The economic fallout from the war in Ukraine − Lawrence Zammit

We are now in the 16th day of Russia’s invasion of Ukraine. At dawn of February 24, Russia launched an attack on Ukraine, a European democracy of 44 million people, bombarding its cities and closing in on the capital, Kyiv. The peace that we had grown accustomed to in Europe for the last 77 years was shattered all of a sudden, bringing risks to Europe’s security and Europe’s economy, including ours.

Thinking that there would be no fallout from Russia’s invasion of Ukraine (because this is what it is, and we cannot call it by any other name) would be foolhardy and behaving worse than the proverbial ostrich digging its head in the sand.

Admittedly, Russia is a prisoner of its geography. It suffered invasion twice in a space of 140 years and the invaders nearly made it to Moscow. It, therefore, seeks to keep its borders secure by having a buffer. This is why it kept a number of countries under its hegemony between 1945 and 1989. The term ‘Iron Curtain’ may be one which many are unaware of or have forgotten. It was nothing more than a buffer made up of a number of countries on Russia’s western border.

Those countries got rid of the Russian yoke following the fall of the Berlin Wall and, in the meantime, became members of the European Union. Some of them even became members of NATO. In the early 1990s, we had the disaggregation of the Soviet Union, but Russia maintained a buffer on its western border by exercising control over Belarus and Moldova.

The southern border was left exposed and this explains the invasion of Ukraine. Even if Russia feels a prisoner of its geography, the invasion can never be justified.

Russia must have been preparing for this invasion for years, not so much militarily, but politically. Its richest people invested heavily in the Western economies. The UK woke up to the fact that its financial centre has handled billions of Russian money, a part of which (no one knows how big that part is) was just money laundering. Can it do without this money at this stage?

Malta had shied away from this Russian money and the financial regulator kept a very watchful eye over Russian financial operations. Cyprus was far less wary and today parts of the Cypriot economy are controlled by Russian money. At a European level and global level, we then had to witness the successful attempt by Russia to influence public opinion through its sponsorships of sport and cultural events.

Inflation will bite hard, while the economic recovery from the coronavirus is still a bit fragile

The football World Cup, the Winter Olympic Games, Formula 1 racing and the sponsorship of the UEFA Champions League are only the tip of the iceberg. All this was being done while Russia nibbled at some provinces belonging to other countries here and there, and the western world stayed silent as the economic risks of antagonising Russia were not worth defending the interests of these other countries.

As such, the invasion of Ukraine was the culmination of a strategy that was long term. Meanwhile, Europe ‒ and to some extent the US ‒ got to rely on fuel and natural gas produced by Russia, and Russia became a significant market for goods and services produced by European companies. Therefore, the invasion of Ukraine could have been seen by Russia as the natural next step and would have completed the process of recreating the Soviet Union by a different name.

The Russian invasion of Ukraine woke us up to the fact that we cannot take peace and security and the economic prosperity which they generated for granted. The fallout from this invasion is likely to include high inflation resulting from an increase in energy prices, shortages in the supply of certain commodities such as wheat, a reduction in demand for goods and services produced for the Russian market and loss of wealth arising from the bad performance of financial markets. There is a real risk of economic stagnation coupled with inflation.

Malta will not be immune to this fallout. Inflation, which had already become a spectre, will bite hard, while the economic recovery from the coronavirus is still a bit fragile. The increased level of indebtedness of the business sector, especially the locally owned sector, is not to be underestimated. Therefore, we need to do some contingency planning in our economic decision making in order to mitigate the impact of this fallout.