The Russia-Ukraine War: How Will It Impact Future Business Decisions?

What issues do business leaders need to be aware of in the unstable economic climate the Russia-Ukraine war has created? Economists Heleen Mees and Olga Pindyuk answer burning questions on supply chain disruptions, the role of China in the war, trade with Ukraine, and more, in the session, The Cost of War: How are Businesses Paying the Price?  

The Russian Oil Dilemma 

The energy landscape in the EU has become volatile as more countries announce oil embargos against Russia. Poland became the first country in the EU to commit to decreasing its dependence on Russian oil and gas by the end of the year. Lithuania followed suit and has stopped importing gas from Russia since April 1.  

In response, Russia has doubled down with President Vladimir Putin signing a decree demanding payments for gas to be made only in rubles. This has received backlash from Russia’s biggest customers, Germany and France, as previous transactions were made in dollars or euros, and are considering their backup plans if Russia decides to cut the cord completely. 

What is the likelihood of Russia cutting off its gas supplies to the EU? 

According to Pindyuk, it would not be a rational move as the Russian economy is still badly impacted by Western sanctions. However, she warns that it is not totally impossible as Russia has cut off gas supplies to the EU before in 2009. “It lasted a few weeks and was quite painful for Eastern European countries, as they have the highest consumption of Russian gas,” she says. 

A number of countries in the EU still have a high demand for Russian gas, and although there are plans to explore alternative energy sources, it will take a long time. If Russia ever decides to pull the plug on its gas supplies, Pindyuk says it will be a detrimental move. “In the long run, this would be counterproductive for the Russian economy because it would accelerate the European move towards diversification from Russian fuel. It’s not so easy for the Russians to develop all the necessary infrastructure to supply gas to alternative locations,” she says.  

Mees echoes Pindyuk’s sentiment but says there is still plenty of uncertainty regarding a total oil ban on Russian gas. “The Europeans have difficulty agreeing on a total gas and oil boycott from Russia. But I think [businesses] should really take into account the possibility of President Putin cutting gas supplies, and how irrational it would be from a Russian perspective,” she adds.  

China’s Role in the War

China has not made any big moves to support the Russian economy due to fears of secondary sanctions. In fact, several Chinese financial institutions have already discontinued deals with Russian-backed firms and restricted financing for purchases of Russian commodities. However, China is still one of Russia’s biggest allies and has not openly condemned the invasion of Ukraine. Mees talks about the possibility of China being the last resort for Russia when it comes to gas supplies, but this transition will be difficult. “China will be happy to buy Russian oil, they already trying to do transactions in Yuan. Russia will have a problem because it will take time to have the pipelines to deliver gas to China,” she explains.  

Mees also believes that China will prioritize having good trade relations with the West. She says there is much at stake for Xi Jinping politically this year as he plans to hold his position as leader of China for life. “I’m not so sure that once he has been [elected] to lead for life that trade relations with China will stay the way they are. I suggest business leaders prepare for that,” she adds.  

An Update on Ukraine’s Exports and Imports  

Ukraine supplies a substantial amount of wheat, corn, and vegetable oil to the EU. With imports coming to a halt, food prices in the EU have soared as there is difficulty procuring raw ingredients. European farmers are also feeling the pinch as prices of fertilizers have increased by 142% compared to last year.  

According to Pindyuk, Ukraine is doing what it can to salvage its economic situation. Prior to the war, more than half of its exports were exported through the Black Sea ports. Access to those ports is now completely blocked. “Ukraine is trying to find new logistics routes to transport its exports,” Pindyuk says. Not only is Ukraine’s infrastructure for exports important, but its ability to harvest crops as well. “Ukraine [recently] announced that it’s ready to do some agricultural work in regions which were affected by shelling, but it’s too early to say how successful this would be,” she adds. 

More Supply Chain Disruptions Expected 

Almost 300,000 companies in the U.S. and Europe have suppliers in Ukraine and Russia. The global supply chain has taken a turn for the worse, especially in the food production and metal industries. Geopolitical instability due to the war and existing disruptions from the pandemic are spreading supply chains thin. Companies have no choice but to rethink their supply chain strategies, find alternative suppliers, and consider reshoring operations.   

“Companies [must] reassess the importance of political risks in their decision making. In terms of their investment decisions about supply chains and locations, these political risks will feature more prominently. There will be an increased urge to assure the resilience of their supply chains as sanctions won’t be lifted anytime soon,” Pindyuk says.  

“It seems there is a new Iron Curtain being raised in Europe. The position that Xi Jinping so far has taken should give all businesses a reason to reconsider their own activities around the globe, especially in China. There may be some reshoring but I don’t think it will [happen] quickly. I think we will see businesses resorting to Europe, America, and maybe South America. If Ukraine joins the EU, it would be a wonderful place to reshore part of your activities,” Mees adds. 

Emergency Financing Needed for Ukraine 

Ukraine has shifted to a war economy and needs emergency financing as long as the war lasts. “The majority of the population still resides in the country, and the macro-financial situation at the moment is remarkably resilient. This will not last long because about half of the enterprises have stopped operating. Salaries are not being paid; credits are not being repaid. Now, practically all the banks have introduced credit repayment holidays, but the quality of their assets is deteriorating rapidly,” Pindyuk says.  

When the war ends, Ukraine could benefit from extra military aid and a Marshall fund to get the country up and running again. Mees says it is important that a recovery fund be put in place in the EU similar to the one set up during the pandemic, “which will be financed by issuing euro bonds for all the member states.”   

“In Ukraine, the GDP per capita is far below other countries that joined the EU. There’s momentum for Ukraine to eventually join the EU. If that happens, Ukraine will become an attractive place for investments,” Mees adds.  

Despite ongoing peace talks between Russia and Ukraine, the war shows no signs of ceasing. Furthermore, Russia is expected to be hit with tougher sanctions in light of recent atrocities. Only time will tell the economic toll these additional sanctions will have on businesses and consumers worldwide.