On 24 February 2022, Russia invaded Ukraine in a major escalation of the Russo-Ukrainian War, which began in 2014. Ever since, the effects of this invasion have been felt by most – if not all – countries around the world. The Russia-Ukraine war has significantly impacted the economy and stability of many nations that heavily relied on both Ukraine and Russia for trade and supply chains.
Covid-19, a two-year long pandemic that greatly disrupted global markets and Europe’s economy due to the fact that many were forced to stay at home for an extended period of time, which caused trade and production to slow down, causing the Gross Domestic Product of many nations to collapted. As the continent was resurging from a two year global pandemic that greatly impacted its economic stability, the war triggered by Russia only weakened an already frail economy.
Worldwide, consumers can feel the weight of this conflict that has disrupted supply chains and affected many global markets, more specifically the global energy market. As a response to this conflict, many nations have imposed economic sanctions on Russia, in the sole purpose to economically pressure the country to put an end to this war that had already cost the lives of many. The volatility in European energy markets caused by the European Union and United Kingdom sanctions on Russian energy - imposed in retaliation for Russia's invasion of Ukraine in February - have cut out a slice out of the continent's economy.
The disruption of supply chain and trade caused by Russia’s invasion of Ukraine has led to an increase in the price of many goods, energy, and gas related goods in many European nations, which has created inflation throughout the continent.The reason for such increase in price is due to the fact that many nations were heavily dependent on Russia and Ukraine for many goods. Most importantly, Russia was an important oil and energy trade partner with European nations. Inflation is a general increase in the prices of goods and services in an economy. Inflation affects the economy of a country by increasing the price of food, energy, higher utility cost, while not receiving an increase in wages and higher interest rates on home loans which negatively affect consumers, and thus the economy, as inflation lowers the purchasing power of many.
Inflation is a hard thing to get rid of in an economy. Triggered by the disruption of trade as a consequence of Russia’s invasion of Ukraine, policy makers and governments are actively attempting to mitigate the negative effects of inflation on their country’s economy. However, while inflation remains a big issue in Europe and the rest of the world, the energy market is slowly collapsing under the sanctions against Russia.
As a response to inflation, the European Central Bank, the Bank of England and other central banks across Europe have aggressively raised interest rates to bring down high inflation. Raising interest rates is an economic policy used for the sole purpose to slow the economy down and bring down inflation. As a result of high interest rates, companies and individuals will cut back on spending, which will naturally bring down the price of goods and services that were previously increased due to the disruption of global markets.
While interest rates rise around the world, stocks and bonds are being sold off. The reason behind which bonds are being sold off is that when interest rates rise, new bonds pay investors higher interest rates than old bonds, so old bonds tend to fall in price. Inflation caused by political instability has led to this increase in interest rates as well as stocks to go down, which further highlights the lack of confidence in the economy from consumers, investors, and businesses. In a bear market—stock prices are falling—consumers and companies have less wealth and optimism—leading to less spending and lower GDP.
Households have found it challenging throughout the continent to keep up with inflation. While inflation results from changes in the cost of a market basket of goods, wages, on the other hand, are driven by changes to supply/demand for labor. As the weight of this conflict weighs on the shoulders of consumers and governments, Russia’s current economic and political instability keeps on harming the global economy, while disrupting markets.
While Russia’s invasion of Ukraine has greatly disrupted supply chain, trade, and global markets, all of which have had negative repercussions on Europe’s economy, the most important challenge to consider as to this day is the energy crisis that nations have been facing and are currently facing as a result of this bloody conflict.
The repercussions of the war in Ukraine have "distorted" the natural gas market, leading to higher energy prices. Indeed, natural gas, used to generate electricity and heat, is now about ten times more expensive than it would have been a year ago. Electricity prices, which are tied to the price of gas, are also several times higher than what was considered reasonable. The reason behind such volatility in natural gas prices is due to the fact that Russia is an important producer of natural gas and thus, its role in trade is crucial. The rise in natural gas’ prices is a fear that Europe will run out of gas this winter.
On the bright side, governments are actively attempting to stem the energy crisis. European Union countries, such as Germany and the Netherlands, are scrambling to fill gas storage facilities to guard against a possible complete shutdown of Russian gas this winter. Governments have also taken steps to secure additional supplies in the form of liquefied natural gas from the United States and other countries. While France and other countries provide financial assistance to consumers, but not enough to offset the dramatic increase in costs faced by households. A wide range of politicians, consumer advocates and even energy executives are calling on governments to do much more.
The European Central Bank, which oversees economic policy for the 19 nations that use the euro, took an aggressive step to fight inflation with its biggest rate hike ever, three-quarters of a percentage point.
European Union ministers were scheduled to meet on September 9th to discuss a plan to intervene in energy markets in order to control prices. At this meeting, they have discussed strategies that could include price caps and mandatory cuts in energy consumption.
The sharp drop in supplies from Russia, which previously provided about 40 per cent of the European Union's gas needs, has left governments scrambling to find alternative energy resources and raised fears of possible power cuts and a recession. After suffering an increase in the price of many goods amid Russia’s invasion of Ukraine, citizens of many countries now fear spending a winter in the cold, as the price of energy is going up.
Nations across the continent are still attempting to fight inflation through different economic policies, the main one being the rise of interest rates by central banks. Although this has proven to be an efficient method to bring down prices and ultimately lower inflation, this method has also led to a collapse in the stock market. Ultimately, nations are attempting to find alternatives for natural gas, alternatives that will be less costly and harmful to their economies.
Putin, President of Russia, offered the European continent gas through Nord Stream 2. Nord Stream is a natural gas pipeline through the Baltic Sea. The pipeline is a key factor in securing energy security in Europe. For many, this was interesting news, knowing that the country has been reducing gas supplies through Nord Stream 1 for a number of months. While this reduction in gas supplies is affecting many countries, Germany has been the most affected by it, as Russia contributed to 55% of its natural gas. Additionally, the pipelines were damaged, which only further impacted gas supplies, while having a negative impact on the environment.
Aware of the natural gas shortage that Europe is currently facing, Putin offered Europe gas through Nord Stream 2. Germany, on the other hand, said it would not take Russian gas via the Nord Stream 2 pipeline, which has become a major focus of the Ukrainian crisis. Indeed, accepting Russia’s offer now would only go against all of the economic sanctions that were set up against the country to mitigate the repercussions of the crisis that has already affected the world’s economy. While nations seek alternatives to find natural gas, accepting gas from Russia would benefit Putin and his country, as he attempts to gain political power, and economic dominance, amid the war that he started back in February of 2022.
Political and economic instability persist across Europe as relations with Russia are tense. Economic sanctions against the nation have proven to be effective, even if they are harming the world’s economy in the short run, through the disruption of global markets that have weakened the economy of many European countries. In the long run, the economy will self-adapt to these new changes in global financial markets, but in the meantime, governments are attempting to find in which they can alleviate economic and political tensions, in the sole purpose to achieve economic prosperity while improving relations between Russia and its trading partners.
As of today, it seems as if the future of Europe lies within the hands of Russia. The country’s next steps in this crisis will ultimately affect the economic and political stability of neighboring nations. Until Russia puts an end to this war, the world will feel its negative repercussions.