Ethiopia: Commentary - the Cascading Economic Effects in Ethiopia of the Prolonged Russia-Ukraine Crisis


Addis Abeba — The enmity between Russia and Ukraine has existed since the Crimea problem. Since 1991 there has been inherent tension in Russian-Ukrainian relations because the more Ukraine asserts its sovereignty, the more Russia will question it, and vice versa. As a result, Russia invaded Ukraine on 24 February. Internationally considered an act of aggression, the invasion has triggered Europe's largest refugee crisis since World War II, with more than 4.5 million Ukrainians leaving the country and a quarter of the population displaced. Subsequently, to compel Russia to de-escalate the crisis, many sanctions have been imposed on Russia. Though these sanctions were meant to hurt Russia, they have had spill-over effects on economies worldwide, majorly through the disruption of global supply chains. The crisis has led to effects such as trade, energy supply, and commodity supply shocks. This has led to a rise in commodity, energy, and food prices, causing an increase in worldwide inflation in multiple countries.

Russia's invasion of Ukraine carries huge risks for a world economy that's yet to recover from the pandemic shock fully. For the initial time since 2014, oil prices per barrel climbed past $100 while natural gas prices in Europe jumped to as high as 62% past their previous level. On the other hand, according to The Economist, the longer-term impact will accelerate the division of the world into economic blocs. The main effects of the war are already evident in the volatility in financial and commodity markets. They will be seen in weeks and months to come in inflation aggregates, complicating the calculus of central banks already bent on tightening monetary policy. Over the last fortnight or so, as the perceived risk of invasion increased and was then confirmed, oil prices increased from $88/barrel to $98/barrel, and wheat prices increased from 759 US cents per bushel to 878 US cents per bushel. Over the same period, Europe and the U.S. stock values markets have declined by 8% and 5.7%, respectively.

A comparison of various global regions economic indicators show that the Euro has been the most affected. This is primarily due to the fact that the Euro is highly dependent on energy imports. As far as Ukraine is concerned the war has resulted in the country's economy contracting by more than 30% by the end of 2022. Russia has also suffered economic sanctions, with allies freezing $300 billion in the central bank and $30 billion worth of assets belonging to Russian elites. Ultimately the Russian economy shrank by 2.1% by the end of 2022. The war has also caused destruction, casualties and death. Statistics indicate that from February 2022 to July 2023, there have been 16,646 injuries in Ukraine and 9,369 deaths, while Russia has had about 47,000 deaths.

Even before the invasion, Africa's economic prospects were not propitious. Africa is still very exposed to the pandemic, and, according to the World Bank, per-capita income in most African countries will remain below pre-pandemic levels at least into 2023. Median inflation was reported at 5.1% year-on-year in late 2021. Africa--especially North Africa--is especially badly affected by high food prices, as food accounts for nearly 40% of the household budget in many countries. Poverty levels--measured at $1.90 a day--have increased from 34% before the pandemic to 39% according to the Africa Development Bank.

Africa's relation to the conflict between Russia and Ukraine is complicated; however, one clear thing is that as the conflict develops, it will impact the economies of the continent's countries, hurting their populations. Ethiopia is recognized to have had diplomatic relations with the Soviet Union since 1943. Since then, evolving economic, political, and power competition has strengthened the bilateral relations between the Soviet Union, now Russia, and Ethiopia. Thus, it is no doubt that the Russia/Ukraine crisis will have consequences in Ethiopia. There are three exceptional wet seasons in Ethiopia, bringing widespread floods, displacement, and a locust outbreak that was the worst in two decades and coupled with drought in the southern and southeastern parts, have devastating impacts on agriculture, rangelands, and water resources, leading to a sharp decrease in food access and availability due to concerning food production shortages, increases in staple food and water prices, and erosion of livelihoods, which in turn are driving an upsurge in food insecurity and malnutrition.

Furthermore, the drought has led to mass crop failure and livestock deaths in Ethiopia. Inflation rates and food costs have consequently skyrocketed, leading to increased displacement and soaring malnutrition rates.

With Ethiopia already having internal economic problems, the Russia/Ukraine war will negatively impact the country. The adverse economic impacts that the conflict will have on Ethiopia are hugely related to imports. Ukraine and Russia are among the leading exporters and producers of exports, including sunflower oil and wheat, among other products and commodities to Ethiopia.

