Russia-Ukraine: How Bad Can It Get?

July 22nd, 2014
in econ_news, syndication

There is More Involved than Energy.

Written by and 

Note: Part of this report was published previously as "The worst-case economic scenario for the Russia-Ukraine-Europe-World conflict!"

With the downing of Malaysia Airlines Flight MH17, what had been an extremely bad but somewhat localized confrontation between Russia and Ukraine, has now escalated to the point that it could very possibly morph into a broader military regional conflict that would jeopardize the flow of Russian gas to Europe!

Click on map for larger image at National Geographic.

Follow up:

The conflict is a European one (see map above from the National Geographic) but has global ramifications.

In a report out of Deutsche Bank (by way of BI), the infographic below lays out the unresolved issues in the Russia-Ukraine conflict and what the ramifications could be if they stay that way or get worse.

Click for larger infographic at Business Insider.

According to The World Bank, Russia exported energy amounting to 80% of its energy consumption in 2011. According to the U.S. EIA (Energy Information Agency) petroleum exports amounted to 7.20 million barrels per day and natural gas 6.25 billion cubic feet. Using the data published by OPEC, we estimate that Russia has about 22% of all petroleum exports for the world and about 20% of all natural gas exports. We are dealing with factors that could produce major disruptions in the global economy here.

While much of the focus is on energy from Russia, not mentioned in the Deutsche Bank assessment is the potential disruption of global food supplies. Andrew Critchlow (The Telegraph) discussed Ukraine's grain exports back in March. But Russia has also become a net grain exporter in recent years and further regional disruption (and sanctions) could impact that trade as well. The following graphs are from a report by the FAO (Food and Agriculture Organization, United Nations):



The highest year reported, 2011, Russia accounted for 14% of the world's export trade in wheat and 16% in barley. While the economic impact of grains trade could be less than for energy, these are also factors that have major economic follow-ons if the grain trade is disrupted.

Note that sanctions impacting food products would create significant food supply problems for Russia as well. Even though the country is an exporter of grains, many other foodstuffs are imported:


So, in addition to energy, foodstuffs is another area where failure to resolve this confluct could produce much economic distress and human suffering.

Bread Basket of Europe
Ukraine has long been called the "bread basket of Europe" but that is actually quite an exaggeration. Although the fertile black soil of the Ukraine has the potential to produce much more wheat, in recent years Ukraine has produced less than 4% of global wheat. In 2012 it produced 15.8 million bushels (2.3% of global production) and in the peak year of 2008 25.9 million bushels (3.8%). By comparison neighboring European Russia produced approximately twice as much wheat as Ukraine. Asiatic Russia (southern Siberia) grew a significant fraction (between 70% and 90%) of the Ukraine production as well. See here for Russia details. But all of these numbers are dwarfed by the EU which produced 19% of global wheat in 2012 and 22% in 2008. See Wikipedia for global wheat production data.

As the crisis unfolds further there are more complexities being revealed. The first and most obvious was the large amount of energy exports from Russia, upon which Europe has significant a dependance.  But there will be other trade impacts as well, not the least of which is food.


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