Ideas & Debate

Ukrainian crisis adding to global economic woes

Smoke rises from a Russian tank in UKraine

Smoke rises from a Russian tank destroyed by the Ukrainian forces on a roadside in Lugansk region on February 26, 2022. PHOTO | AFP

The Russian/Ukrainian war is now in its third month, and it continues to impact many nations in numerous fronts- energy security, food security, climate change mitigation, and even geopolitics.

It is worth noting that when Russia invaded Ukraine on February 24, this year, the world was already struggling with high prices of goods including energy and food, as the world struggled to reestablish supply chains interrupted by two years of Covid pandemic.

When the Ukrainian war started, oil prices were already above $100 and food prices were on the rise. The war has specifically disrupted huge supplies of grains and cooking oil seeds from the vast farmlands of Ukraine and Russia, making global food crisis more pronounced.

Indeed, the Ukrainian crisis has recently become a credible scapegoat for numerous economic problems emerging around the world.

This is how the Ukrainian crisis is impacting global oil and gas supply chains: The war has forced Europe to remodel its energy supply and use strategies so as to cut European Union demands of Russian gas by two thirds by the end of this year and completely by the end of this decade.

In respect of oil, Europe plans to stop imports from Russia in the next couple of years, having already stopped coal imports.

These changes are motivated by Europe’s need to reduce real risks of Russia using oil and gas exports as political weapons.

Indeed, last week Russia cut supplies of gas to Poland and Bulgaria in an attempt to enforce payments of gas imports in Russian rubles, an attempt by Russia to hit back on EU in respect of economic sanctions imposed on Russia by the West.

From a climate change mitigation viewpoint, the Russian/Ukrainian crisis has become a blessing in disguise as Europe accelerates its energy transition plans to renewable energy (wind, solar, nuclear) to replace fossil fuel imports from Russia.

There is of course an associated climate debit as some European countries increase use of local coal to replace gas from Russia.

In respect of global energy security (availability and affordability) the Russian/Ukrainian war has become one of several global factors that are keeping oil prices just above $100 per barrel.

The other factor forcing prices down is the ongoing Covid pandemic shutdowns in China which have reduced oil demands and pressure on prices.

As Western countries shun Russian oil there are countries in the East which are increasing imports of heavily discounted Russian oil.

Essentially these countries are lifting less Middle East oil , which in turn becomes available to European countries that have opted to boycott Russian oil. A balancing logistics game that may be balancing overall global oil availability and steadying prices just above $100.

Piped gas supplies from Russia are less flexible than oil to replace with supplies from alternative sources. Infrastructure investments have already commenced to increase capacity for LNG (liquefied natural gas) receiving facilities in Europe.

USA is lumping up LNG supplies to Europe and has become the largest beneficiary of the ongoing Russian gas boycott by Europe.

In response to Russian invasion of Ukraine, major western oil companies (Exxon, Shell, BP, Total Energies) are withdrawing their capital from Russian oil and gas industry, a development with significant implications on future Russian standing as a major global oil and gas producer.

This is also another climate change mitigation plus as global fossil fuels production will reduce. Unless of course there is equivalent replacement production capital from China.

Perhaps the most sinister consequence of the ongoing Russia/Ukrainian crisis is the return of polarised geopolitical alliances, with loyalties to either the West (USA and Europe) or East (Russia and China), which signifies a return of “cold war” geopolitical model.

This can be divisive and damaging to economic globalisation which has facilitated global trade and investments over the last three decades. If new geopolitical animosities emerge and persist, maintaining neutrality by various nations will become difficulty diplomacy.

Like the rest of the world, Kenya is already walking a difficult economic terrain with high oil, food, and medicine prices especially with a depreciating shilling and a scarce dollar.

The government will certainly need to craft effective solutions which may entail reducing taxes on selected items including petroleum fuels. This may contravene IMF conditionalities, but it is essential to protect the economy and reduce stress on Kenyan households.