Russia-Ukraine Conflict: Are We Done Yet?
The enormity and illustriousness of the effects of conflicts on the world economies over the years have, in no doubt, been quite substantial. Such economic and political differences have affected parties, locally and internationally, impacting both public as well as private entities. The ongoing feud between Russia and Ukraine is no different.
The thirst for dominance has not only claimed countless lives but has also sent tremors of instability across different industries, rocking financial institutions, impacting fuel prices, food availability, and other basic utilities.
The scale of impact of the disturbances resulting from this conflict differs from region to region. According to the S&P Global Ratings, there is a standing claim that the shockwave from this conflict is unlikely to impact the banking system in the United Arab Emirates (UAE) and Saudi Arabia due to their limited interaction with Russia and Ukraine however, the reliability of such an assertion cannot be fully understood till a considerable amount of time has passed.
The banks with an active rating were shown to have limited direct interaction with Russian or Ukrainian equivalents, but the potential risks that may arise from associating with countries that do have a direct relationship with these regions is yet to be explored.
Furthermore, Central Banks in the UAE, Saudi Arabia, Bahrain, and Kuwait have increased their interest rates following the increase in rates by the US Federal Reserve. Such an increase in rates may be positive and allow for growth in the lender’s income. Alternatively, such an increase in interest rates, amongst many other factors, may in actuality deter future investments into these regions which could leave financial institutions in these countries quite vulnerable and pushed to the brink of recession.
The conflict has also had an overarching effect on the tourism industry. UAE’s main source of income is from its tourism industry, which coupled with Covid-19, took a hit due to the conflict. In 2021, Dubai welcomed over 600,000 Russians into the country for tourism purposes. However, as the conflict sustains momentum, it is probable that Russians may become more and more reluctant to travel as restrictions may be set in place on international travel.
Even well-established air carriers, such as Emirates, have suspended flights to several Russian cities. Further, the inflow of Russian tourists may drop due to the fact that more Russian banks are being suspended from the SWIFT interbank messaging system which enables customers to make international purchases.
Apart from the banking and tourism industry, the conflict has effectively done its worst to disrupt the supply chain system. From an EU perspective, the European Council has imposed a series of import and export restrictions on European entities in relation to their trade with Russia. The Council has also stated that all Council regulations and decisions, as legal acts of general application, are binding on any person or entity under EU jurisdiction.
This is inclusive of any person or entity within the EU, any EU national in any location, and all companies and organizations incorporated under the law of an EU member state. Under the EU Regulation 2022/428 Article 3(h), it is also now prohibited to sell, supply, transfer, or export, directly or indirectly, luxury goods, amongst many other products, to any natural or legal person, entity, or body in Russia. This could impair the ability of European entities to freely trade and may invariably affect the revenue generated.
Given that Russia and Ukraine are major exporters of wheat, especially to many Middle Eastern countries, the prolonged disruption can cause a further impact on access to ports, storage facilities, shipping, and insurance rates. This may lead to supply and price-related issues. The effect of this war has also resulted in the soaring prices of fuel globally. Russia contributing to approximately 10% of the global oil supply was tampered with at the advent of this war and aggravated by the financial sanctions imposed by the West.
Similar to the issue with the wheat supply from these regions, transportation and storage of fuel has now become extremely difficult. This has left world leaders at an impasse – to look for immediate alternate solutions or increase the current oil prices. Increased fuel prices, food prices, and interest rates create a situation of inflationary pressure on businesses and local economies that may create going concern issues in the long run.
As history clearly reminds us, conflicts have a way of manifesting their ugly head through significant economic and social destruction, loss of countless lives, eradication of stable infrastructure, and institutions and political instability. It has a way of negatively impacting the public morale and disrupting the flow of investment into an economy and sending a country into rapid recession. The nature and persistence of the conflict will determine the intensity of the economic costs incurred and invariably affect the speed of recovery of each affected party.
Although the UAE is taking a neutral stance on this matter, the strain of this conflict is slowly but surely being felt in the region which will then raise the question of what contingency plan businesses in this country formulated to minimize the effects of this conflict on their operations in the UAE and in other countries.
Not only does this set a dangerous precedent globally, but undoubtedly, we will also need to brace for its impact in the months to come.