Russia’s war in Ukraine is an ongoing tragedy, destroying lives and livelihoods in Ukraine and altering economic patterns worldwide. In May 2022, we set out an initial analysis of 12 disruptions that the war could unleash. With the passage of time, it seems increasingly likely that the war, coming so soon after a global pandemic, could presage a new economic era. We have been here before: today’s shocks are reminiscent of the immediate aftermath of World War II (1944–46), the oil crisis (1971–73), and the breakup of the Soviet Union (1989–92). Each of those events changed the global landscape with the sudden release of powerful underlying forces that had been building up around a fault line over time. Each ushered in a new era.
To understand the shape of the era now unfolding, we have tracked the evolution of the war’s disruptions since May 2022. At that time, some disruptions were already well under way—notably the humanitarian crisis that followed immediately from the invasion. As we highlighted, others were less predictable but worth watching—for example, we noted that the direct impact of the war on financial systems had so far been limited, but that risks from wider ripple effects might materialize.
In this update, we look at what’s happened in the 16 months since the invasion. As recent events in Ukraine highlight, the ultimate outcome remains profoundly uncertain. However, we find five disruptions with clear effects that may endure: the humanitarian crisis, energy source diversification, defense spending increases, cyber as a stage for conflict, and corporations’ pull-back from Russia.
Three other disruptions have eased, as connections in our global system, together with cooling of demand, buffered their effects. These include spikes in prices and supply disruptions for food, metals, and minerals, which have now dissipated.
Of course, in the past year, forces beyond the war in Ukraine have also roiled the system in compounding, intertwined ways: the steady rise of interest rates, China’s lockdown and reopening, severe weather, and broader geopolitical tensions. All are contributing additional uncertainty. These forces have become the most important drivers of three more disruptions we noted in May 2022—most prominently, the burden carried by the poorest people, a splintering of tech standards, and financial-system instability.
Ongoing and persistent disruption
The war’s impact has persisted across several spheres, from the humanitarian crisis to energy market shifts. Although some of the conflict’s long-term outcomes remain unclear, these once-emerging dynamics have begun to solidify.
Resilience and recalibration
Some of the initial shocks from the invasion have leveled out. In particular, high prices in select sectors have reverted to prewar levels, while global value chains have filled production gaps.
Spikes in agriculture prices eased and supply remained steady
Soon after the invasion, prices for several agricultural commodities rose by 20 to 50 percent. But now prices have largely returned to prewar levels. That said, food inflation is still about 5 percent annually for much of the global population and could continue to run hot. Rises in the costs of inputs, such as fertilizer and labor, as well as in transport, processes, and trade do not show many signs of slowing down.
Global production of staple crops also held up in 2022, defying the worst fears. Immediately following the invasion, the UN had estimated that 30 to 40 percent of the autumn 2022 harvest in Ukraine would be at risk if farmers were unable to plant. The good news on Ukraine and Russia production can be traced in part to the Black Sea Grain Initiative of July 2022, which allowed cargo ships to load grain at three ports in Ukraine and transit the Black Sea safely. The deal was renewed several times, but its future is in doubt: on July 17, Russia announced that it was ending its participation.
That could worsen the outlook for food trade, which has become more restricted since the war as some governments have reacted to higher prices for food commodities. Active restrictions on both imports and exports now affect about 7 percent of global calories, up from zero in 2019. And while the worst-case scenario has so far been avoided, food insecurity has increased over the past 15 months. The war played a role in price fluctuations, exacerbating long-standing challenges from weather and conflicts in other regions—challenges that have been borne out recently (for example, in early July 2023 as Earth recorded several of its hottest days ever).
Prices for critical minerals and metals spiked, then returned to prewar levels
Both Ukraine and Russia are significant producers of multiple metals and mined commodities that are vital to industry and agriculture across the globe. After the invasion, the world watched with bated breath as prices for these materials spiked.
The fears proved mostly unnecessary. Prices for almost all these materials have retreated to prewar levels and are only slightly higher for the others. Part of this is due to extended lockdowns in China that tempered demand and thereby moderated price increases. Also, global trade flows adjusted; other economies increased their production to make up for decreases in output from Russia and Ukraine, while some materials continued to flow from Russia to countries that had not put in place trade restrictions. It is too soon to determine the impact of more recent sanctions on the Russian metals and mining sector.
The major exception is phosphate rock, the price of which doubled between the time of the invasion and April 2023.1 However, its price has been rising since 2020, driven by a combination of rising demand and supply disruptions (including pandemic lockdowns and adverse weather in producing regions) to which the war in Ukraine likely contributed.
Global value chains filled in production gaps across commodities
Despite all the disruptions, commodity production systems held up. But the balance of production shifted. In most commodities, Ukraine and Russia have lost share of total world production. This holds for 24 of the 32 commodities we looked at, for all of which Ukraine or Russia is a major producer. More specifically:
- In five commodities, Ukrainian and Russian production dropped, but the rest of the world compensated, and overall global output increased. We see this pattern in mined commodities such as silver, asbestos, and titanium, as well as gem-quality diamonds.
- In six commodities, the rest of the world could not close a production gap left by Ukraine and Russia. This is the category where disruptions were most keenly felt. Potash and natural gas are prime examples, as are steel and some minerals involved primarily in steelmaking (iron ore, ferrosilicon, vanadium).
- In 13 commodities, Ukrainian and Russian production increased but by less than the gain in overall world production. Among agricultural products, sunflower oil and seed meal, barley, and oats are examples. Crude oil, coal, and aluminum as well as cobalt and nickel are other examples. In such cases, Russia found buyers in new locations and largely managed to boost production in line with global increases.
By contrast, Ukraine and Russia actually gained share of global production in eight of the 32 commodities we looked at. Most notably, their production of wheat, pig iron, and palladium increased, even while world production decreased or stayed near constant.
Compounding complexities
In May 2022, we thought that the war in Ukraine might directly and unambiguously influence these areas. It hasn’t. Instead, the ongoing conflict is one of several forces that are complicating important aspects of global affairs.
Volatility, volatility, volatility
The Greek philosopher Heraclitus taught that all things are in continual flux, and change is the only constant. That certainly seems true today.
Volatility in economic outlook and performance is hitting companies hard, particularly through margin compression and slower growth. Analysts and companies have consistently revised down 2023 forecasts for 2023 earnings and revenues.
As we noted in May 2022, these disruptions are already affecting people’s lives and livelihoods with potent force and should be part of every company’s scenario planning. The past 16 months have shown that the trends set in motion by the war are far from dispositive regarding the global economy. Each will bear watching over coming months.
