomica, 1, 2011, p. 5-15; Tranziţia şi grupurile de interese, Œconomica, 2, 2011, p. 15-27,; Sunt capabile elitele româneşti să regândească rolul statului?, Ziarul Financiar, 23 august 2017,; Rolul economic al statului: o veche problemă rămasă deschisă, Ziarul Finanaciar, 19 ianuarie, 2018,; Dimensiunea morală a economiei de piață,; Salariul minim și stafia comunismului,; Mentalitatea anticapitalistă: o mare problemă a României,; Deficitele gemene şi viabilitatea politicii economice,; Statul şi piaţa, pia%C8%9Ba/.

[3] Guvernul României, Sprijin pentru România. Măsuri propuse de coaliția de guvernare,

[4] Rezoluția Parlamentului European din 7 aprilie 2022,


[6] S. Cerna, Economie monetară, Editura Universității de Vest, Timișoara, 2009, p. 610.



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