Global Economic Shockwaves from Ukraine

As one of the world’s largest 25 emerging markets, with GDP of $333 billion (in PPP terms) in 2013, events in Ukraine are attracting worldwide attention.  Yet even more important in economic terms are the increasing strains between Russia and the West. The role of the two economies in commodity markets is of crucial concern.

Ukraine’s Weak Economic Performance Belies a Crucial Contribution to Global Commodities

Real GDP growth in Ukraine has been subdued since 2012 – with the economy actually contracting in 2013 – by 0.5%. This weak economic performance has been in part due to political instability and the difficult business environment:

• Ukraine’s trade linkages with Europe are central to the economy: 62% of Ukraine’s exports and 74% of its imports are to and from Europe. Trade is split roughly equally between Russia and the EU-28. Russia is the destination for 36% of its exports and origin of 32% of its imports. The EU is the destination of 25% of its exports and origin of 31% of its imports. In trade alone the tussle between east and west is therefore apparent.

• Ukraine has a crucial role in commodities globally. The agricultural sector is important - Ukraine has nearly a third of the arable land of the whole EU, and is the world’s 12^th largest producer of cereals and within this its 11^th largest producer of wheat. Prolonged unrest is likely therefore to have an impact on the price of wheat. Minerals are also crucial, Ukraine has the world’s largest supply of titanium, the third largest deposit of iron ore and 30% of the world’s manganese ore. Titanium is alloyed with steel and is widely used in the aerospace and industrial sectors; it is found in diverse products from paper to cement to plastics.

Real GDP Growth: 2008-2013

Source: Euromonitor International from national statistics/Eurostat/OECD/UN/IMF

The Russian Economy is Susceptible to External Shocks

Russia is increasingly coming under pressure for its incursion into Crimea by the UN, EU, USA and NATO. This comes at a time when President Putin has been trying to improve Russia’s image globally, and when its economy is in an already weakened state:

• The Russian economy is particularly vulnerable to external shocks – in part due to its reliance on energy exports and its trade linkages with the EU. Capital flight was high last year and this remains a key concern in 2014 – even without tensions over Ukraine. Global tensions have the potential to push Russia into recession in 2014;
• Structural reform of the economy is vital to improve growth prospects and investor confidence. The latter is not helped by the current situation, and the rouble has fallen to an all-time low at a time when economic growth is already low by emerging market standards;
• The USA has suspended trade and investment negotiations with Russia;
• Like Ukraine, Russia also plays a crucial role in commodities – energy but also wheat, metals and minerals. Russia is the world’s 5^th largest producer of iron ore for instance and its 7^th largest producer of cereals.

Cereal Production in Russia and Ukraine: 2008-2013

Source: Euromonitor International from UN Food and Agriculture Organisation, FAOSTAT

Fragile Global Economy in a Vulnerable Position

These tensions come at a time of fragile growth globally, with many advanced economies in the early stages of recovery, but still at heightened risk, and with many emerging markets already battling issues around investor confidence linked to the Fed taper. Risks therefore are global rather than restricted to Russia and Ukraine, with commodity prices of crucial concern. At the current time it seems likely that a solution will be reached, but as we have seen time and time again uncertainty is no friend of global economic growth.