By Angelica Nanayakkara
The ongoing conflict in Ukraine has not only caused a humanitarian crisis but has also significantly impacted the global economy. The war’s ramifications have gone far beyond the countries involved, altering trade and affecting countries all over the world. The impact of the Ukraine war on global trade is examined in this article, with a focus on the effects on trade relations between Ukraine, its major trading partners, and Sri Lanka.
Impact on Global Trade
The Ukraine conflict has disturbed global supply chains and international trade, necessitating countries to adapt to new challenges in trade. Since February 24th, 2022, the United States, the European Union, and other Western countries have imposed a number of sanctions on Russia. These measures, which target various Russian sectors such as banking, energy, and defence, have resulted in a more complicated global trade landscape.
Further, the International Monetary Fund forecast revisions from October 2021 – October 2022 note that the volume of global trade in goods and services declined by 3.4 percent, whilst energy prices increased by about 100 percent, and the prices of non-energy commodities increased by approximately 8 percent. These fluctuations can be attributed to global supply chain disruptions, sanctions, and decreased consumer confidence. This has resulted in trade law experts working hard to navigate the shifting landscape of global trade, heightening the need to ensure countries comply with new regulations.
The Ukraine war has moreover impacted commodity prices, manufacturing and industrial production, shipping and transportation and foreign investments. One of the drastic consequences of the war has been the disruptions Ukraine faced in agricultural production, leading to a substantial rise in global food prices, thus subsequently leading to concerns over food security. The closure of key ports and shipping routes in the Black Sea region has additionally impacted shipping and transportation. Manufacturing industries have faced scarcities of raw materials and critical components, while financial markets have seen fluctuations in foreign investment and capital flows. Therefore, the combined ripple effects of the conflict have greatly influenced Ukraine and other nations in several regions to face political and economic instability.
Trade Relations with Sri Lanka
While Sri Lanka is not a direct participant in the conflict, it has experienced the ripple effects of the Ukraine war on its economy and trade relations. For instance, the conflict has exacerbated Sri Lanka’s existing economic challenges, affecting its tourism industry, trade, and energy sector. With Russia and Ukraine being significant trade partners accounting for 2 percent and 2.2 percent of its imports and exports in 2020, this situation has left Sri Lanka seeking new alternatives, increasing its reliance on neighboring countries like India.
- The effect on energy and fuel prices
The conflict has caused a surge in global energy and fuel prices, which has had a significant impact on Sri Lanka’s economy. As a country that imports the majority of its fuel, the price hike has put a strain on the country’s finances. As estimated by the Central Bank of Sri Lanka the cost of petroleum imports during January – March 2022 rose by 49.1 per cent on a year-on-year basis.
Figure 1: Monthly Average prices for Crude Oil and Natural Gas January 2018- March 2022
Source: World Economic Forum
- Global supply chain disruptions
The Ukraine conflict has disrupted global supply chains, adversely affecting Sri Lanka’s imports and exports. Russia and Ukraine have historically played a critical role in Sri Lanka’s trade, continuing to be one of the biggest wheat importers and black tea exporters. Together, they account for 18 percent of Sri Lanka’s black tea exports and 45 percent of its wheat imports. However, the conflict has caused a substantial decline in demand from Russia, a major market. Consequently, tea export revenues have dropped, negatively impacting Sri Lanka’s overall trade balance. Additionally, over half of Sri Lanka’s soybean, sunflower oil, and pea imports come from Ukraine, while both countries are significant sources of asbestos, semi-finished iron and steel products, copper cathodes, and potassium chloride for fertilisers, all of which have been significantly impacted due to the conflict.
Figure 2: Sri Lanka’s Exports and Imports from Russia and Ukraine
Source: Talking Economics, the blog of the Institute of Policy Studies of Sri Lanka (IPS)
- Impact on Sri Lanka’s tourism industry
In recent years, Russia has been a major source of tourists for Sri Lanka. Regrettably, due to the ongoing conflict and economic sanctions imposed on Russia, the purchasing power of Russian citizens has decreased, resulting in a decrease in Russian tourists visiting Sri Lanka. Further, the conflict has resulted in an increased perception of global insecurity and unrest, prompting potential tourists to postpone or cancel their travel plans. This increased sense of insecurity has had a direct impact on the tourism industry in Sri Lanka, as fewer people are willing to travel for leisure during times of geopolitical instability, thereby decreasing the country’s tourism revenue.
The Effects of the War Clearly Go Beyond the Borders of Russia and Ukraine
The Ukraine conflict has had a significant impact on global trade, necessitating changes in regulations and compliance measures. Despite not being directly involved in the conflict, Sri Lanka has felt the consequences in its economy and trade relations. Sri Lanka hopes to mitigate the negative effects of the conflict on its economy by diversifying its trading partners and adapting to the changing global trade landscape. The country’s fortitude in the face of these difficulties serves as a model for other countries dealing with the far-reaching consequences of the Ukraine war.