How will Russia’s attack on Ukraine affect the world economy?

How will Russia’s attack on Ukraine affect the world economy?

Russia’s attack on Ukraine will have lasting and negative effects on the world economy, with especially harsh impacts on Russia for a decade or longer, lesser negative consequences on Europe for a decade, with even smaller effects on the U.S. and the rest of the global economy.

Moreover, one country that is in a tough position due to the war is Ethiopia.

The war between Russia and Ukraine is escalating and casting a shadow over the world, the  world is becoming more volatile, oil prices are skyrocketing, and Ukrainian refugees are fleeing. 

Ethiopia is no exception, and the war, which has just begun, is already having a huge economic impact on a country that relies heavily on imports and is short of foreign currency. Inflation in Ethiopia is now at its peak, and the impact of the war on the international market system could send inflation out of control and put further pressure on the country’s economy. 

Russia is the second-largest oil producer after Saudi Arabia, and soaring oil prices would be a devastating blow to Ethiopia.

Fuel accounts for 25 percent of Ethiopia’s total imports.

A large portion of which comes from Saudi Arabia. With U.S. and EU sanctions cutting off fuel pipelines from Russia to Europe, oil prices around the world will be affected. 

Even though Ethiopia does not buy directly from Russia. But fuel supplies are now limited to the Middle East, and many countries are scrambling to buy in case the war lasts longer. But until prices climb further, Ethiopia cannot afford to buy as much as other countries and keep stocks.  This will make the future even more difficult for Ethiopia, which has already been suffering from fuel shortages. 

Much of the impact of the war on Ethiopia’s trade is indirect.

And what we have learned so far does not address the transmission of effects between multiple countries and how the process can be different for each country due to different national conditions. It is difficult to see the complete chain. 

According to the National Bank of Ethiopia. Ethiopia’s imports from Ukraine amount to 12.8 percent of total imports in 2020/21. And Russia accounts for 3.8 percent of total imports. Ethiopia also buys raw materials for industrial production from these two belligerent countries. And will have to look for alternative products in the future. 

The war will also affect Ethiopia’s coffee exports.

Germany is a major importer of Ethiopian coffee, exporting 40% of its coffee to Germany each year. After processing, Germany re-exports the coffee to other countries, including Russia. Therefore, if customers stop buying due to the war, Germany may curtail coffee imports from Ethiopia. In addition, if the war spreads to Europe, Ethiopia’s flower exports will be greatly affected or even interrupted. As the foreign market’s need for coffee decreases, the world price of coffee would decrease which is bad for a coffee exporter. Terms of trade (export price/ import price) will go down which reflects a bad economic appearance to some degree. 

The construction sector, which accounts for nearly one-fifth of Ethiopia’s gross domestic product (GDP). Has been the main driver of the public investment-led development model implemented by the government over the past two decades. According to the Ethiopian Bureau of Statistics, the industry has been growing at an average rate of 11 percent per year, employing more than 5  percent of the nation’s 41 million workforces. 

Ukraine is the main country where Ethiopia imports construction materials. And is a source of raw materials to produce construction products. This war will also put a heavy yoke on the difficult Ethiopian construction industry. Over the past few years, the sector has been fraught with trials and tribulations. Due to the rising prices of imported construction materials. The shortage of raw materials will cause Ethiopia to import less. And make more bad buildings drag on longer and longer. 

On August 6, 2021, the Government of Ethiopia (GOE) decided to revise the tariff on imports. To change the current bad international trade condition. 

Russian Tanks Destroyed In Ukraine

First, the GOE aspires to impose a higher tariff on similar goods locally to make domestic producers more competitive. Imposing import tariffs as a large country, Ethiopia will gain from the tariff at the expense of foreign exporters. However, GOE may impose a reasonable import tariff considering the optimal tariff for the large country. Instead of imposing a very high one, because if the tariff is too large, the big country will still lose. 

Second, the GOE intends to support local producers who import non-localizable raw materials by imposing a lower tariff. The lower tariff will encourage the domestic producers to import more raw materials at a lower final price including tax which benefits local construction at the expense of sacrificing the revenue of the government. 

In addition, Ethiopia tries to adjust its tariff book to coordinate with the World Customs Organization. Which can help Ethiopia integrate into regional and global trading systems. 

Several Chinese-owned companies that benefit from African Growth and Opportunity Act (AGOA) duty-free exports to the U.S. have also halted or reduced production because the U.S. discontinued Ethiopia’s preferential treatment.

Some factories are negotiating with U.S. agents to share taxes. In addition, some are looking for other exporting countries, and some are already preparing to relocate their production sites. 

Ethiopia Huajian International Shoe City used to be the largest export earner for Chinese companies in Ethiopia. But also due to the epidemic, the U.S. side canceled orders. Now together with the cancellation of AGOA by the U.S. The factory has been shut down for more than a year and investors have suffered huge losses. The investors are afraid that they are simply solving the local labor surplus at the expense of corporate profits. The loss of industries would lead to unemployment and tax revenue of government reduction. 

However, Ethiopia believes that although the Russo-Ukrainian war has hurt the country, the war has also created a supply gap. Therefore, if Ethiopia could produce more agricultural products and export them, it could get more foreign exchange from the international market. But Ethiopia is severely short of food, and not to mention exports. Lastly it would be great if it could feed itself.

War in Ukraine, Russia’s Failure & Burnt Tanks with US Army Colonel & Paratrooper Ret. Dave Fivecoat

How will Russia’s attack on Ukraine affect the world economy?