Russia-Ukraine Tensions - A Sour Patch

First brothers, sharing the same heritage under the Soviet Union, but after its disintegration in the 1990s, a series of unbrotherly events have taken place between Russia and Ukraine. Soon after its independence, Ukraine surrendered its nuclear arsenal to Russia in exchange for security guarantees, a clause Russia flouted in recent times, as Russia opposes Ukraine’s intention to join the North Atlantic Treaty Organization (NATO).

Since the cold war, the schism between Russia and the West has widened, leading the former to strengthen its military capabilities. In 2014, Viktor Yanukovych, a pro-Russian Ukrainian president, rejected membership of the European Union (EU) as a sign of allegiance to Russia. This triggered a wave of protests across Ukraine, culminating in Yanukovych's ouster. Following clashes between both armies, Russia took control of Crimea and stationed military forces in Donbas. After Russia’s unlawful occupation of the Crimean Peninsula in 2014, many Ukrainians gravitated towards the West with stronger intentions to join Western alliances, such as the EU and NATO. The Minsk agreement, signed in 2015, was intended to bring the Donbas war to an end by restoring Ukraine’s control of its state border and allowing for self-government in certain Donbas areas. Even though the fighting stopped, the war was never truly over. Between 2017 and early 2020, renewed escalations resulted in an estimated 14,000 deaths and 1.5 million displaced people.

More recently, after a buildup of Russian troops along Ukraine's borders in late 2021, Russia launched a full-fledged attack on Ukraine on February 24, 2022. Putin claims it is a special military operation to protect people who have been subjected to bullying and genocide, with the goal of "demilitarizing and de-Nazifying" Ukraine. These claims, however, appear to be a cover for Putin's disregard for Ukraine’s territorial sovereignty, unlawful acknowledgment of Ukraine’s secessionist areas, and worries over Ukraine’s alignment with the West.

In response to Russia's aggression, the West imposed a series of economic sanctions aimed at crippling Russia's economy and defunding its military ambitions. Recently, some Russian banks were barred from access to the interbank messaging platform SWIFT, in order to impede financial transactions and cut Russia off from the global financial system. Furthermore, the US banned Russian oil, natural gas, and coal imports, while the EU reduced imports by two-thirds. The United States imports about 8% of its oil from Russia, while Europe imports nearly 40% of its natural gas and 25% of its oil from Russia. While this may hurt Russia even more, Americans may feel the pinch at the pump, and Europe may face further increases in heating and gas bills.

In response to the newly imposed sanctions, Russia has also stated that certain export commodities will be restricted, further complicating stressed supply chains and exacerbating global food inflation. As energy and commodity prices rise, central banks may consider delaying rate hikes to ease the squeeze on consumer wallets. On the contrary, the Chair of the Federal Reserve, Jerome Powell, has stated that he could support a 25-basis point rate hike, as inflation levels reach record highs. Nonetheless, historical evidence shows that oil prices above $120/barrel could drag the US economy into a recession. While Russia is facing sanctions from both corporates and individual countries, the Russian Ruble has depreciated, while the country’s sovereign credit rating has been downgraded to junk grade. While the Russian Central Bank attempted to salvage the situation by raising interest rates to 20%, constrained financial market access and concerted economic sanctions could pose significant challenges to the Russian economy.

Globalization has made the impact of these sanctions far-reaching. Russia, in addition to being the world's second-largest oil producer, is the world's largest supplier of wheat, accounting for nearly a quarter of total global exports, and Nigeria is not excluded from the equation. Because 94% of wheat consumed in Nigeria is imported, rising wheat prices as a result of tensions between Russia and Ukraine could have a significant impact on inflation levels and consumer wallets. Wheat remains a vital grain in Nigeria, which means that consumers may have to pay more for commonly consumed goods like flour, bread, noodles, and pasta. Nigeria also imports other agricultural commodities such as barley, maize, and fertilizers which are produced in Russia. As the cost of these imports rises, imported food inflation could be on the ascent.

A prolonged war could destabilize the global economy even more. Russia's ongoing assault on Ukraine could have far-reaching consequences at a time when inflation is already high. Ukraine, known as Europe's breadbasket, has also banned the export of key agricultural products to meet the domestic demand of a people ravaged by war. Further escalation could spur higher food inflation, degenerate into famine, and create new rounds of pressure in Sub-Saharan Africa, where food dominates the Consumer Price Index. Amid elevated food prices, high oil prices could be a double whammy at a time of rising global inflation. The Organization of Petroleum Exporting Countries (OPEC) may have to ramp up supply to taper oil prices. In the medium term, however, tensions have to be de-escalated. In this war, there may be no winners.