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The world economic impact of the Ukraine-Russia conflict

8 May 2022

The world economic impact of the Ukraine-Russia conflict

The war between Russia Vs Ukraine still shows no signs of abating. But what is certain is that the effects of war are starting to be felt in various countries, including Indonesia.

Why the war between the two countries can make food prices in Indonesia rise? We know the term butterly effect (butterfly effect) which was introduced by Edward Norton Lorenz.

He referred to the flapping of a butterfly’s wings in a Brazilian forest could produce a tornado in Texas. A small change in a condition at the start, but can drastically change a system in the long run.

Butterly effect also occurred in the world economic system as a result of war. Of course the war was not a small initial change. The war was a significant early change.

The deployment of a large military force was also marked by a large mobilization of funds. War takes not only human and physical toll, but also great after-war effects. Refugees, the collapse of the economic system, the trauma of war and the effects of radiation from weapons have become a burden on the economy.

We know the term global village. We as humans actually live in a global village. Humans are interconnected with one another.

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Several countries have imposed economic sanctions on Russia. Sanctions will cause the balance of supply and demand to be disrupted globally.

Those countries will not buy goods from Russia. Several companies have left their business activities from Russia. Companies will certainly leave business in Russia.

These companies must comply with the regulations of the country where they originate. In addition, these companies will also find it difficult to send their goods to Russia.

This company will experience performance disruptions with that policy. Decreased performance will result in losses for investors who have invested in these companies.

The effect of this decline in performance will vary from one company to another. A massive decline in performance will result in a decline in the composite stock index on a stock exchange.

In addition to the decline in company performance, transactions with the two countries will also be affected due to war and sanctions. Existing export and import transactions must be stopped. As a result, the supply of goods or products will decrease. On the other hand, there are certain goods that will be redundant due to reduced demand due to war.

The war between the two countries not only affects the economy and politics of the two countries, but the effects of the war also affect other countries around the war area.

Displacement, military mobilization and economic effects will disrupt the countries around the war area. We know that Poland is hosting refugees. Belarus conducts military mobilization on the border. NATO also mobilizes military forces.

We also know the effect of this war on sporting activities. Even Roman Abramovich immediately sold the Chelsea football club due to this war. In addition, how many aircraft routes and ship routes avoid passing through the disputed area. All of this has an economic cost. As a result, transaction fees become expensive.

Thus, we understand why the wars in Ukraine and Russia can lead to an increase in the price of food and clothing goods in Indonesia. We are a society living in a global village.

Disturbances in the system will have implications for the disruption of the entire existing system. This is known as systemic risk. Systemic risk is one of the risks in the financial industry. Let us not think that war in one place on this earth will not affect life on other earth.

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