Particularly to take wheat as an example; Russia accounts for 66% of wheat imports to Ethiopia. Furthermore, in 2020, Russia exported $44.2M to Ethiopia. The leading products exported from Russia and Ukraine to Ethiopia were cereals and amounted to $11.08M and $142.08M, respectively (see Figure 1). During the last 25 years the exports of Russia to Ethiopia have increased at an annualized rate of 14.4%, from $1.54M in 1995 to $44.2M in 2020. Ukraine previously supplied around 15% of wheat imports. With the war's onset Ethiopia saw a drastic increase in the prices of these commodities, among other imports from the warring countries. The crude Brent petroleum average moving price for 12 months by June 2022 was characterized by a 64% increase from its previous rate in June 2021. On the other hand, wheat and edible oil each experienced an average 48% price increase during this period. In 2020, Ethiopia imported $123 million worth of sunflower oil from Ukraine and Russia. Another important point to note is that Russia is the main exporter of nitrogen-based fertilizer. It accounts for 77% of Ethiopia's imported fertilizer. In 2020, Ethiopia imported approximately 460,000 tones of fertilizer from Russia according to the Ethiopian Ministry of Finance. Thus, a disruption in its supply and demand results in a global price surge.

Ethiopia is a developing country that is a net oil and food importer standing at 28.2% in 2021. Thus, the commodity price shocks that the war triggered have profound effects. Statistics indicate that the sectors most hit are the service, industry, and agricultural sectors. Of the three, the service was the hardest hit, followed by the agricultural and industry sectors. The fact that the service sector is the leading user of fuel through transportation explains why it is the hardest hit. This has spillover effects on the country's retail and wholesale trading sectors. Agriculture is bearing the direct brunt of the increase in fertilizer prices and indirectly through high transportation costs caused by the rise in fuel prices. The effect of the war on construction materials such as metal has had a moderate impact on the industry sector..

Consequently, countries like Ethiopia will feel the pinch of economic sanctions and trade disruption. In the short term, Ethiopia will feel the adverse economic effects of food and oil shortages and an upsurge in the price of commodities. For instance, as Fig 2 depicts, the Russia and Ukraine combined export share is 18% of Ethiopia's total imports for cereals. A disruption of this supply due to the fighting would drive up commodities prices and exacerbate food insecurity across Ethiopia. Russian and Ukraine inventories that hadn't been shipped before the conflict could increase the pressure on the already soaring prices.

If the crisis prolongs, the two countries in conflict could impose trade or export tariff restrictions on commodities they export to support their domestic needs. Nonetheless, if trade disruption happens and markets run out of stock, there's likely to be an increase in the prices of products in Ethiopia. These effects have already started to be experienced. For example, from January 2022 to June 2022, there was a 21.6% increase in petroleum prices, 22.1% in wheat and 29% increase in fertilizer.

There will be a negative impact on Ethiopia's overall Gross Domestic Product (GDP), with statistics indicating that a 7.6% fall is likely. Agriculture and the service sector are great contributors to the overall economy, which will cause the decline. Statistics suggest that in 2021 the two sectors contributed to over 72% of the country's GDP, with agriculture accounting for 32.5% and service39.6%. There has also been a look at how the Russia/Ukraine war has affected unskilled labor in Ethiopia, which accounts for 78% of the country's labor force. Due to the fact that the most affected sectors, the agricultural and services sector, account for much of the unskilled labor, by 2023, there's already a significant loss of employment estimated to be at 18%.

Russia is the world's biggest exporter of fertilizers, but its war with Ukraine has disrupted shipping and driven up prices for natural gas, a key ingredient for fertilizer manufacturing. In addition, western sanctions, including against Russian banks, could further curtail exports by constraining financing. Prices for urea fertilizer have jumped 32% since the invasion began on Feb. 24, while diammonium phosphate, or DAP, futures are up 13%. Thus, continued disruptions of fertilizer exports and production is likely to cause an increase in the cost of producing food, consequently leading to higher food prices.

The conflict will also affect transportation. With several commercial ships hit in the conflict, operators were forced to divert vessels. Russia's airspace is closed to 36 countries, with most large shipping companies, citing unpredictable operational impacts, have suspended shipments to and from Russia, but some also to Ukraine. This will, without a doubt, affect the importation of goods to Ethiopia. Though the extent to which the war will cut commodity supply is not yet well known, the fact is that it will have economic effects on Ethiopia, in which commodity supplies will either be cut or reduced. The resulting shortage of certain commodities will cause inflation to the already high cost of living that Ethiopians are experiencing.

In conclusion, The Russia/Ukraine crisis amalgamated with the drought and not ignoring the covid-19 pandemic definitely, affects the economy of Ethiopia both in the short-term & long-term. Particularly, since Ethiopia is highly reliant on imports from the two countries, including grains and fertilizer, the increased food price inflation and its management will be an acute concern for Ethiopians.

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