The economic aftershocks of Russia’s invasion

After the shock and sadness of the news about Ukraine yesterday, commentators are starting to think about the potential economic impacts of the situation. Clearly, there are potential ramifications for energy prices, which followers of this blog will know I have been covering for the last six months. 

Europe gets around a third of its oil and 40% of its gas from Russia, and much of it comes via pipes that cross Ukraine. Yesterday and today wholesale gas prices have moved dramatically – the risk being that any kind of constraint of supply, either due to NATO/western sanctions or Russian retaliation, could cause prices to rise.

Investec’s analysts produced a report yesterday that suggested that the UK energy price cap could increase an additional 50% in October, meaning (theoretically) the average household could pay over £3000 per year for their energy. That figure is currently around £1300, and is predicted to rise to just under £2000 from April. The impact on larger households, or less energy efficient homes will be even greater. 

It’s also worth noting other potential impacts – not only is there the direct cost of energy to UK households, there is the knock-on of energy costs as inputs into the costs of other goods. (I blogged about this in more detail here). In addition, there’s significant export of wheat and corn from the region, and any impacts, either due to restriction of Ukrainian supply or sanction on Russian output, may have a knock on effect for food prices. Analysts yesterday were noting multi-year highs in wheat prices, with significant risk to future food inflation.

Obviously, these impacts are secondary to the awful human suffering of conflict, but they are potentially very real and damaging to an already fragile economic situation.