Russia's invasion of Ukraine is the most serious military escalation since the Second World War - with significant loss of life in the first month of the conflict and an unfolding, tragic humanitarian crisis. The range of scenarios and outcomes remains highly unpredictable, but here we draw together the current consensus on economic and business impacts in 2022 and potential longer-term policy shifts.

In summary:

  • Global GDP growth forecasts are being downgraded by c1% (to around 3.5%-4%) for 2022 - with European economies most directly exposed to economic and trade risks. The UK's growth forecast has been reduced from 6% to 3.8% in 2022.
  • Price inflation is now expected to hit 6% globally (peaking at 8-10% in some countries such as the UK) - as elevated energy and commodity prices course through the global economy. Oil prices are expected to remain above US$100/b throughout the conflict.
  • Supply chain disruption and delays in securing key materials and components will remain a challenge throughout 2022 - including acute risks for food-related exports and the supply of metals critical to industrial sectors such as automotive and aviation.
  • Potential longer-term policy shifts include: accelerated investment in clean energy and diversity of energy supplies, increased government spending on defence and fragmentation of global trade and supply chains into more regional, politically-aligned blocs.

Key issues for business will include:

  • Sanctions - ensuring compliance with western sanctions imposed on Russia-connected institutions and individuals. Our EU, Trade and Competition team's latest article provides a summary of UK and EU sanctions.
  • Supply chain management - reviewing increased supply chain risks (short term) and supply chain structures (medium-long term).
  • Managing inflationary pressures - assessing operational efficiency and cost absorption options, reviewing pricing and market positioning to pass through rising costs to customers, and careful management of wage growth expectations.
  • Financing strategy and timing- taking account of the anticipated programme of central bank interest rate rises during 2022-23 and the impact of this for (re-)financing and investment/M&A funding plans.
  • Assessing strategic risks and opportunities – with signs that the M&A frenzy of 2021 is slowing there will nonetheless remain opportunities for well-capitalised businesses to invest in strategic growth, particularly as price/valuation volatility begins to stabilise.

Emerging impacts

Low impact

Global economic stability and growth

The macro picture of global growth and post-pandemic recovery during 2022 remains - with direct reliance on Russian energy and commodity exports materially weaker outside Europe.  Nonetheless, global supply constraints and price pressures will cast a broad shadow, with the pace of global expansion reducing by c1% with 2022 growth now expected in the range of 3-4% rather than 4-5% in earlier forecasts.

Financial markets and equities

The conflict has increased volatility in equity markets, with broad-based falls in global equities in the aftermath of the invasion - though (at the time of writing) a material degree of losses have since been repaired.  At this stage, the conflict is not being viewed as a risk to global financial market stability.

Moderate impact

Inflation

Global inflation was already high – and has been amplified further.  It is now expected to exceed 6% in 2022 with nations heavily dependent on food and energy imports most directly affected. Government support packages are likely to (partly) ease cost-of-living pressures.

Supply chain disruption

Supply chains within and running across Europe will be disrupted by the effects of western sanctions, land-based transit difficulties and the reciprocal closure of airspaces preventing flights to/from Russia.

European economy

European economies are more closely linked to Ukraine and Russia exports, resulting in an estimated -1.4% hit to 2022 GDP growth in the Eurozone, roughly double the impact expected in the US economy.

High impact

Russian economy

Western sanctions have been extensive and highly co-ordinated – and are expected to result in a rapid and deep recession in Russia, with GDP falling by 10% (or more) this year.  Capital Economics assess that Russia could drop from being the 11th largest global economy to 14th by the end of 2022.

Energy prices

Europe relies on Russia for 40% of its natural gas and 25% of its oil. Political pressure to implement rapid shifts away from such energy reliance - coupled with risks that supplies may suffer further shocks from western embargoes or Russia imposing limits on supply - have led to surging oil and gas prices.

Food and commodity markets

Ukraine and Russia account for 30% of all global wheat exports - the "bread basket of the world" - as well as being key suppliers of metals such as nickel and palladium. The conflict is already starting to drive up food prices, with shortages feared during 2022, alongside concerns that limited fertiliser supplies will have a knock-on impact for future crop seasons.

Emerging risks and policy directions

Policy direction: interest rates are (still) expected to rise given persistently high inflation

Central banks including the US Fed and the Bank of England look set to stick to a programme of interest rate rises during 2022 – judging that the risks from persistently high inflation outweigh the heightened risks to economic recovery and growth.

Risk: consumer and business confidence drops - impacting spending and investment

The post-pandemic recovery was already slowing due to rising inflation, cost-of-living pressures and taxation. M&A deal-making has also slowed - down 22% year-on-year in Q1 2022 according to Refinitiv data. The Ukraine crisis will further dent confidence and potentially subdue household and corporate spending.

Risk: China supports Russia to mitigate sanctions or militarily

This currently looks unlikely - with China focused on its own economic and COVID-related challenges - but would be a serious escalation risking secondary sanctions on the Chinese economy, which is significantly more globally inter-connected than Russia.

Policy direction: energy security concerns accelerate clean energy investment

Western reliance on fossil fuels may increase in the immediate term as exposure to Russia's oil and gas supply is reduced/managed - but large-scale investment in low carbon technology (including renewed interest in nuclear) will accelerate as nations tie together energy security and Net Zero objectives.

Policy direction: surge in global defence spending and the risk of a new "arms race"

The conflict has galvanised NATO members' commitment to devote at least 2% of GDP into defence spending - including Germany announcing an additional €100 billion defence fund.

Policy direction: supply chains restructure to reflect current and future geopolitical risks

For both governments and businesses, witnessing the severe shocks being caused by global inter-dependencies in energy markets, supply chains and financial systems may cause a deeper and more structural re-think - with global trade re-shaped into more regional, politically-aligned blocs.

Risk: future fragmentation of global financial systems

Sanctions placed on Russia have included restricted access to the SWIFT global payments system and to its foreign currency reserves. China and others will be assessing whether they are at risk of similar sanctions in the future - driving "decoupling" from SWIFT and efforts to supplant the US Dollar as the dominant global reserve currency.

In summary

In this first quarter of the 21st century, businesses have been confronted by a series of significant economic and geopolitical shocks. The Global Financial Crisis, Brexit, the COVID-19 pandemic and now the invasion of Ukraine have all tested the agility of businesses to adapt in crisis moments - and raised the prospect of profound and lasting changes for global commerce.

For business leaders, the coming weeks and months will be a vital period to consider both short-term contingency planning - in the face of high uncertainty and rising costs - and to assess broader strategic risks and implications.

Above all, we hope for a rapid and peaceful resolution of the conflict. The aftershocks, however, look set to re-shape global relations, trade and investment for the long term.