CSS Current Affairs | Economic Impacts of Russia-Ukraine War
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Outline
1- Introduction
2- Cursory glance at the Russia-Ukraine war
3- Potential long-term economic impacts of Russia-Ukraine war on both countries
3.1- War long-term economic impacts on Russia
- ✓Declining in the export of energy sources decrease in state revenue
- Case in point: According to the International Energy Agency, the decline in the export of energy impacts Russia’s economy, could last for several years and has the potential to decline the GDP of the country by up to 15% by 2030
- ✓Isolation from the global economy due to sanctions impacts the country’s economic growth
- Case in point: Due to Russia’s isolation from the global economy, their foreign investment declined, which directly impacts their country’s economic growth, as per the International Chamber of Commerce
- ✓ Spending more on an already overheated economic sector reduces investment in other sectors, leading towards long-term economic instability
- Case in point: According to the European Bank for Reconstruction and Development (EBRD) report, Russia’s overspending on the military increases the country’s fiscal burden, which hinders its ability to invest in other sectors that create economic instability within a country
3.2 War long-term economic impacts on Ukraine
- ✓ Decrease in foreign direct investment
- Case in point: According to the World Bank, the war has significantly declined the rate of FDI by over 50%, which is critical for Ukraine’s economic development, particularly in conflict-affected areas
- ✓ Infrastructure damage requires time and high cost
- Case in point: According to the European Union report, the war resulted in significant damage to Ukraine’s infrastructure, which reduced the economy’s rate and increased costs.
- ✓ Collapse in the tourism sector
- Case in point: The tourism sector of Ukraine lost an estimated amount of 1.5 billion euros in revenue since the war began
4- Critical Analysis
5- Conclusion
Answer to the Question
The ongoing conflict between Russia and Ukraine has shattering long-term economic impacts on both countries as well as on the world. The war has affected trade, economic growth, and investment, resulting in significant income and employment losses. Furthermore, Russia’s economy suffers due to global isolation, sanctions, and a decline in energy exports, while Ukraine’s economy suffers from infrastructure damage and a decrease in foreign direct investment (FDI). Thus, the war between the countries causes the economies of the countries to suffer the most. These lasting economic impacts on both nations result from war, which may hinder their economic development for years.
Cursory glance at the Russia-Ukraine war
The war between both countries, which starts in 2022, has some severe impacts on Russia and Ukraine; the most significant impact is on the economic level. Both countries suffered greatly from the damage that was caused by war. The ongoing conflict also fuels the already existing social and political tensions that lead towards social unrest, increased poverty and inequalities. The international community’s efforts to bring peace also do not reach its goal and remain unsuccessful, and the tension continues. As the war began, the economic situation may have become worse, and it may have long-term economic implications.
Potential long-term economic impacts of Russia-Ukraine war on both countries
3.1 War long-term economic impacts on Russia
- ✓Declining in the export of energy sources decrease in state revenue
The ongoing war between Russia and Ukraine has some far-reaching impacts on Russia’s energy export and state revenue. Moreover, it affects Russia’s economy for an extended period, decreasing European countries’ dependence on Russia’s energy sectors and reducing their reliance on Russian supplies. This, in turn, led to a substantial decrease in the state’s revenue. For example, According to the International Energy Agency, the decline in energy exports impacts Russia’s economy, which could last for several years and decline the country’s GDP by up to 15% by 2030. The report demonstrates how this situation significantly decreases the state’s revenue, mainly depending on the country’s energy sector. As a result, Russia’s economic progress has slowed, and the government may struggle to hold its position as a leading energy exporter.
- ✓Isolation from the global economy due to sanctions impacts the country’s economic growth
Russia has been facing isolation from the global economy due to the war between Russia and Ukraine, which has had devastating impacts on its foreign direct investment ( FDI), leading to a significant decline. Due to Russia’s isolation from the global economy, their foreign investment declined, directly impacting their country’s economic growth, per the International Chamber of Commerce. Because International sanctions imposed on Russia led to a decline in the FDI rate, if the situation remains the same, it will lead toward long-term isolation from the global economy. Besides this, foreign investors do not want to invest where the problem is not reliable and constant.
- ✓Spending more on an already overheated economy sector reduces investment in other sectors leading towards long-term economic instability
Furthermore, war situations alert the citizens and stakeholders; therefore, they start spending more on the defence sector, which is already an overheated sector of their economy. Ultimately, this will lead to neglect of other sectors, such as health and education. According to the European Bank for Reconstruction and Development (EBRD) report, Russia’s overspending on the military increases its fiscal burden, hindering its ability to invest in other sectors and creating economic instability. Russia prioritized its military sector in the war and neglected other areas, such as health, education, and infrastructure. Neglecting these areas affects their economy, which could lead to a long period and burden the state.
3.2. War’s long-term economic impacts on Ukraine
- ✓ Decrease in foreign direct investment
The war between Russia and Ukraine has seriously impacted FDI in Ukraine, leading to decreased FDI inflows. The war situation makes Foreign investors cautious about the country’s instability and political instability. According to the World Bank, the war has significantly declined the rate of FDI by over 50%, which is critical for Ukraine’s economic development, particularly in conflict-affected areas. This report illustrates how the war makes Ukraine less attractive to foreign investors. Additionally, infrastructure, road, and building damage has increased risks and costs for foreign investors, making it a less attractive distinction. As a result, the long-term consequences of the situation may lead the country towards economic instability, increased poverty and inequality, and reduced opportunity to achieve sustainable development.
- ✓ Infrastructure damage requires time and high cost
The destruction caused by the war has caused some far-reaching damage to Ukraine’s infrastructure, requiring significant time and resources to restructure and repair. As per the European Union report, the war resulted in considerable damage to Ukraine’s infrastructure, which reduced the country’s economic rate and increased costs. Infrastructure damage costs approximately billions of dollars, which is a burden on Ukraine’s economy and a lot of time. Destroyed infrastructure, including roads, bridges, and buildings, is in severe damage, causing trouble in carrying out essential services and economic activities, leading towards a reduction in the economic rate. All these issues have long-term consequences for Ukraine’s economy.
- ✓ Collapse in the tourism sector
The war between Russia and Ukraine resulted in the collapse of the tourism sector of Ukraine. The decrease in tourists’ arrival and state revenue may lead to the closure of the tourist industries and businesses, which results in the loss of jobs or reduces the income of those employees working in those sectors. The tourism sector of Ukraine has lost an estimated amount of 1.5 billion euros in revenue since the war began. The tourism sector of Ukraine struggles with reductions in economic growth, unemployment, increased poverty rate, and reduced investment in the industry. In addition, Ukraine’s status as a tourist country also impacted and reduced competitiveness on a global level.
Critical analysis
On a robust analysis, the war between Russia and Ukraine has had some severe impacts on the economy of both countries. On the one hand, Russia’s economy may particularly suffer for a prolonged period in terms of a decline in energy sector exports, international sanctions, and reduced access to European markets that lead towards poverty and economic stagnation for a long time. On the other hand, Ukraine’s economy faces challenges in repairing the destroyed infrastructure, which requires billions of dollars. Trade disruption leads to a decline in the state’s revenue, unemployment, and reduced competitiveness, leading towards long-term economic instability. Both countries will likely experience economic stagnation. Moreover, both nations experience a loss of human capital, brain drain, and reduced investment in other sectors, including education and health. Therefore, the international community should support and cooperate with both countries to recover from the war and minimize the further economic implications.
Conclusion
In a nutshell, these countries suffered from long-term economic impacts due to the war between both countries. Russia’s lasting impacts included global isolation, the decline in the export of the energy sector, and overspending on defence. Likewise, Ukraine’s impacts included infrastructure damage, reduced FDI, and the collapse of the tourism sector. Moreover, there is always a way forward, even in the face of adversity; in an evolving war situation, it is essential to prioritize the discussed areas to mitigate the long-term economic impact and achieve sustainable development to bring prosperity and positive change to both regions.
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