War in Ukraine – how could it affect the UK economy?
The UK has few direct economic links to Russia. Trade between the two is relatively small and Russia is not closely integrated into the global financial system. However, Russia’s invasion of Ukraine – and the sanctions imposed on Russia by the UK and its allies, could still have a significant impact on the UK economy. This article will outline a summary of the potential economic impact and signpost to further information.
Direct trade links
Russia accounts for 0.7% of UK exports, and 1.5% of our imports. The vast majority of our exports to Russia are vehicles and their parts, machinery and appliances. Imports from Russia to the UK were almost entirely comprised of oil and petroleum products and precious metals in 2019, the latest year for which data is both available and unaffected by the pandemic.
Russia also produces other commodities, notably metals that are essential for a range of supply chains. For example, in 2020 the country produced 43% of the world’s palladium, an essential component of catalytic converters in cars.
How might the links be disrupted?
- Logistical issues related to moving goods in and out of Russia
- Large international businesses are withdrawing from Russia
- Steep devaluation of the ruble
The combination of the above is likely to substantially reduce Russia’s trade volumes, particularly their imports. Given that direct links between the UK and Russia are very small however, the spillover effect on the UK economy is likely to be minimal.
Russia is a prominent exporter of energy, producing 17% of the world’s natural gas supply and 12% of its oil. It was the largest external supplier of gas to Europe (defined here as the EU and UK) in 2021, with pipeline deliveries accounting for 31% of total European supply. Russian liquified natural gas (LNG – natural gas that is liquified for transport without pipelines, for instance on ships) accounted for a further 4%, meaning more than a third of Europe’s gas comes from Russia.
Ukraine and Russia are both major agricultural exporters. Ukraine is the world’s second biggest exporter of grains and Russia is high up on the list for wheat exports. They also account for about 80% of sunflower oil trade.
Any disruption to flows would quickly ripple through to buyers globally, raising costs for bread and meat. Though Russia and Ukraine predominantly export these agricultural products to Africa, Asia and the Middle East the scale of the impact on global supplies could result in increasing demand from the Americas or Europe as well, raising prices there.
What impact could this have?
The economic impact of the war will depend on the extent to which the conflict, and therefore the severity of sanctions and economic disruption, escalates and how long it lasts. To read more about the variety of scenarios please follow the link below to the Institute for Government:
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