Whilst the entire planet observes the intensifying crisis in Ukraine, investors and global leaders wonder how this instability could toss the global economy.
The intensifying political crisis in Ukraine and the infiltration of Russian forces in Crimea has left global investors and leaders concerned about how the country’s instability could disturb the global economy. The Political turmoil is rooted in Ukraine’s strategic economic position, as it’s an important channel of transport between Russia and major European markets, as well as the fact that Ukraine is a large exporter of grain.
When observed in detail it is seen that in the post-Soviet Union era, Ukraine is an enfeebled and weakened economy. Now the Ukrainian government is in the dire necessity of an economic rescue hence torn between the choice of its original parent country Russia or the western powers such as the United Kingdom as it desperately need a savior.
Below are the top four reasons why the world largest economies and investors shall keep a keen eye on the escalating tensions:
- Important tie between Russia and the whole of Europe: Ukraine isn’t holding the economic status it once had but on the other hand it still hold the same geographic structure. Russia supplies about 25% of the gas needed by Europe and more than half of this gas is pumped via pipelines that are running through Ukraine. In the past once Russia had cut off the flow of those pipelines and it had caused a public outcry in the whole of Europe as gas prices rose steeply for consumers. Also the critical area of dispute of the Crimean Peninsula protrudes into the Black sea and the primary Russian Military naval bases are there.
- Ukrainian Government in debts: The Ukrainian situation wouldn’t have worsened to this level if the economy was more stable and had a better outlook; as the public and government frustration is what pushed this country to the brink of political volatility and armed conflict. Ukraine currently this year owes a debt of $13 billion and by 2015 a further $16 billion is outstanding. This is a principal factor worrying the international community due to the fact that if Ukraine can’t attain economic help in the next few months, it will be headed for default as it cant meet its own expenses. It is currently unclear who shall help rescue the Ukrainian economy as Russia froze the $15 billion bailout after key pro Russia officials were expelled. Currently the IMF Head Christine Lagarde is trying to raise the $35 billion that Ukraine says it requires to survive. But even if IMF manages to secure these funds, it shall need a stable government so that planning talks can go forward.
- Russian Sanctions: The US secretary of state has said that President Obama is bearing in mind all options on the table and this can also involve sanctions against Russia; which if undertaken by the American government will trigger European powers to press sanctions too.
This will unquestionably affect the Russian economy, as currently Russia is profoundly dependent on the international economy unlike how it wasn’t dependent a decade ago. More than half of the Russian foreign trade currently takes place with the European union, as Russia is reliant on the imports to feed its people and uphold the lifestyle of living that the Russian public is used to now. - Internationally trade will be affected: The gas supply being affected shall in no doubt affect Europe but the effect of this conflict escalating will be felt internationally as the international grain supply shall be affected. Ukraine currently stands as one of the top exporters for wheat and corn and a conflict will cause the prices to rise either due to a production halt or the higher cost to export the good due to insecurity reasons. So overall this conflict could have dire consequences on the price of gas, wheat and corn internationally.
By Sandeep Singh Ahluwalia
sahluwalia1 