Marshall's Thoughts

Political economy of the war in Ukraine

Jonathan Loke

On February 24 at 3:00 GMT, ending months of stalled negotiations with the US and EU, Russian forces advanced on the Ukrainian cities of Kyiv, Kharkiv and Kherson. The 200 deaths so far reported by President Volodymyr Zelenskyy’s government, 3 children among them, are the latest casualties in a war that has taken 13,000 lives since Russia’s annexation of Crimea in March 2014.

War is always grim and tragic, independent of the abstract political theories or cost-benefit analyses behind it. It is easy to treat violence that appears far-removed from many of our lives with an inhuman levity. One hopes that by applying the lens of political economy to this most recent war, this brief can respectfully clarify (i) its economic causes, to help make sense of the conflict; and (ii) its economic consequences, which affect us all.

President Vladimir Putin’s treatise On the Historical Unity of Russians and Ukrainians last July articulated an irredentist pretext for invasion, situating Ukraine as part of historical Russia. Less well-known is that Ukraine’s economy, referred to by the tsars as their Empire’s breadbasket, is highly resource-rich. Investment Monitor’s Sebastian Shehadi lists several:

Raw materials

  • 1st in Europe in proven recoverable reserves of uranium ores
  • 2nd in Europe and tenth place in the world in terms of titanium ore reserves
  • 2nd in Europe in mercury ore reserves
  • 3rd in Europe in shale gas reserves



  • 2nd largest explored reserves of manganese ores
  • 2nd largest iron ore reserves, 3rd largest iron exporter
  • 8th largest coal reserves
  • 2nd in Europe in installed capacity of nuclear power plants
  • 3rd in Europe in gas production, 4th largest natural gas pipeline system



  • 1st in Europe in arable land area
  • 1st in exports of sunflowers and sunflower oil
  • 3rd largest area of black soil (25% of world’s volume)
  • 4th in rye production
  • 5th in wheat exports


Placing Ukraine within Russia’s orbit would secure the latter’s access to vital commodities, and strengthen its bargaining position with European economies dependent on Ukrainian exports. In turn, Ukraine as a member of NATO or the EU would be as much an economic threat to Russian importers as it would be a military one. And unlike Iraq’s invasion of oil-rich Kuwait in 1990, the US, now a net energy exporter, faces no direct economic threat from an incursion into Ukraine that warrants retaliation. As Harvard University’s Stephen Walt observes, President Putin weighed the economic opportunities of invasion against the slim probability of a military reaction from the West, and acted.

Russia’s invasion also carries wide-ranging economic consequences.

The first is a spike in commodities prices, particularly energy. While Germany’s suspension of Nord Stream 2, a pipeline that has not yet been placed online, was largely symbolic, Russia remains Europe’s main gas supplier. Anticipation of disruptions due to military operations or sanctions caused a jump in oil prices. On February 24, Brent oil surged to 100 USD a barrel for the first time since 2014 and European gas prices jumped by 30%. A European Central Bank simulation exercise estimated a 10 per cent shortage in gas could knock 0.7 per cent off eurozone GDP, with the effects most pronounced among countries with large gas and electricity sectors and industries most dependent on gas. These effects are not uniform across the eurozone either: Portugal, Austria and Slovakia all would expect a fall in gross value added of 1.0%, while Netherlands and Luxembourg would expect a less severe 0.4% drop. Conflicting economic interests suggest a coordinated EU response to Russian escalation would be challenging. And it is impossible to estimate the extent to which tit-for-tat sanctions will affect the global economy.

Russia is also a large exporter of nickel, used in lithium-ion batteries, and palladium, found in catalytic converters, both vital in automobile manufacturing. This will further exacerbate increases in car prices due to global chip shortages: in jurisdictions like the UK, 1 in 5 nearly-new cars already sell at more than their brand-new equivalents.

Ukraine’s large volume of commodities exports are also likely to be temporarily disrupted by war. For instance, disruptions to trade in wheat and corn may also lead to a scramble for alternative suppliers in the Middle East and Africa, which receive 40% of Ukrainian grain exports.

A second related phenomenon is even higher inflation persistence amid a more uncertain investment environment. The Centre for Economics and Business Research notes that inflation in major Western economies could hit close to 10%. This exacerbates already high inflation due to persistent supply-chain disruptions, demand recovery as governments revert to the pre-pandemic normal, and a slow response by the Federal Reserve to higher prices. Cambridge’s own Mohamed A. El-Erian argues that a decade of easy money has made financial markets particularly vulnerable to current market volatility. He provides 3 reasons: higher risk appetite due to years of predictable injections of liquidity; exposure of a more diverse crowd of asset-holders, particularly members of the working and middle-class; and a shift of safer assets to central bank balance sheets under quantitative easing, which limits investors’ ability to insure against their higher-risk investments. Central banks now face the difficult decision of raising interest rates to manage higher inflation without damaging already shaky business confidence.

A third is a further fragmentation of commerce into Sino-Russian and Euro-American spheres. Since its invasion of Crimea, Russia has reduced its share of invoices denominated in USD, building up alternative foreign-exchange reserves. In particular, Russia has worked to insulate its trade and capital flows with China. Only 33% of payments from China to Russia now take place in dollars, and down from 97% in 2014. Even the impact of a ban for major Russian banks like Sberbank and VTB from Swift, a secure messaging service used for processing cross-border payments, may be limited. Russian firms could route payments through countries like China, using alternatives like Cips. And this move could accelerate a shift away from USD as a reserve currency to the yuan or cryptocurrencies, which would undermine the purchasing power of the US consumer and increase the real value of USD-denominated debt.

Behind the clear human suffering and naked political objectives of war, economic considerations do animate the Russian invasion of Ukraine, and the world’s response to it.

This week's thought was by Jonathan Loke

Jonathan Loke is a second year economics undergraduate at the University of Cambridge.

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