Why would a war in Ukraine impact Australia economically?

SMALL BUSINESS AND FINANCIAL LITERACY

War is expensive. Ripples from the war between Ukraine and Russia are being felt by the international community, even in locations far from the conflict zone.

The war in Ukraine continues to have economic consequences internationally and a significant impact on food supply in the affected regions and beyond. But why?

This blog centres on the war’s economic impact in Australia, namely why this war has caused the cost of some goods and commodities to rise which will directly or indirectly impact small business and their employees.

Russia and the global economy

Measured by gross domestic product (GDP), Russia is the world’s 11th largest economy. This makes Russia an important player in the global economy. The country is a major exporter of gas, oil, metal, coal and wheat. However, the supply of these commodities has been negatively impacted through the various sanctions (trading and economic restrictions) placed on Russia by other countries.

Petrol price rises in Australia

The main exports from Ukraine are usually steel, coal, fuel and petroleum products, chemicals, machinery and transport equipment, and grains such as barley, corn and wheat.

Most of Ukraine’s fuel and petroleum products were supplied to Russia. In response to other countries placing trading and other restrictions (sanctions), Russia has been using its control of large suppliers of fuel to restrict supply to the rest of the world. This is a major cause of the fuel price increases in Australia since the first quarter of 2022.

According to the Australian Competition and Consumer Commission, Russia’s invasion of Ukraine combined with no increase in crude oil production and recovering oil demand as countries relaxed COVID-19 restrictions, pushed February 2022 prices for international refined petrol and average retail petrol in Australia’s largest cities to an eight-year high. Higher fuel prices mean increased operating costs for many businesses, causing a flow-on effect in the cost of goods and commodities.

Increasing grain prices

Ukraine is known as a major agricultural producer. Its main food crops for export included wheat, corn and sunflower seeds. Other important crops were barley, oats and rye. In addition to these crops, Ukraine also exported other agricultural products, including vegetables, fruits and livestock.

However, the conflict has seriously disrupted agricultural production. Damage to roads, bridges and other infrastructure, coupled with restrictions on shipping from Ukraine, have led to global shortages of certain goods and commodities. For example, Ukraine was one of the world’s largest exporters of wheat. As a result of the war, it follows that with less wheat supply from Ukraine, the price of wheat has increased.

Rising cost of gas

When it comes to the cost of gas, there are several factors at play. One way or another, the war is creating instability in gas supply and therefore an increase in prices. Several countries are indicating they might decrease their country’s gas imports from Russia, a major supplier of gas. However, Russia might limit its gas exports as a response to sanctions (restrictions), but this is expected to be balanced with the country’s need to keep their exports going to fund the war.

Australia is a large exporter of gas and these exporters are seizing the opportunity to make good profits, so they might not be motivated to assist supply in the domestic market to keep prices down during this period.

Outlook

You can expect the supply and pricing of certain commodities to continue to be unstable for the duration of this war. It is a complicated situation, so be aware, that as we hear news of this ongoing war, we are almost all impacted in some way.

Further reading

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