Long term effects of a short term war
Long term effects of a short term war
How a war in a far away country is changing your money and its worth
Oil prices are skyrocketing, markets are volatile as ever and people are fleeing their country in just the hope to stay alive. The Russia-Ukraine fight has more consequences than what we can see, politically and in our pockets. But let’s understand why the fight is happening in the first place.
The North Atlantic Treaty Organization was started as a defensive alliance against the expansion of the Soviet Union after World War 2. But even after the Soviet collapse in 1990, NATO continued to expand. When Ukraine, lying on the border of Russia, expressed its interest in joining NATO, Russia attacked Ukraine in order to curb NATO’s influence and dominance. More so, it wants Ukraine for one more important thing - ENERGY!
Russia’s quest to capture power and rich economic resources has both immediate and far-reaching repercussions. Let’s get to know them and be prepared, hoping there’s some scope for recovery.
Oil and inflation
Nearly 40% of Europe’s energy demands are satisfied by Russia. And 30% of Russia’s GDP depends on energy. It’s a resource-rich country. But there’s a catch.
To transfer oil from Russia to Europe, Russia had built some underground gas pipes in Ukraine because Ukraine was a part of Russia then. Ukraine now earns tax and other types of duty for sustaining the pipes and allowing Russia to continue the oil supply. Recently, new gas reserves were found in the Black Sea, which forms part of Ukraine’s territory.
This is a classic example of how a big country is attacking a small one to capture its resources, i.e. war.
Due to the violence that Russia has begun, the world is cutting ties with it in all ways possible. Many European and Asian countries have pledged not to import their energy from Russia. And Ukraine is not even capable to operate as of now.
Cutting ties with them has drastically cut oil supplies and sent oil prices to the sky. An input for so many products and the number one source of energy, high oil prices undoubtedly lead to stagflation, a form of inflation caused due to supply-side issues.
Not just oil, Russia and Ukraine exported wheat enough to feed 30% of the world. Countries like Egypt import 80% of their needs from them. Even sunflower oil is majorly imported from the 2 countries.
There are tons of other stuff like precious metals, fertilizers, etc. that are imported from those countries. Imagine the effect on prices if so much supply is avoided.
Airfares, petrol, and even wheat, everything is going to get costly!
Inflation is dreaded by every government and monetary authority in the world since it is an indication of declining purchasing power. It takes ages to bring down inflation naturally, and artificial ways (government policies) of controlling inflation have unavoidable effects in the long term like declining economic interest and loss negative impact on foreign trade.
There is a ray of hope here though, read on…
Atma Nirbhar Bharat
You would be pleased to know that India is the 2nd largest producer of wheat in the world. Since India maintains a neutral stance on the war, it is open to supplying wheat and edible oil to many countries in Europe. swiftly replacing Russia and Ukraine as suppliers.
However, there is a possibility that in order to compete with the export market, domestic prices of these essentials may rise.
Russia is being removed from the international SWIFT payment system. India’s UPI technology can be leveraged here. Being accepted in countries like Nepal, Bhutan, and even Singapore, this financial payment system can slash transaction costs from 5% to 3%.
Stock Markets
Russia lost 50% of its market capitalization when a fire was declared. People have panic - sold in the past few weeks and 7.5 lakh crores of investor wealth have been wiped. Most Asian markets have succumbed to this crisis…
Such volatile times are no person’s friends, except a few talented traders who know when to ride which trade…
People fleeing Ukraine are forced to stay in shelter homes and temporary camps. Such a situation is an invite to crimes and black money, increasing the size of parallel economies. The Ukrainian government has almost lost its credibility and effectiveness.
It’s would be safer to not park your capital in the markets of war-struck countries till the situation clears.
What can you do?
First of all, start investing if you haven’t already. It’s one of the only ways to combat inflation. A bear phase would help you capture good buying prices.
And donate if you can - let’s make sure resources actually reach them: