TRADE, INVESTMENT AND COMPETITIVENESS TRADE, INVESTMENT AND COMPETITIVENESS EQUITABLE GROWTH, FINANCE & INSTITUTIONS INSIGHT The Impact of the War in Ukraine on Global Trade and Investment Edited by Michele Ruta 1818 H Street NW Washington DC 20433 Telephone: 202-473-1000 Internet: www.worldbank.org This work is a product of the staff of The World Bank with external contributions. The findings, interpretations, and conclusions expressed in this work do not necessarily reflect the views of The World Bank, its Board of Executive Directors, or the governments they represent. The World Bank does not guarantee the accuracy, completeness, or currency of the data included in this work and does not assume responsibility for any errors, omissions, or discrepancies in the information, or liability with respect to the use of or failure to use the information, methods, processes, or conclusions set forth. 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Cover photo: TiborCarPhoto / iStock >>> Contents Acknowledgements 4 About the authors 5 Executive Summary 6 M. Ruta 1. Effects on trade and income of developing countries 11 M. Chepeliev, M. Maliszewska and M S E Pereira 2. Effects on Food Trade 27 M. Ruta, N. Rocha and A. Espitia 3. Effects on Global Logistics and Connectivity 39 J F. Arvis, C. Rastogi and D. Saslavsky 4. Effects on Ukraine’s key (non-food) exports and specific GVC 44 J-C Maur 5. The Effects of Russia’s global value-chain participation 57 D. Winkler, L. Wuester and D. Knight 6. Effects on Global FDI 70 Y. Liu 7. Effects on Global Tourism 75 A. Pio, A. Beath and R C. Kuo 8. Long term effects of the war in Ukraine on global value chains 80 M. Ruta >>> Acknowledgments This study has been produced by a team coordinated by Michele Ruta (Lead Economist, ETIRI). Individual chapters were authored by Jean François Arvis (Senior Economist, ETIRI), Andrew Beath (Senior Economist, ETIMT), Alvaro Espitia (Consultant, ETIRI), Maksym Chepeliev (Research Economist Center for Global Trade Analysis, Purdue University), David Knight (Lead Economist, EECM1), Ryan Chia Kuo (Young Professional, ETIMT), Yan Liu (Economist, ETIIC), Maryla Maliszewska (Senior Economist, ETIRI), Jean Christophe Maur (Senior Economist, ETIRI), Maria Seara E Pereira (Consultant, ETIRI), Alex Pio (Extended Term Consultant, ETIMT), Cordula Rastogi (Senior Economist, ETIRI), Nadia Rocha (Senior Economist, ETIRI), Michele Ruta (Lead Economist, ETIRI), Daniel Saslavsky (Senior Economist, ETIRI), Deborah Winkler (Senior Consultant, ETIRI), Lucie Wuester (Consultant, ETIRI). This report is an output of Trade, Investment and Competitiveness department. Mona Haddad (Director; TIC), Asya Akhlaque (Practice Manager, ETIIC), Martha Licetti (Practice Manager, ETIMT), Antonio Nucifora (Practice Manager, ETIRI) provided guidance and supervision. The study also benefited from the comments of Jasmin Chakeri (Practice Manager, EECM2), Ana Fernandes (Lead Economist, DECTI), Madhur Gautam (Lead Economist, SAGGL), Sandeep Mahajan (Practice Manager, EECM1), Aaditya Mattoo (Chief Economist, EAP), Lalita Moorty (Regional Director, EECDR), Ilias Skamnelos (Practice Manager, EECF1), Daria Taglioni (Research Manager, DECTI), Dominique van der Mensbrugghe (Research Professor and Director, Center for Global Trade Analysis, Purdue University). Alvaro Espitia (Consultant, ETIRI) helped coordinating the revision process. Bruna Sofia Simoes developed the cover and interior design. Chris Wellisz edited the text. Nathalie David (Knowledge Management Analyst, EFIOS) managed the publishing process. The team also thanks Aidara Janulaityte and Victoria Fofanah in Washington, D.C., for their assistance in preparing this report and for their support of the project. >>> About the authors The editor Michele Ruta is Lead Economist at the World Bank where he works on trade and regional integration. He holds a PhD in economics from Columbia University and had previous appointments at the International Monetary Fund, the World Trade Organization and the European University Institute. His research has appeared, among others, in the Journal of International Economics, the Journal of Development Economics, and the Journal of Public Economics. His books and edited volumes include The Economics of Deep Trade Agreements and Belt and Road Economics. Chapters’ authors Jean François Arvis (Senior Economist, ETIRI) Andrew Beath (Senior Economist, ETIMT) Alvaro Espitia (Consultant, ETIRI) Maksym Chepeliev (Research Economist Center for Global Trade Analysis, Purdue University) David Knight (Lead Economist, EECM1) Ryan Chia Kuo (Young Professional, ETIMT) Yan Liu (Economist, ETIIC) Maryla Maliszewska (Senior Economist, ETIRI) Jean Christophe Maur (Senior Economist, ETIRI) Maria Seara E Pereira (Consultant, ETIRI) Alex Pio (Extended Term Consultant, ETIMT) Cordula Rastogi (Senior Economist, ETIRI) Nadia Rocha (Senior Economist, ETIRI) Michele Ruta (Lead Economist, ETIRI) Daniel Saslavsky (Senior Economist, ETIRI) Deborah Winkler (Senior Consultant, ETIRI) Lucie Wuester (Consultant, ETIRI). >>> Executive Summary The war in Ukraine is an immense human tragedy for the people of Ukraine, but its economic implications are global. This instant report focuses on the direct impact of the war on world trade and investment. Key questions addressed in this study are: How will trade and welfare, especially of developing countries, be affected in the short run? Which sectors are being most disrupted? What are the implications for logistics networks, FDI, and global value chains (GVCs)? The war comes at a difficult moment for the world economy. The recovery from the pandemic-induced recession is decelerating because of continued COVID-19 flareups and diminished policy support (World Bank, 2022). Inflation is increasing in many countries, and large economies are increasing interest rates to reign it in. Disruptions in world trade and investment will curb growth in developing countries and add to price pressures, especially if governments impose trade restrictions to shield their economies. This report identifies five direct trade and investment channels through which countries will be affected by the war in Ukraine. These encompass disruptions to: (i) commodity markets (especially food and energy), (ii) logistic networks, (iii) supply chains, (iv) foreign direct investment, (v) specific sectors. From a development perspective, it is crucial to understand how these various factors play out and how they affect individual economies. Trade in food and energy are feeling the most immediate impact of the war. Russia and Ukraine rank among the top seven global producers and exporters of wheat, corn, barley, sunflower seeds, and sunflower oil. Russia is also a major supplier of fossil fuels, such as crude oil and natural gas, in addition to fertilizer and agricultural commodities. Disruptions of these supplies are fueling a surge in prices, with negative consequences for global trade and welfare and asymmetric effects on exporting and importing countries. Exporters gain from higher commodity prices and increase production and shipments, replacing part of the decrease in exports from Ukraine and Russia. Importers are hurt twice: They both consume these commodities and use them as inputs to produce other goods and services for export. A Computable General Equilibrium (CGE) model quantifies these effects on trade and welfare. Global income drops by 0.7 percent, with low-income countries losing 1 percent, driven by a contraction in global exports (Figure 0.1). Manufacturing exporters such as Vietnam, Thailand, and Mexico see a sharp decline, especially in energy intensive sectors. Net exporters of crops, such as Turkey, Brazil, and India, and of fossil fuels, such as Nigeria and countries in the Middle East, see a surge in their exports, attenuating the negative effects of the war. THE IMPACT OF THE WAR IN UKRAINE ON GLOBAL TRADE AND INVESTMENT <<< 6 > > > FIGURE 0.1(a): Change in real income in selected countries and regions 2.5% Large energy and agricultural 2.0% exporters could gain 1.5% Net energy and agricultural importers are the most 1.0% vulnerable 0.5% 0.0% -0.5% -1.0% -1.5% co Co e y C a b il Th p e u t in a d ld Ni A st AP es a R st N A es st e ria st ico e s - in ia st am M A Eu e Vi p. Co tr ies Ar a z r ic an r n om SS EC LA ite SA or d Re at rk ro tri Re e x In So Ch Re f E Re M E Re etn Br Af W ail Re g m Tu m un un St c of of of Un o f o h d f to g h te e s e hi t, Re yp of Hi nco W Eg st In I Re gh w Lo > > > FIGURE 0.1(b): Change in exports relative to reference year as a share of real GDP in the reference year 1.5% 1.0% 0.5% 0.0% -0.5% -1.0% -1.5% -2.0% Th m a in s es xic o t o ia na A A s AC M il to d ou s a SA AP e R es nite ope p. to y ou d ig tat e rie di az rie ric m es rke n EN l So f EC r or na SA Re e hi R aila In fS fE co fL nt Br nt Af ig W ur e Tu C et es f M S y p of R ab N to E Vi h d h- ut to Eg est rn C Ar In e C es es te es e R R R R t, fh m Lo com U co to W In h w R ig H Agriculture Natural Resources EITE non-EITE Services Total Note: ENVISAGE simulations. See chapter 1. THE IMPACT OF THE WAR IN UKRAINE ON GLOBAL TRADE AND INVESTMENT <<< 7 Trade-policy interventions risk further destabilizing food increase demand. Since the beginning of the war, 53 new markets. Ukraine and Russia together represent roughly a trade policies (67 including subsidies) have been imposed quarter of global wheat exports. For corn and fertilizers, their or announced. Export restrictions such as outright bans or combined pre-war share was almost 15 percent. Disruptions licensing requirements account for 31 new measures. Export to supplies of these key commodities are causing prices restrictions alone have added seven percentage points to the to surge. The price of wheat, for example, has jumped by price of wheat and risk igniting a tit-for-tat escalation that could more than 40 percent since the beginning of the war in late trigger a food crisis. Higher food costs take the biggest toll on February (with futures prices rising by more than 60 percent). net importers—largely low and low-middle income countries Trade-policy interventions risk making a bad situation in Sub-Saharan Africa (Botswana, Zimbabwe) and the Middle worse (Figure 0.2). Export restrictions further reduce global East (Algeria, Tunisia)—deepening world poverty. supply, while import liberalization measures and subsidies > > > FIGURE 0.2: International wheat prices and trade policy measures 180 36 Russia invades Ukraine 160 30 Price Index, Jan 2022=100 N. of trade policies 140 24 120 18 100 12 80 6 60 0 Feb-03-2022 Feb-06-2022 Feb-09-2022 Feb-12-2022 Feb-15-2022 Feb-18-2022 Feb-21-2022 Feb-24-2022 Feb-27-2022 Jan-01-2022 Jan-04-2022 Jan-07-2022 Jan-10-2022 Jan-13-2022 Jan-16-2022 Jan-19-2022 Jan-22-2022 Jan-25-2022 Jan-28-2022 Jan-31-2022 Ma r-02 -2 022 Ma r-05 -2 022 Ma r-08 -2 022 Ma r-11 -2 022 Ma r-14 -2 022 Ma r-17 -2 022 Ma r-20 -2 022 Ma r-23 -2 022 Wheat Trade Measures Source: Chapter 2. The war and resulting sanctions have disrupted Russian and East Asia. Rail transit through Russia may be slowed and Ukrainian trade connectivity affecting the logistics of by additional procedures to check for sanctions compliance, the broader region. Russia’s connections to European ports and further rounds of sanctions could risk bringing it to a halt have been cut, and commodity exports to other destinations entirely. The role of rail routes in the movement of mechanical, have been constrained. Ukraine’s Black Sea ports have been electronics, automotive, and other goods between Europe and blockaded or occupied, leaving the country few routes for Asia (mainly China) is relatively small but has been growing its commodity exports. The war brought reciprocal closures in response to maritime shipping disruptions during the of air space between Russia and 36 countries, resulting in pandemic. Disruptions to global and regional supply chains longer routes and higher prices for air freight between Europe have caused input shortages and price hikes. THE IMPACT OF THE WAR IN UKRAINE ON GLOBAL TRADE AND INVESTMENT <<< 8 ● Sectors critically dependent on inputs from Ukraine ● Russia stands out as a supplier of primary and intermediate include steel (iron ores, ferro silico manganese, and pig goods and services for other countries’ exports at an early iron), heavy manufacturing (flat and rolled steel products), stage of production. Transport equipment, machinery, semiconductors (neon gas), cars (ignition cables), and electronics, and agribusiness are especially reliant on software. European markets are the most vulnerable, imports of Russian metals, chemicals, fertilizers, and other with Moldova being the most dependent on imports commodities (Figure 0.3). Supply chain production hubs from Ukraine. Within the European Union, Poland and in China, Germany, and the United States are among the Czech Republic are most exposed to imports from Russia’s largest trade partners, both as importers of Ukraine. Elsewhere, Turkey, Arab Gulf countries, Ethiopia, Russian commodities and as exporters of goods produced and Nigeria rely on Ukraine as a key supplier for some via GVCs. The largest effects of trade disruptions would be products, but overall, the exposure of non-European felt by members of the Eurasian Economic Union (Armenia, markets appears limited. Belarus, Kazakhstan, and Kyrgyzstan) and other members of the Commonwealth of Independent States. > > > FIGURE 0.3: Russia as a seller, key sectors and products, and implications for supply chain partners Russia as a seller Key Global / Regional Largest direct Most dependent Sector Key Products Value Chains partners partners CHN, DEU, NDL, MNG, BLR, SVK, Crude oil Many POL, BLR EST, KAZ Petroleum USA, TUR, DEU, MNG, KAZ, KGZ, Fuels Many products GBR, KOR BLR, TJK ITA, JPN, BLR, BLR, SVK, EST, Natural Gas Many SVK, CZE LVA, SRB Transp. equipment USA, JPN, DEU, CAN, JPN, USA, Palladium (catalytic converters) CHN, ITA ITA, KOR Transport equipment, TUR, USA, BLR, KAZ, BLR, KGZ, Iron and steel machinery ITA, BEL AZE, UZB Metals Copper, Electronics, trans. CHN, DEU, TUR, BLR, KAZ, ARM, aluminum equip, machinery JPN, USA UZB, AZE Metal (alloying), auto CHN, FIN, DEU, FIN, BLR, UKR, Nickel (batteries), electronic NLD, USA LVA, MDA BRA, USA, CHN, MNG, BLR, AZE, Chemicals Fertilizers Agribusiness IND, MEX KAZ, MDA Cell phones, BLR, KAZ, AZE, BLR, ARM, GEO, Electronics Electronics receivers, etc. CHN, GEO TJK, KAZ Metal, auto Transport equipment, CHN, FIN, DEU, FIN, BLR, UKR, Transport Equipment parts machinery NLD, USA LVA, MDA Transport, Business services, DEU, NLD, JPN, LIT, LVA, EST, Services business serv. agribus., transport AUT, USA, FIN SLV, FIN Source: Chapter 4. The war is expected to curb FDI in neighboring countries a contraction in their existing stock, an increase in capital and in the energy sector. Armenia, Moldova, and the Kyrgyz outflows, and losses on their outward FDI in Russia. European Republic —where more than 20 percent of inward FDI is countries including Finland, Germany, and Norway have large from Russia —could suffer from shrinking inflows of FDI and investments in Russia’s energy sector, and Europe is highly THE IMPACT OF THE WAR IN UKRAINE ON GLOBAL TRADE AND INVESTMENT <<< 9 1 dependent on Russian oil and gas. The war’s direct impact on effects could prove more profound and far-reaching as elevated global FDI is likely to be muted because Russia and Ukraine uncertainty and geopolitical risks damp investor confidence. play a limited role in global FDI networks (Figure 0.4). Indirect > > > FIGURE 0.4: Russia and Ukraine in global FDI networks Source: Chapter 5. Tourism in developing countries will be hurt. Russia and respond to the changing geopolitical environment. As Ukraine account for a large number of tourists in developing several observers have noted (see, among others, Posen, countries (ranked 6th and 38th globally in tourism expenditure). 2022), the risk of a fragmented world trade and investment Countries including Georgia, Moldova, Montenegro, and system has suddenly increased, and with it a reversal of Turkey are highly dependent on tourists from Russia and globalization, which has been the engine of economic growth Ukraine. The effects will also be felt outside the region. and development in the last 30 years. Firms will respond to Countries that attracted large shares of tourists from Russia the shock by re-assessing security-related risks, possibly and Ukraine during the pandemic include Egypt, Tunisia, leading to changes in the structure of GVCs as firms move Thailand, Cuba, the Maldives, and Tanzania. A decline in production away from countries they see as riskier. But given global tourism will at least temporarily stall the industry’s post- the capital in place, the cost of searching for alternatives, pandemic recovery, as scheduled flights are disrupted and and factors such as wage differentials across countries, this consumers await more certainty before booking. process is likely to be gradual rather than sudden and affect different sectors and products differently. It will not result in a The war’s long-term implications for global trade and reversal of globalization, unless it is supported by pronounced investment will largely depend on how governments government intervention. References Giordani, P.E., N. Rocha, M. Ruta (2016). Food prices and the multiplier effect of trade policy. Vol. 101, 102-122, Journal of International Economics. Posen, A. (2022). The End of Globalization? What Russia’s War in Ukraine Means for the World Economy. Foreign Affairs, March 17, 2022. World Bank (2022). Global Economic Prospects: Slowing Growth, Rising Risks. World Bank, Washington DC, January 2022. THE IMPACT OF THE WAR IN UKRAINE ON GLOBAL TRADE AND INVESTMENT <<< 10 1. >>> Effects on trade and income of developing countries1 Introduction Many countries are suffering serious economic consequences as a result of the Russian invasion of Ukraine. Ukraine and Russia are major exporters of agricultural commodities and fossil fuels, and disruptions to supplies of these commodities and associated price spikes are already being felt across the globe. As the Black Sea region is a large exporter of fertilizers, the resulting shortages and price increases could translate into lower crop yields in many regions. This in turn could lead to food prices reaching new highs.2 The Russian invasion has prompted an unprecedented reaction by the United States, the European Union, and other high-income economies, in the form of sanctions. These range from sanctions targeting Russian individuals and enterprises, to bans on Russian energy imports and restrictions on exports of select electronics to Russia, such as semiconductors.3 Countries that have a high dependence on tourists from Russia and Ukraine, such as Georgia, Moldova, and the Maldives, will see significant declines in exports of tourism and accommodation services.4 The negative impact of the conflict will also be visible in other areas of the global economy through increases in transportation costs 5, or the loss of remittances in countries that are heavily dependent on inflows6 from Russia, such as Tajikistan and the Kyrgyz Republic. Russia itself has imposed several restrictions, including bans on exports of wheat and other food products outside of Eurasian Economic Union, and a ban on exports of electronics, motor vehicle parts and transport equipment. The likely duration of the sanctions is hard to assess. Stylized simulations are applied to analyze the effects of the war on trade flows of developing countries. The state-of-the-art economic model is applied to take into account longer-term supply constraints on agricultural and energy commodities in the Black Sea region, as well as rising fertilizer costs and select trade restrictions. Future work should aim to expand the analysis to cover other channels through which the war is affecting other countries, such as financial sanctions, changes in tourism, remittances, and inflows of refugees. 1. Prepared by Maksym Chepeliev, Maryla Maliszewska, Maria Seara E. Pereira with inputs from Mike Nyawo and Israel Osorio-Rodarte. We are grateful to Aaditya Mattoo, Michele Ruta and Dominique van der Mensbrugghe for their comments and suggestions. Cleared by Antonio Nucifora (Manager, ETIRI) and Mona Haddad (Director, TIC). 2. See FAO (2022) report for more information on the impact on yields. 3. For more details see: https://www.piie.com/blogs/realtime-economic-issues-watch/russias-war-ukraine-sanctions-timeline 4. 4. See Chapter 7. 5. See Chapter 5. 6. See Chapter 6. THE IMPACT OF THE WAR IN UKRAINE ON GLOBAL TRADE AND INVESTMENT <<< 11 The importance of the Black Sea soybean producer, buys about half of its potash fertilizers from these two countries. Most of Brazil’s soybeans are sold region in global trade in crops, to China, which uses much of the crop to feed livestock. As energy, and fertilizer a result, a disruption in fertilizer supplies might affect meat prices in China and around the world. The EU has already Countries in the Black Sea region have become key global banned all imports of potash from Belarus as of March 4th7. providers of grains, oilseeds, and vegetable oils over the last three decades. Russia and Ukraine rank among the top Russia is a major producer and supplier of fossil fuels, seven global producers and exporters of wheat, corn, barley, such as crude oil and natural gas, in addition to fertilizer sunflower seeds, and sunflower oil. Most of these products are and agricultural commodities. In 2019, Russia accounted shipped to North Africa and the Middle East, as well as Europe for 14 percent of global exports of coal briquettes and 13 and China (corn from Ukraine). Ukraine is also a major supplier percent of crude petroleum (the second biggest exporter of of sunflower oil, accounting for over half of global production. In this commodity). Russia is also a major exporter of refined 2019 Russia and Ukraine accounted for a combined 25 percent petroleum products and natural gas, accounting for respectively of global exports of wheat and 14 percent of exports of corn (UN 10 and 9 percent of global exports (Figure 1.1).7 Petroleum is Comtrade, 2022). vital for transportation, and gasoline prices have already risen significantly around the world. At the same time, natural gas Aside from the direct impact on agricultural production accounts for over half the cost of producing ammonia fertilizer, and exports, the war is affecting fertilizer trade. Russia and compounding the impact on fertilizer prices. Belarus, are the world’s second and third-largest producers of potash fertilizer, respectively. Brazil, the world’s largest > > > FIGURE 1.1: Ukraine’s and Russia’s share of global trade, 2019 Petroleum gas Petroleum Energy Cru de Petroleum Coal briquettes Fertilizer Agricultural goods Corn Wh eat 0 5 10 15 20 25 30 Russia Ukraine Source: UN Comtrade, 2022 7. https://www.euractiv.com/section/agriculture-food/news/eu-sanctions-on-belarus-target-key-fertiliser-amid-rising-input-prices/ 8. Annex 1 provides top the 10 countries relying on commodity imports from Russia and Ukraine as a share of total domestic consumption in a given sector (Figures 8a-8g). THE IMPACT OF THE WAR IN UKRAINE ON GLOBAL TRADE AND INVESTMENT <<< 12 Several developing countries rely heavily on imports of World Bank (WB) regions, both net exporters and net wheat from Russia and Ukraine (Annex 1, Figure 8a-h).9 importers of crops and energy, to illustrate the potential effects Such imports constitute a large share of domestic consumption of the shocks caused by the war. CGE simulations come in countries across all regions. Nicaragua imports 86 percent with caveats discussed in the Box 7.1 and should be treated of the wheat it consumes from the Black Sea Region, in Sub- as illustrative scenarios on how the shocks are transmitted Saharan Africa, the most heavily dependent on imports from across countries and sectors, not as projections. The stylized the region are the Republic of Congo (67 percent) and Niger scenario considers: (60 percent), in MENA - Lebanon (86 percent); and in South 1. A shock to energy and crop supplies from Russia, Asia - Bangladesh with 41 percent. Dependence on other Ukraine, and Belarus resulting in a global crude oil price cereal grains is also relatively high in many countries, but lower increase of 7 percent and a 20 percent price rise for wheat than in the case of wheat. Libya imports 81 percent of other and other cereal grains. These are annual average price grains from the region, followed by Mauritania, (78 percent), estimates (details below). Mongolia (74 percent), and several high-income countries. 2. An increase in the price of imported fertilizer used in Among countries from ECA region, the Netherlands imports agricultural production by 50 percent. 30 percent of its consumption from the Black Sea region and 3. Restrictions on exports of electronics to Russia imposed Portugal 24 percent. The dependence on imports of oil seeds by high income countries and large exporters of electronics is much less significant, with the highest share in consumption from Asia, as well as export bans on electronics from in ECA countries such as Georgia (63 percent), Armenia (39 Russia. percent), and Mongolia (35 percent). 4. A ban on imports of fossil fuels from Russia by the United States. Several countries in the ECA region are highly dependent on energy imports from Russia as a share Our scenario generates crop price increases in line of consumption. In terms of coal, the reliance on imports with the upper bound of FAO (2022) findings, which from Russia is relatively high in Latvia (100 percent) and estimate increases in international food and feed prices Moldova (96 percent), as well as in some developing by 8 percent to 22 percent above already elevated levels. countries like Belize (99 percent) and Algeria (94 percent). These price increases are expected over the course of a year, Many high-income countries in the ECA region are also as CGE models operate at an annual basis. The currently deeply connected with Russia in terms of crude oil, namely recorded price hikes of 37 percent for wheat and 21 percent Slovakia (97 percent), Finland (82 percent), and Poland for corn are expected to be temporary, and prices are likely (71 percent). For natural gas, Kyrgyzstan’s ratio of imports to stabilize over 2022 as other countries step up production to total domestic consumption reaches 94 percent; it is to replace some of the production from Ukraine and Russia. followed by Czech Republic and Lithuania (both 90 percent). Some economies outside the ECA region, such as Taiwan, Following the effects of sanctions and the prospect China (29 percent) and Togo (24 percent), also show a high of supply interruptions, all major commodity markets dependence on Russia. Several developing countries in the displayed signals of inflationary shock, worsening the ECA region rely on Russia for more than 60 percent of their mounting price pressure seen in 2021 and early 2022. consumption of petroleum and coal products. These include The price of crude oil has risen to over US$100 per barrel10, Uzbekistan (71 percent) and Tajikistan (62 percent). and gasoline prices reached new highs during the first weeks of conflict. The progression of the war will largely determine whether this growing pressure on prices will continue or Methodological approach undergo a mid-term correction; however, there are currently few signs of de-escalation. The price of nitrogen fertilizer in New Orleans soared 29 percent during the first week of the Simulations with a global computable general equilibrium conflict, a record for the 45-year Green Market index, due (CGE) model illustrate the potential effects of the Ukraine to limitations on Belarus’s fertilizer exports to the EU, rising war on their trading partners (see Box 7.1). The modelling energy prices, and concerns about future supply interruptions. exercise covers a wide range of developing countries across 9. The calculations are based on the GTAP v. 11 data base (https://www.gtap.agecon.purdue.edu) database, which aggregates fertilizers with other chem- icals. 10. Price as of April 2nd, 2022. THE IMPACT OF THE WAR IN UKRAINE ON GLOBAL TRADE AND INVESTMENT <<< 13 Our assumed supply shock to Russian energy, along with US higher cost of fertilizer reduces agricultural yields, potentially sanctions, results in a 7 percent increase in oil prices. This reversing the terms-of-trade gains for agricultural exporters. should be seen as a direct effect of the shocks adding to On the other hand, net importers of agriculture and energy the inflationary pressures streaming from a variety of factors are worse off due to rising prices of final and intermediate beyond the scope of our modelling exercise. products. However, they might be able to expand exports in manufacturing and services sectors if their production is The effects of various shocks to trade flows will be relatively more competitive or less energy intensive than that determined by the characteristics of trade, production, of other countries. For all countries, trade costs are expected and consumption in the countries affected. Net exporters to increase as higher energy prices drive up transport costs, benefit as gains in the terms of trade in agricultural and energy mostly affecting time-sensitive goods. Figure 1.2 displays net commodities drive up exports up (if production can be scaled exports as a share of GDP to show the relative strength of up or redirected from the domestic market). At the same time, the crops and energy exposure at the country and regional higher commodity prices reduce the competitiveness of goods levels. A more granular representation of potential exposure and services that use them as inputs and therefore make to shocks across various developing countries is presented them less profitable to produce and export. In addition, the in Annex 1. > > > FIGURE 1.2: Net exports of commodities, percentage of GDP (2017) 25% 20% 15% 10% 5% 0% -5% -10% -15% A il nd m a es ia o AR na p. pe ey A s AC s a SA AP e az rie di rie ric m ic EN C er na Re rk la at hi ro ex In fE fS fE fS co fL Br nt nt Af ig Tu ai St C et Eu fM M b ou ou N in to to to to to Th Vi h ra d h- ut rn to C es C es es es es te A ig So te ni es e e R R R R R t, fh m m es yp U R co co to W Eg In In es h w R ig Lo H Wh eat Oil seeds Other cereal grains Other crops Livestock Oil extraction Coal extraction Gas extraction and distribution Natural resource products Computer and electronics Mo tor vehicles Other manufacturing Source: Author’s calculations based on GTAP database data THE IMPACT OF THE WAR IN UKRAINE ON GLOBAL TRADE AND INVESTMENT <<< 14 > > > BOX 1.1: Methodological approach To explore the impacts of Russia-Ukraine war, we rely on a static version of the global computable general equilibrium model ENVISAGE, which distinguishes agent-based demand for imports by region of origin (Chepeliev et al., 2022). The model represents global economy with 20 aggregate regions/countries and 30 sectors (see Annex 2 for details). To cap- ture the short-term implications of the explored policy shocks, we lower trade and labour substitution elasticities. Two broad channels of the commodity market disruptions are captured in the modelling framework. These include impacts of the conflict on international prices of food and fuel. Early evidence suggests that these commodity groups are among the most impacted amid fears of global supply tightening (JPMorgan, 2022; IMF, 2022). The following exploratory policy shocks are implemented in the model: a reduction in the fossil fuel and crops supply in Russia, Ukraine and Belarus, and a 50 percent increase in the price of imported fertilizer used in agriculture in all rep- resented countries/regions. Our shocks to supply and imposition of various trade restrictions through sanctions result in an increase in the global price of wheat and other cereal grains by 20 percent. Global price of oil rises by 7 percent. To simulate the sanctions that resulted from the conflict, we implement a total ban by the US on fossil fuels imports from Russia. Furthermore, we implement a ban on electronics sector’s exports to Russia by high income countries (comput- ers, electronics and optical products). Finally, Russia also imposes a ban on exports of wheat and food products, as well as all electronics, select manufacturing products, and motor vehicles, parts and transport equipment. Three important caveats should be considered in the context of interpreting price implications in particular and model- ling results in general. First, in the applied modelling framework all prices are relative and measured with respect to the global GDP deflator (indexed to “1”). Thus, nominal price changes are not captured in the applied framework. Second, an applied model provides representation of the economic flows on an annual basis, therefore observed impacts also reflect annual average implications, which are different from the short-term market volatility impacts. Finally, in the current assessment we focus on the impacts on key commodity markets – energy, crops and fertilizers, and only cover select sanctions (Russian ban on exports of electronics and machinery, restrictions on exports of electronics to Russia imposed by high income countries and ban on imports of fossil fuels from Russia to the US). The analysis does not cap- ture the potential spill-overs from the significant and broad sanctions imposed on the Russian economy (e.g., Krugman, 2022) and the increased uncertainty in markets. Impacts of the war on global trade volume terms, reflecting the relatively low energy intensity of these activities. At the same time, rising prices of agricultural Commodity and energy price shocks reduce global trade. and energy commodities result in a different pattern of The crop and energy price shocks reduce global trade, with global trade-flow restructuring when measured in value the total value of exports declining by 1 percent, exports terms. Accounting for the price effect, exports of agricultural of developing countries declining by 1.06 percent, and of commodities increase by 7 percent and of energy by 1.9 developed countries by about 1 percent (Figure 1.3). It is percent. Exports of energy intensive and trade-exposed important to distinguish between value and volume changes (EITE) sectors decline11 by 1 percent; they drop 1.8 percent for in trade flows. In volume terms, imports of natural resources non-EITE manufacturing sectors and 2 percent for services.12 from outside of the Black Sea region fall 2.3 percent, of Developing countries’ imports decline by 0.7 percent, while energy intensive and trade-exposed goods (EITE) by 0.7 imports of high-income countries fall by 1.1 percent. Global percent, and of agricultural commodities by 0.1 percent to 0.2 imports mimic exports; imports of agricultural commodities and percent. Imports of non-EITE sectors, like light manufacturing, natural resources increase slightly, while imports of services and service sectors increase by 0.2 percent to 0.4 percent in and all manufacturing sectors decline. 11. Annex 2 includes the details of sectoral and regional aggregation. EITE sectors - Wood and paper products; Refined oil; Chemical products; Non-metallic minerals; Metals. 12. In volume terms the decline of EITE exports is steeper (0.9 percent) than exports of non-EITE sectors (0.4 percent), but rising input prices (energy) slow down the decline of the value of exports of EITE sectors. THE IMPACT OF THE WAR IN UKRAINE ON GLOBAL TRADE AND INVESTMENT <<< 15 > > > FIGURE 1.3: Change in exports relative to reference year as a share of real GDP in the reference year 3.0% 2.5% 2.0% 1.5% 1.0% 0.5% 0.0% -0.5% -1.0% -1.5% -2.0% -2.5% ou s e a d u t CA y il A Ar AR s of p. Re e ria rld m pe gh te s A P ico ina C ca e C trie di rie az Re rke EN an EA m LA SS e na fri Un uro m Wo E fS Ch In ex co a Re b R Br nt g ail of of M St of of co oun Tu et hA Ni o M -in E Th a Vi s t ited st st st st st rn C Re Re Re st So te e t, hi m yp es of co W Eg In In Re w gh Lo Hi Agriculture Natural Resources EITE Non-EITE Services Total Note: see Annex 2 for sectoral and regional aggregations. Source: ENVISAGE simulations Net exporters of agricultural commodities or energy see some of the lost exports from Russia and Ukraine (Western gains in terms of trade and expand total exports. Several Europe, the United States, Brazil, rest of LAC). A change in countries are expected to expand the total value of exports, the composition of agricultural trade is also observed. Large with the biggest growth rates recorded in the rest of ECA importers of wheat from the Black Sea region, such as Egypt region (1.5 percent), rest of MENA (1.2 percent), Nigeria (1 and Turkey, increase their imports of other cereal grains and percent) and rest of SSA (0.7 percent) with smaller gains in crops, substituting for declining wheat imports. Turkey, Brazil, rest of LAC and Egypt. All other countries/ regions in our simulations experience total export losses, even though some observe gains in selected sectors. Rising prices create incentives for agricultural exporters to expand production and replace some of the exports from the Black Sea region (Figure 1.4). Wheat exports from Western Europe, rest of HICs, rest of ECA region, the United States, and India expand the most. Exports of other crops that substitute wheat in consumption expand in several countries, with the biggest gains in Western Europe, rest of LAC, Turkey, China, Brazil, rest of MENA, India, and the United States. A few countries with a comparative advantage in oil seeds replace THE IMPACT OF THE WAR IN UKRAINE ON GLOBAL TRADE AND INVESTMENT <<< 16 > > > FIGURE 1.4: Value change in agricultural exports – top 10 gains 18 16 15.3 14 12 Billion, 2014 US Dollars 10 8 5.6 6 5.1 3.7 3.9 4.0 4 3.2 2.0 2.1 2.2 2 0 India Rest of MENA China Turkey Rest of high- Brazil Rest of ECA United States Rest of LAC Western -2 income Europe Livestock Oil seeds Other cereal grains Other crops Wheat Total Note: see Annex 2 for sectoral and regional aggregations. Source: ENVISAGE simulations Exporters of fossil fuels in MENA and ECA regions, Nigeria, SSA and LAC step up production and exports in response to the negative supply shock created by the Ukraine war. Exports of natural resources from the rest of MENA and from the rest of ECA region could expand by almost 2 percent as a share of GDP. Furthermore, countries such as Nigeria and the rest of SSA also expand exports of these commodities by about 0.3 percent of GDP. Exports of energy intensive and trade-exposed manufacturing sectors decline in most regions (Figure 1.5). In the net commodity exporters, production shifts toward agriculture and energy, therefore reducing the factors of production (capital and labor) available for other sectors. Rising prices also drive-up exports of refined oil in several countries (the United States, Western Europe, Rest of MENA). Exports of sectors such as metals, wood and paper products and non-metallic minerals decline. We would expect to see some EITE sectors expand in energy efficient countries, but the large price shock to agricultural and energy commodities substantially reduces their competitiveness. THE IMPACT OF THE WAR IN UKRAINE ON GLOBAL TRADE AND INVESTMENT <<< 17 > > > FIGURE 1.5: Value change in EITE exports - top 5 biggest losses and 5 biggest gains 10 5 2.0 1.5 -0.2 -0.1 -0.1 Billion, 2014 US Dollars 0 -3.0 -2.1 -3.8 -5 -7.1 -10 -15 -20.2 -20 -25 -30 Western Rest of high- Rest of China Rest of EAP Egypt, Arab Nigeria Rest of SAR India United States Europe income MENA Rep. Chemical products Metals Refined oil Wood and paper products Non metallic minerals Total Note: see Annex 2 for sectoral and regional aggregations. Source: ENVISAGE simulations with other means of transportation declining by 0.8 percent. Exports of non-EITE sectors, such as light manufacturing The decline of services exports is linked to shrinking global and electronics, decline across the board (Figure 1.3). demand with lower income, as well as productive resources The biggest losses in exports of non-EITE sectors are shifting toward expanding commodity sectors. expected in countries that shift toward exports of agriculture and energy and also face export bans on electronics to With the decline of energy and non-energy intensive Russia. The biggest exporters of electronics to Russia are manufacturing, and services, demand shifts towards China (48 percent of total Russian imports), Western Europe food, energy and transport for which demand is quite (33 percent) and the rest of high-income countries (6 percent) inelastic. This leads to lower integration in global value with the United States and Vietnam at about 3 percent of chains (GVCs) for commodity rich exporters such as ECA total imports of electronics by Russia. However, for none of region (Figure 1.6). Exports of agricultural and energy these countries, is Russia a significant importer as a share of commodities from ECA expand and these sectors become their total exports. The sanctions apply to Western Europe, more integrated into GVCs – primarily through increasing the United States, and major Asian electronics producers backward participation. At the same time, a reduction in (Malaysia, Vietnam, Indonesia) resulting in China stepping the GVC participation for a higher-value and more GVC- up its exports of electronics to Russia. integrated goods, such as motor vehicles, electronics and other manufacturing leads to an overall reduction in the GVC Services exports decline in most countries, with participation rate. construction, recreation, communications, and energy intensive services such as transport declining the most. At the global level, exports of construction services decline by 3.7 percent, followed by recreation and communications at about 3 percent. Air transport exports decline the most among transport sectors at 2 percent at the global level, THE IMPACT OF THE WAR IN UKRAINE ON GLOBAL TRADE AND INVESTMENT <<< 18 > > > FIGURE 1.6: Change in GVC participation rate for ECA (selected sectors) 0.6 0.4 0.2 0.0 Percentage points -0.2 -0.4 -0.6 -0.8 -1.0 -1.2 -1.4 at g s s s rt l es s od l oi ta al he p rin nic po he icl ro fo To et ed ot tu tro ns h W rc M d Cl fin ve ac ra se he c Ele Re uf or es rt Ot an oc ot Ai rm M Pr he Ot Forward participation Backw ard participation Total Source: ENVISAGE simulations Total imports increase in countries benefiting from especially among net importers such as Egypt, Turkey, and terms-of-trade gains (Figure 1.7). The value of global the rest of MENA. imports declines by 0.3 percent, with LICs decreasing imports by 0.2 precent and HICs by 0.3 percent. Several energy and agricultural exporters can afford higher imports of manufactured goods and services thanks to growing export revenues. These countries include the rest of ECA, Nigeria, rest of SSA, Egypt and the rest of MENA. They mostly increase imports of light manufacturing – non ETIRI sectors and agricultural commodities. The remaining countries reduce their imports in the light of terms-of-trade losses. Importers of energy intensive EITE commodities, especially Vietnam and Thailand, reduce their imports, mostly of manufacturing goods and services. In addition to lower export revenues, the decline is driven by lower demand among high-income countries for manufactured goods from Vietnam and Thailand, which drives down demand for imported components in GVC-intensive sectors. Most countries’ import bills for agricultural products go up, THE IMPACT OF THE WAR IN UKRAINE ON GLOBAL TRADE AND INVESTMENT <<< 19 > > > FIGURE 1.7: Change in imports relative to reference year as a share of real GDP in the reference year 1.5% 1.0% 0.5% 0.0% -0.5% -1.0% -1.5% -2.0% Th m a h- t es es xic o t o ia na A A s AC M il to d ou s a SA AP e R e p. to y ou d rie di az rie ric m es rke n op EN l So f EC r or na SA Re e hi R aila In a fS fE co fL nt Br nt Af ig W ur t e Tu C et es f M S y p of R ab N in to E Vi h t o ed ut to Eg est rn C Ar In e C es es ig it te es e R n R R R t, fh m Lo com U co W In es h w R ig H Agriculture Natural Resources EITE non-EITE Services Total Note: see Annex 2 for sectoral and regional aggregations. Source: ENVISAGE simulations Impacts on income are mostly driven Belarus, Russia, and Ukraine account for 4.3 percent and crops for 0.7 percent (2017 statistics from the GTAP 11p2 by higher energy prices data base). Furthermore, the share of Belarus, Russia and Ukraine in global output of fossil fuels is 10.4 percent, and for Energy price spikes are a key driver of income changes crops it is significantly lower at 2.2 percent. at the country level. The effects on income are driven by the overall changes on agricultural and energy markets and by The estimated decline in global income is 0.7 percent, their respective shares in production and consumption. Crops with low-income countries losing 1 percent and high- account for a limited share of total household consumption income countries losing 0.6 percent (Figure 1.8). Given (though higher for poorer households) and intermediate the relative size of energy in GDP, the expected impact from use, while energy constitutes a much higher share of final the increase in energy prices as compared with the impact consumption, but also a high share of intermediate inputs of prices of crops and stylized sanctions on total income are in production and in services (mainly transport). Exports much higher.13 of energy commodities constitute a much higher share of global trade. Global exports of wheat amounted to US$44.1 Importers of energy and agricultural commodities suffer billion in 2019, while total grain exports amounted to US$115 real income losses. In particular, importers of crude oil billion. By comparison, global exports of crude oil amounted suffer significant real income losses of 1 percent for Turkey, to US$986 billion and those of natural gas to US$300 billion followed by Thailand with a 0.9 percent drop, India and South in 2019. As a share of global exports, fossil fuels from the Africa with declines of about 0.6 percent each. 13. We isolate the effects of the energy supply shock alone and find that the majority of the impact on income is driven indeed by energy prices. THE IMPACT OF THE WAR IN UKRAINE ON GLOBAL TRADE AND INVESTMENT <<< 20 in crop and energy production and exports from the Black Sea region by increasing production and exporting more Countries in MENA and ECA regions could benefit from natural resources. The rest of MENA is likely to see the terms-of-trade gains and see their incomes expand. highest increase of real income, 1.9 percent relative to the Crude oil producers in the rest of Middle East and North reference year. Other net exporters of crude oil, such as Africa region could capture the benefits of drastic reductions Nigeria and Mexico, see their real income increase, by 0.9 > > > FIGURE 1.8: Change in real income in selected countries and regions 2.5% Large energy and agricultural 2.0% exporters could gain 1.5% Net energy and agricultural importers are the most 1.0% vulnerable 0.5% 0.0% -0.5% -1.0% -1.5% m ou n y C a b il Th p e u t in a d ld N A st AP es a R st N A es st e ria st ico W g h- d ia st am M A Eu e Vi p. Co tr ies Ar a z In e C rke r ic an rn m SS EC LA ite SA or Re at ro tri Re e x n h Re f E Re M E Re etn Br te co Af W ail Re ig m Tu C I un St of of of Un o f e s in o h d f to So e s hi t, Re yp of co Hi nco Eg st I Re gh w Lo Note: see Annex 2 for sectoral and regional aggregations. Source: ENVISAGE simulations percent and 0.5 percent, respectively. for the rest of MENA, 12 percent for the rest of ECA, and around 10 percent for Egypt and Western Europe. Export Households are likely to face wheat price increases of up restrictions on trade in food products are expanding, which to 10 percent. This effect is driven only by the shocks covered will boost prices even more. Our exercise doesn’t account for in our modelling framework, so it should be interpreted as 10 his ramp-up in policies (see chapter 2). percentage points added to the high inflationary pressures already present in the wheat market. The highest increases The war is adding inflationary pressures to food prices in the price of wheat are recorded in the rest of ECA with that were already high due to COVID-19 disruptions, 20.3 percent, and rest of SSA, and Egypt at around 9-10 region-specific weather events, currency devaluations, percent. Depending on the substitutability across crops and and worsening fiscal constraints.14 Before the conflict, food availability of supply from other sources, households are prices were trending upward due to recovery in demand after likely to face higher prices of other grains of up to 16 percent the global COVID-19 recession and to temporary disruptions 14. https://blogs.worldbank.org/voices/four-paths-respond-food-price-crisis THE IMPACT OF THE WAR IN UKRAINE ON GLOBAL TRADE AND INVESTMENT <<< 21 in supply chains and logistics. Bad weather has also been harming harvests in some of the world’s breadbaskets, accompanied by lowering reserves of crops. Extreme heat and downpours in West Africa have lowered crop yields for sorghum and millet, and a drought in Australia contributed to profound declines in wheat production. Supply disruptions, more due to weather conditions than to the pandemic, rising costs of fertilizers, and trade restrictions contributed to the price increases, although to a lesser extent. Increases in crop and energy prices will add to the strain, especially on the poorest households. Higher food prices will hit poor households especially hard. The poorest households spend 54 percent of their consumption expenditures on food, 7 percent on energy and 4 percent on transport.15 (Global Consumption database, 2010). By contrast, food accounts for just 21 percent of consumption spending in the richest households. Energy accounts for 3 percent and transport for 19 percent, making rich households relatively more vulnerable to the energy price shock and the resulting increase in transport costs. References Chepeliev, Maksym, Maryla Maliszewska, Israel Osorio-Rodarte, Maria Filipa Seara e Pereira, and Dominique van der Mensbrugghe. 2022. Pandemic, Climate Mitigation, and Re-Shoring: Impacts of a Changing Global Economy on Trade, Incomes, and Poverty. Policy Research Working Paper 9955, World Bank, Washington, DC. http://hdl.handle.net/10986/37105 FAO. March 2022. The importance of Ukraine and the Russian Federation for global agricultural markets and the risks associated with the current conflict. https://www.fao.org/3/cb9013en/cb9013en.pdf Global Consumption Database, 2010, https://datatopics.worldbank.org/consumption/ International Monetary Fund (IMF). 2022. IMF Staff Statement on the Economic Impact of War in Ukraine. https://www.imf.org/en/News/Articles/2022/03/05/pr2261-imf-staff-statement-on-the-economic-impact-of-war-in-ukraine J.P. Morgan. 2022. The Russia-Ukraine Crisis: What Does It Mean For Markets? https://www.jpmorgan.com/insights/research/russia-ukraine-crisis-market-impact Krugman, P. 2022. Wonking Out: Putin’s Other Big Miscalculation. The New York Times. https://www.nytimes.com/2022/03/04/opinion/russia-ukraine-sanctions-economy.html?referringSource=articleShare UN Comtrade data base, 2022, https://comtrade.un.org/ 15. Households in developing countries were categorized in four consumption segments for the Global Consumption Database: lowest, low, middle, and higher. Four levels of consumption are used to segment the market in each country: lowest, low, middle, and higher. They are based on global income distribution data, which rank the global population by income per capita. The lowest consumption segment corresponds to the bottom half of the global distribution, or the 50th percentile and below; the low con- sumption segment to the 51th–75th percentiles; the middle consumption segment to the 76th–90th percentiles; and the higher consumption segment to the 91st percentile and above. THE IMPACT OF THE WAR IN UKRAINE ON GLOBAL TRADE AND INVESTMENT <<< 22 >>> Annex 1. Shares of imports of selected commodities from the Black Sea region in consumption > > > > > > FIGURE 8a: Wheat imports from Russia and Ukraine FIGURE 8b: Cereal imports from Russia and Ukraine as a share of consumption, 2017 as a share of consumption, 2017 Cameroon Ira n Bangladesh Egypt Uganda Latvia Egypt Angola Yemen Turkey Oma n Kuwait Senegal Portugal Tanzania Jordan Ma uritania Saudi Arabia Qatar British Virgin Islands Niger Netherlands Israel Cyprus Republic of Congo Tunisia Georgia Turkme nistan North Korea Lebanon Lebanon Israel Nicaragua Qatar British Virgin Islands Mo ngolia Benin Ma uritania Cape Verde Libya 0% 20% 40% 60% 80% 100% 0% 20% 40% 60% 80% 100% Russia Ukraine Russia Ukraine > > > > > > FIGURE 8c: Seed oil imports from Russia and FIGURE 8d: Coal imports from Russia and Ukraine Ukraine as a share of consumption, 2017 as a share of consumption, 2017 Germa ny Belarus Azebaijan Ukraine Portugal Hungary Mo ldova Slovakia United Arab Emirates Italy Poland Mo ro cco Israel Denmark North Macedonia North Macedonia Turkey Georgia Netherlands Albania Ira n Oma n Egypt Cyprus Lebanon Lithuania Belgium Lebanon Belarus North Korea Mo ngolia Turkme nistan Arme nia Algeria North Korea Mo ldova Georgia Belize San marino Latvia 0% 20% 40% 60% 80% 100% 0% 20% 40% 60% 80% 100% Russia Ukraine Russia Ukraine THE IMPACT OF THE WAR IN UKRAINE ON GLOBAL TRADE AND INVESTMENT <<< 23 > > > > > > FIGURE 8e: Crude petroleum imports from Russia FIGURE 8f: Petroleum and coal products imports from and Ukraine as a share of consumption, 2017 Russia and Ukraine as a share of consumption, 2017 Portugal Turmenistan Ethiopia Gibraltar Italy Turkey North Korea Lebanon Romania Kazakhstan Cro ati a Ukraine Cuba Georgia Netherlands Denmark Trin idad and Tobago Latvia Turkey Falkland Islands Germa ny Caribbean Netherlands Lithuania Ma lta Czech Republic Mo ldova Hungary Greece Poland Estonia Tajikistan Bulgaria Kyrgyzstan Finland Arme nia Belarus Uzbek istan Slovakia Mo ngolia Aruba 0% 20% 40% 60% 80% 100% 0% 20% 40% 60% 80% 100% Russia Ukraine Russia Ukraine > > > FIGURE 8g: Natural gas imports from Russia and Ukraine as a share of consumption, 2017 Slovenia Hungary Togo Boznia and Herzogovina We stern Sahara Bulgaria Slovakia Mo ldova Belarus Taiwan Finland Latvia Italy Estonia Georgia Greece North Macedonia Lithuania Czech Republic Kyrgyzstan 0% 20% 40% 60% 80% 100% Note: GTAP data underestimates the imports of Russian natural gas by Germany, hence Russia Ukraine this data point has been dropped. Source: GTAP 11p2. THE IMPACT OF THE WAR IN UKRAINE ON GLOBAL TRADE AND INVESTMENT <<< 24 >>> Annex 2. Aggregations > > > A 2.1. Regional Aggregation No. Region code Region description GTAP 10 regions 1 WER Western Europe Austria (AUT), Belgium (BEL), Bulgaria (BGR), Croatia (CRO), Cyprus (CYP), Czech Republic (CZE), Denmark (DNK), Estonia (EST), Finland (FIN), France (FRA), Germany (DEU), Greece (GRC), Hungary (HUN), Ireland (IRL), Italy (ITA), Latvia (LVA), Lithuania (LTU), Luxembourg (LUX), Malta (MLT), Netherlands (NLD), Poland (POL), Portugal (PRT), Romania (ROU), Slovakia (SVK), Slovenia (SVN), Spain (ESP), Sweden (SWE), Switzerland (CHE), United Kingdom (GBR), Norway (NOR), Rest of EFTA (XEF), Rest of Europe (XER), Rest of the World (XTW) 2 USA United States United States (USA) 3 CHN China China (CHN) 4 BRA Brazil Brazil (BRA) 5 MEX Mexico Mexico (MEX) 6 IND India India (IND) 7 TUR Turkey Turkey (TUR) 8 RUS Russia Russia (RUS) 9 UKR Ukraine Ukraine (UKR) 10 BLR Belarus Belarus (BLR) 11 ZAF South Africa South Africa (ZAF) 12 NGA Nigeria Nigeria (NGA) 13 VNM Viet Nam Viet Nam (VNM) 14 THA Thailand Thailand (THA) 15 EGY Egypt, Arab Rep. Egypt, Arab Rep. (EGY) 16 XSS Rest of Sub-Saharan Africa Benin (BEN), Burkina Faso (BFA), Cameroon (CMR), Côte d’Ivoire (CIV), Ghana (GHA), Guinea (GIN), Senegal (SEN), Togo (TGO), Rest of Western Africa (XWF), Central Africa (XCF), South-Central Africa (XAC), Ethiopia (ETH), Kenya (KEN), Madagascar (MDG), Malawi (MWI), Mauritius (MUS), Mozambique (MOZ), Tanzania (TZA), Uganda (UGA), Zambia (ZMB), Zimbabwe (ZWE), Rest of Eastern Africa (XEC), Botswana (BWA), Namibia (NAM), Rest of South African Customs Union (XSC) THE IMPACT OF THE WAR IN UKRAINE ON GLOBAL TRADE AND INVESTMENT <<< 25 2 No. Region code Region description GTAP 10 regions 17 XHY Rest of high-income Australia (AUS), New Zealand (NZL), Canada (CAN), Hong Kong (HKG), Japan (JPN), South Korea (KOR), Taiwan (TWN), Singapore (SGP) XLC Rest of Latin America & Argentina (ARG), Bolivia (BOL), Colombia (COL), Ec- Caribbean uador (ECU), Venezuela (VEN), Chile (CHL), Paraguay (PRY), Peru (PER), Uruguay (URY), Rwanda (RWA), Rest of South America (XSM), Costa Rica (CRI), Guatemala 18 (GTM), Honduras (HND), Nicaragua (NIC), Panama (PAN), El Salvador (SLV), Rest of Central America (XCA), Domini- can Republic (DOM), Jamaica (JAM), Puerto Rico (PRI), Trinidad and Tobago (TTO), Rest of Caribbean (XCB), Rest of North America (XNA) Rest of Oceania (XOC), Malaysia (MYS), Mongolia (MNG), Rest of East Asia (XEA), Brunei Darussalam (BRN), Cam- 19 XEA Rest of East Asia bodia (KHM), Indonesia (IDN), Laos (LAO), Philippines (PHL), Rest of Southeast Asia (XSE) Bangladesh (BGD), Nepal (NPL), Pakistan (PAK), Sri Lanka 20 XSA Rest of South Asia (LKA), Rest of South Asia (XSA) Albania (ALB), Rest of Eastern Europe (XEE), Kyrgyzstan (KGZ), Tajikistan (TJK), Rest of Former Soviet Union 21 ECA Rest of Europe & Central Asia (XSU), Armenia (ARM), Georgia (GEO), Kazakhstan (KAZ), Azerbaijan (AZE) Bahrain (BHR), Iran (IRN), Kuwait (KWT), Oman (OMN), Jordan (JOR), Qatar (QAT), Saudi Arabia (SAU), United Arab 22 XMN Rest of Middle East & North Africa Emirates (ARE), Rest of Western Asia (XWS), Israel (ISR), Rest of North Africa (XNF), Morocco (MAR), Tunisia (TUN) > > > A 2.1. Sectoral Aggregation No. Sector Aggregation Sectors 1 Agriculture Wheat (WHT); Oil seeds (OSD); Other cereal grains (GRO); other crops (CRP); livestock (LVS) Natural Resources Oil extraction (OIL); coal extraction (COA); Gas extraction and 2 distribution (GAS); Natural resources products (NRS) Wood and paper products (WDP); Refined oil (P_C); Chemical 3 EITE products (CHM); Non-metallic minerals (NMM); Metals (MET) Meat products and other food (PFD); Textiles (TEX); Wearing apparel and Leather products (WAL); Computer, electronic and optical products 4 Non-EITE (ELE); Motor vehicles, parts and transport equipment (MVT); other manufacturing (XMN) Electricity (ELY); Construction (CNS); Trade incl. (TRD); Accommodation, food and service activities (AFS); Water transport 5 Services (WTP); Air transport (ATP); Communications (CMN); Recreational and other services (ROS); Other services (XSV) THE IMPACT OF THE WAR IN UKRAINE ON GLOBAL TRADE AND INVESTMENT <<< 26 2. >>> Effects on Food Trade1 Ukraine’s integration in agriculture markets Ukraine is a large exporter of commodities and agricultural products, including staple foods. Data for the period 2018-2020 indicate that Ukraine’s exports of sunflower seeds, maize and wheat account for, respectively, 38 percent, 10.6 percent and 7.2 percent of the world market (Table 2.1). In these markets, Ukraine is the first, the fourth and the fifth world exporter, respectively. The risks of disruptions to global wheat market are particularly high, for two reasons. First, Russia and Ukraine together export roughly a quarter of the world’s wheat, with Russia being the largest exporter of this staple globally. Second, on February 15 Russia implemented a new quota on exports of wheat and other cereals to countries outside the Eurasian Economic Union (EAEU). Thus, disruptions to the production and export of Ukraine’s wheat would compound a situation that is already under pressure for this key staple. Countries that are most dependent on imports of wheat from Ukraine will face the immediate trade consequences of the conflict. In the period 2018-2020, a total of 23 countries imported 10 percent or more of their wheat from Ukraine. Most are low-income economies (Table 2.2). For countries like Gambia, Lebanon, Republic of Moldova, Djibouti, Libya, and Tunisia, wheat from Ukraine accounted for well above 40 percent of their total imports of the grain. Because of their heavy reliance on Ukrainian wheat, these importers may face difficulties to switch quickly to alternative export sources, possibly causing to supply shortages in the short run. The impact on the global wheat market will be deeper and more general, affecting many low-income economies that are net importers of wheat and leading to spillover effects on other food markets. Food prices have been on the rise, driven by weather conditions in key producing countries and the rising cost of energy. The price of wheat has already surged by more than 40 percent since the beginning of the conflict. Prices of other staples like rice and corn are facing similar upward pressures, in part because of disruptions in production, in part because they close substitutes for wheat. 1. Prepared by Michele Ruta (Lead Economist, ETIRI), Nadia Rocha (Senior Economist, ETIRI) and Alvaro Espitia (Consultant, ETIRI). THE IMPACT OF THE WAR IN UKRAINE ON GLOBAL TRADE AND INVESTMENT <<< 27 > > > TABLE 2.1: Most important export products of Ukraine (2018-2020) Avg Exported Value Share of Ukraine Share of Code Product Label 2018-2020 (US Exports World Market Dollar Thousand) ‘TOTAL All products 48,858,607 Sunflower-seed, safflower or ‘1512 cotton-seed oil and fractions 4,568,730 9.4% 38.0% thereof, whether or not refined, ... ‘1005 Maize or corn 4,536,010 9.3% 10.6% Iron ores and concentrates, incl. ‘2601 3,502,041 7.2% 2.4% roasted iron pyrites ‘1001 Wheat and meslin 3,419,411 7.0% 7.2% Semi-finished products of iron or ‘7207 2,871,087 5.9% 10.0% non-alloy steel Flat-rolled products of iron or non- ‘8544 alloy steel, of a width >= 600 mm, 1,912,003 3.9% 3.6% hot-rolled, not clad, ... Insulated “incl. enamelled or ‘1205 anodised” wire, cable “incl. coaxial 1,430,844 2.9% 1.1% cable” and other insulated ... Oilcake and other solid residues, ‘2306 whether or not ground or in the 1,037,522 2.1% 13.4% form of pellets, resulting ... Pig iron and spiegeleisen, in pigs, ‘7201 925,538 1.9% 16.8% blocks or other primary forms Source: Trademap, International Trade Centre, https://www.trademap.org/Index.aspx Note: The table presents the simple average top-10 exported products during the period 2018-2020 for Ukraine. > > > TABLE 2.2: Countries most dependent on imports of wheat from Ukraine (2018-2020) Avg Exported Value of Share of Ukraine Ukraine Share of total Importer wheat 2018-2020 Exports of wheat Imports of wheat (US $ Thousand) Gambia 1,582 0.0% 84% Lebanon 89,744 0.1% 67% Moldova, Republic of 478 2.9% 57% Djibouti 21,239 0.0% 57% Libya, State of 120,151 0.7% 45% Tunisia 193,216 3.8% 41% Pakistan 86,009 6.2% 39% THE IMPACT OF THE WAR IN UKRAINE ON GLOBAL TRADE AND INVESTMENT <<< 28 Avg Exported Value of Share of Ukraine Ukraine Share of total Importer wheat 2018-2020 Exports of wheat Imports of wheat (US $ Thousand) Somalia 3,128 2.7% 31% Bangladesh 293,620 0.1% 24% Mauritania 36,174 9.3% 22% Israel 78,024 1.2% 21% Eritrea 498 2.5% 20% Indonesia 522,453 0.0% 20% Morocco 210,351 16.6% 19% Yemen 120,167 6.7% 18% Egypt 512,138 3.8% 18% Thailand 122,572 16.3% 16% Jordan 34,335 3.9% 15% Tanzania, United Republic of 8,600 1.1% 14% Malaysia 47,149 0.3% 12% Philippines 200,553 1.5% 12% Qatar 5,213 6.4% 11% Korea, Republic of 100,888 0.2% 10% Source: Trademap, International Trade Centre, https://www.trademap.org/Index.aspx Note: The table presents the list of countries that imported (on average) 10 percent or more of their wheat from Ukraine. Trade policies could trigger a particularly since the war in Ukraine began. As of March 23, governments had imposed a cumulative 161 trade food crisis liberalizing measures and 208 trade restrictive measures (Figure 2.1). Rising trade-policy interventions risk further disrupting global food markets. ● Monitoring by the World Bank – Global Trade Alert released at the end of March Trade shows that countries actively used trade policy to respond to domestic needs in the presence of potential shortages in food supply at the beginning of the COVID-19 pandemic. This policy activism resurfaced since the beginning of 2022 and THE IMPACT OF THE WAR IN UKRAINE ON GLOBAL TRADE AND INVESTMENT <<< 29 > > > FIGURE 2.1: Number of active trade policies on food and fertilizers in force between January 1st 2020 and March 23, 2022 140 130 120 105 Number of active trade polices 100 103 80 60 40 31 20 0 1-01-20 1-02-20 1-03-20 1-04-20 1-05-20 1-06-20 1-07-20 1-08-20 1-09-20 1-10-20 1-12-20 1-01-21 1-02-21 1-03-21 1-04-21 1-05-21 1-06-21 1-07-21 1-08-21 1-09-21 1-10-21 1-12-21 1-01-22 1-02-22 1-03-22 1-11-20 1-11-21 Liberalising export Liberalising import Restrictive export Restrictive import reforms reforms curbs curbs Source: Authors using World Bank and Global Trade Alert trade policy monitoring in essential goods. ● A total of 53 new trade policies (67 including subsidies) introduced a ban on consumer products such as sugar, were imposed or announced between the beginning of pasta, oil, and semolina; and Egypt, which on March 18 the conflict on February 23 and March 23, 2022 (109 imposed a ban exports of cooking oil, corn, and all kinds since the beginning of the year).2 This surge has of cracked green wheat for a period of three months. been dominated new export bans and export-licensing requirements (31 measures), followed by import bans and import quotas (13 measures), and liberalizing import reforms such as tariff cuts (9 measures).3 ● Sixteen nations are responsible for the increase in export controls since the beginning of the war, especially in the ECA region (Figure 2.2). Examples include export bans of vegetable oils, maize and wheat imposed by Serbia on March 10 and export licenses for grains by Hungary on March 4. Export controls were also imposed by food- importing nations such as Algeria, which on March 13 2. See appendix Table A 1.1 for a detailed list of trade policy measures imposed between the beginning of the conflict on February 23rd and March 23rd, 2022. Note this list includes both measures that have been implemented and policy announcements gathered from official sources and news reports. 3. See appendix Table A 1.2 for a granular description of the measures. THE IMPACT OF THE WAR IN UKRAINE ON GLOBAL TRADE AND INVESTMENT <<< 30 > > > FIGURE 2.2: Regional breakdown of new trade policies on food and fertilizers imposed between February 23rd and March 23rd, 2022 14 12 Number of countries 4 10 8 1 6 4 8 2 2 3 3 33 1 11 2 1 0 1 Europe & East Asia & Middle East Latin America North South Asia Sub-Saharan Central Asia Pacific & North & Caribbean America Africa Africa Restrictive export Restrictive import Liberalising import curbs curbs reforms Source: Authors using World Bank and Global Trade Alert trade policy monitoring in essential goods. ● Since Russia’s invasion of Ukraine, 13 new import ● In addition, nine measures have been taken since restrictions have been imposed by countries, mainly the beginning of the war to reduce or remove import targeting Russian exports. For instance, the United States barriers on food and fertilizers. For instance, on March on March 11 prohibited imports of fish, seafood, and 3, Colombia decreased to zero import duties on corn, preparations thereof; as well as alcoholic beverages from seeds, and resinoid oils, among other food products. Russia. Similarly, on March 11, the G7 countries revoked The Philippines has announced cuts to taxes on food Russia’s Most-Favored-Nation status at the WTO, which imports to curb broad price pressures. may result in further tariff increases on specific products. Increasing export restrictions on staples such as wheat ● Governments have taken measures to alleviate are magnifying the surge in food prices (Figure 2.3). pressures in national food markets. Since the beginning Rising global food prices have typically induced differential of the war, 12 governments from every continent except policy responses, as governments try to shield domestic North America have increased subsidies for farmers and markets from price surges. Some governments lower fertilizer producers or have subsidized food purchases import restrictions, and some food producing countries curb by citizens. Azerbaijan, for instance, announced the exports. As research shows (Giordani et al. 2016), trade allocation of up to US$44.1 million in subsidies to cover interventions contributed to an increase in world food prices the difference in domestic and international prices of of 13 percent during the 2008-11 global food crisis—and by wheat and flour products. 30 percent for wheat. THE IMPACT OF THE WAR IN UKRAINE ON GLOBAL TRADE AND INVESTMENT <<< 31 > > > FIGURE 2.3: International wheat prices and trade policy measures 180 36 Russia invades Ukraine 160 30 Price Index, Jan 2022=100 N. of trade policies 140 24 120 18 100 12 80 6 60 Feb-03-2022 0 Feb-06-2022 Feb-09-2022 Feb-12-2022 Feb-15-2022 Feb-18-2022 Feb-21-2022 Feb-24-2022 Feb-27-2022 Jan-01-2022 Jan-04-2022 Jan-07-2022 Jan-10-2022 Jan-13-2022 Jan-16-2022 Jan-19-2022 Jan-22-2022 Jan-25-2022 Jan-28-2022 Jan-31-2022 Ma r-02 -2 022 Ma r-05 -2 022 Ma r-08 -2 022 Ma r-11 -2 022 Ma r-14 -2 022 Ma r-17 -2 022 Ma r-20 -2 022 Ma r-23 -2 022 Wheat Trade Measures Source: Authors’ calculations on Capital IQ commodity price statistics and on World Bank and Global Trade Alert trade policy monitoring of essential goods. Trade measures are already driving up world prices of While the consequences of the war on food markets will wheat. Bans on wheat exports imposed by Russia to countries be difficult to manage, a more catastrophic scenario can outside the Eurasian Economic Union, by smaller exporters be avoided. Large exporters of food products like the United like Serbia or North Macedonia, and by food-importing States, Canada, the European Union, Australia, Argentina, countries like Egypt cover 16 percent of world trade and are Brazil — which together represent more than 50 percent of responsible for a 7-percentage point increase in world wheat global exports of key staples like wheat, barley and corn — prices (i.e. roughly one-sixth of the observed price surge). could make a clear joint statement that they will not restrict their exports of staples (Malpass, 2022). Security of these Further escalation in trade intervention in wheat signals flows would allow markets for critical products to continue more disruptions ahead. If any of the top five exporters of working, helping to preserve the stability of global food wheat were to ban exports, the cumulative effect of these markets— and well beyond these markets. measures would be to increase the world price by at least 13 percent, and much more if others react. Rising prices are more damaging for net food-importing countries that are predominantly low-income economies (Figure 2.4). As the consumption basket of poorer people is dominated by food, food-price surges hurt the poor everywhere and threaten to push millions into poverty. THE IMPACT OF THE WAR IN UKRAINE ON GLOBAL TRADE AND INVESTMENT <<< 32 > > > FIGURE 2.4: Percentage of net food imports in domestic food supply (total calories) FOOD DEPENDENCY HIGH (>50%) MEDIUM (20 - 50%) LOW (<20%) NET EXPORTER NO DATA IBRD 46561 | APRIL 2022 Source: UN’s Food & Agriculture Organization Global Perspectives Studies (2018) Note: Net imports are defined as difference between domestic production and domestic absorption, that is the sum of demand for food and “other uses” (feed, seed, food losses, non-food processing). References Giordani, P.E., N. Rocha, M. Ruta (2016). Food prices and the multiplier effect of trade policy. Vol. 101, 102-122, Journal of International Economics. Malpass, D. (2022). A New Global Food Crisis Is Building. Barron’s. April 9, 2022. THE IMPACT OF THE WAR IN UKRAINE ON GLOBAL TRADE AND INVESTMENT <<< 33 >>> Annex > > > Table A 2.1. New trade policies imposed between February 23rd and March 23rd, 2022 Jurisdiction Type Initial assessment Announcement Ireland Subsidies 3/22/2022 Kenya Subsidies 3/20/2022 Argentina Exports restrictive 3/19/2022 EAEU (Eurasian Economic Union) Imports liberalizing 3/18/2022 Indonesia Exports restrictive 3/17/2022 Azerbaijan Subsidies 3/17/2022 Egypt Subsidies 3/17/2022 Pakistan Subsidies 3/17/2022 Rwanda Subsidies 3/17/2022 Pakistan Subsidies 3/16/2022 Mongolia Subsidies 3/16/2022 India Export Subsidies 3/16/2022 Bangladesh Imports liberalizing 3/16/2022 Ukraine Imports liberalizing 3/16/2022 Philippines Imports liberalizing 3/16/2022 United Kingdom Imports restrictive 3/15/2022 Russia Exports restrictive 3/14/2022 Russia Exports restrictive 3/14/2022 Russia Exports restrictive 3/14/2022 India Subsidies 3/14/2022 State of Palestine Imports liberalizing 3/14/2022 Argentina Exports restrictive 3/13/2022 Algeria Exports restrictive 3/13/2022 Egypt Exports restrictive 3/12/2022 Ukraine Exports restrictive 3/12/2022 THE IMPACT OF THE WAR IN UKRAINE ON GLOBAL TRADE AND INVESTMENT <<< 34 Jurisdiction Type Initial assessment Announcement Lebanon Exports restrictive 3/11/2022 United States of America Imports restrictive 3/11/2022 United Kingdom Imports restrictive 3/11/2022 Japan Imports restrictive 3/11/2022 European Union Imports restrictive 3/11/2022 United States of America Imports restrictive 3/11/2022 Turkey Exports restrictive 3/11/2022 North Macedonia Exports restrictive 3/10/2022 Egypt Exports restrictive 3/10/2022 Serbia Exports restrictive 3/10/2022 Japan Subsidies restrictive 3/9/2022 Sri Lanka Imports restrictive 3/9/2022 Turkey Exports restrictive 3/9/2022 Japan Exports restrictive 3/8/2022 European Union Imports liberalizing 3/8/2022 Philippines Subsidies 3/7/2022 Iran, Islamic Rep Subsidies 3/6/2022 Ukraine Exports restrictive 3/5/2022 Bulgaria Subsidies 3/5/2022 Ukraine Exports restrictive 3/5/2022 Hungary Exports restrictive 3/4/2022 Russia Exports restrictive 3/4/2022 Turkey Exports restrictive 3/4/2022 Turkey Exports restrictive 3/4/2022 Colombia Imports liberalizing 3/3/2022 Canada Imports restrictive 3/3/2022 Turkey Imports liberalizing 3/3/2022 Ukraine Exports restrictive 3/2/2022 Ukraine Imports restrictive 3/2/2022 Japan Exports restrictive 3/1/2022 THE IMPACT OF THE WAR IN UKRAINE ON GLOBAL TRADE AND INVESTMENT <<< 35 Jurisdiction Type Initial assessment Announcement Pakistan Imports liberalizing 3/1/2022 Moldova Exports restrictive 2/28/2022 Burkina Faso Exports restrictive 2/28/2022 Switzerland Exports restrictive 2/28/2022 Switzerland Imports restrictive 2/28/2022 Turkey Exports restrictive 2/27/2022 Australia Imports restrictive 2/24/2022 Japan Exports restrictive 2/24/2022 Japan Imports restrictive 2/24/2022 New Zealand Exports restrictive 2/24/2022 European Union Imports restrictive 2/23/2022 Russia Exports restrictive 2/1/2022 Source: Authors using World Bank and Global Trade Alert trade policy monitoring in food products and medical goods. THE IMPACT OF THE WAR IN UKRAINE ON GLOBAL TRADE AND INVESTMENT <<< 36 > > > Table A 2.2: New export restrictions on food products (measures announced between February 23, 2022, and March 23, 2022) Announcement Jurisdiction Export Ban Products Date Argentina Soybeans, oil and flour 3/19/2022 Indonesia Palm oil 3/17/2022 Russia YES Wheat, meslin, rye, barley, and corn 3/14/2022 Russia YES White sugar and cane sugar 3/14/2022 Russia Sunflower oil 3/14/2022 Argentina Flour and soy oil 3/13/2022 Algeria YES Sugar, pasta, oil, semolina and all wheat derivatives 3/13/2022 Egypt YES Cooking oil, corn, and all kinds of cracked green wheat 3/12/2022 Nitrogenous mineral or chemical fertilizers, phosphatic Ukraine YES mineral or chemical fertilizers, potassic mineral or 3/12/2022 chemical fertilizers Meat products, fish, potatoes, fruits and vegetables, oils, Lebanon YES 3/11/2022 animal fat, ice cream, cacao, mineral water, and milk Lentils, chickpeas, wheat, dried beans, barley, sunflower Turkey 3/11/2022 seeds, and sunflower seed oil Durum wheat, maize, wheat flour, corn flour, and sun- Serbia YES 3/10/2022 flower-seed oil Wheat, barley, corn, wheat flour, sunflower seeds, and North Macedonia YES 3/10/2022 sunflower seed oils Egypt YES Wheat, fava beans, lentils, pasta, and all kinds of flour 3/10/2022 Soyabean oil, sunflower seed oil, vegetable fats and oils, Turkey YES 3/9/2022 margarine Japan YES Food products (not specified) 3/8/2022 Ukraine Wheat and meslin, corn, poultry, eggs, sunflower oil 3/5/2022 Rye, oat, buckwheat, millet, sugar, salt, bovine meat and Ukraine YES 3/5/2022 by-products and live cattle Russia Fertilizers 3/4/2022 Hungary Wheat, rye, barely, oats. Maize, soybean, sunflowers 3/4/2022 Turkey YES Beans, lentils, olive oil 3/4/2022 Rice, wheat flour, corn, vegetable oil, and meat of bovine Turkey 3/4/2022 animals THE IMPACT OF THE WAR IN UKRAINE ON GLOBAL TRADE AND INVESTMENT <<< 37 3 Announcement Jurisdiction Export Ban Products Date Goods (food) from Australia to all Russian military end- Australia YES 3/3/2022 users Ukraine YES All food products to Russia 3/2/2022 Japan YES Single blanket export ban on goods to Russia 3/1/2022 Moldova YES Wheat, maize and sugar 2/28/2022 Burkina Faso Millet, maize and sorghum flours 2/28/2022 Switzerland YES Food products (not specified) 2/28/2022 Turkey YES Beans, lentils, and olive oil 2/27/2022 Japan YES Food products (not specified) 2/24/2022 New Zealand YES Food products (not specified) 2/24/2022 Source: Authors using World Bank and Global Trade Alert trade policy monitoring in food products and medical goods. THE IMPACT OF THE WAR IN UKRAINE ON GLOBAL TRADE AND INVESTMENT <<< 38 3. >>> Effects on Global Logistics and Connectivity1 Impact on shipping connectivity of the Russian Federation Sanctions have severely limited container shipping connectivity of the Russian Federation. Complying with sanctions, major western logistics companies, ocean carriers and express freight providers have ended operations with and in the Russian Federation, with the possible exception of food and pharmaceuticals. Sanctions imposed on the Russian Federation not only require shipping companies to check if a shipment is legally permissible, but also to make sure that every party to the transaction is compliant, including banks, insurers, and shippers. Payments to European ports by vessels flagged, owned, or operated by entities based in Russia are becoming increasingly difficult. This resulted in cutting connections between Russian Baltic container ports (e.g., in St. Petersburg, Ust-Luga) and Northern European gateways (e.g., Antwerp, Rotterdam, Hamburg). Container traffic from and to Russia goes through Baltic ports (40 percent of total volume) as well as Black Sea and Far East ports (30 percent each). While traffic to the Northwest (Baltic) is directly affected by European sanctions, Russia may still connect from the Black Sea or Far East to countries or with operators (e.g., Chinese shipping lines) not joining sanctions. Russia’s own shipping lines may be able to operate with ports not among the more than 35 countries that have issued sanctions. The global impact is small, but uncertainty may add to stress in global shipping. Russia is a comparatively small destination for container shipping as its ports handle only about 4.9 million TEUs (for comparison: Canada and Greece handled 6.2 million TEUs and 5.8 million and respectively, in 2021). The freed-up capacity in container shipments from and to Russia (due to idling vessels), however, is not expected to alleviate global container-shipping stress; it may instead create increased uncertainty and disruptions at a time when the world economy is on the path of post-pandemic recovery. 1. Prepared by Jean-François Arvis, Cordula Rastogi and Daniel Saslavsky. THE IMPACT OF THE WAR IN UKRAINE ON GLOBAL TRADE AND INVESTMENT <<< 39 Sanctions will not affect bulk shipping of commodities cargo handling in western ports affects bulk shipping from the from Russia as severely as container shipping. Russian Baltic Sea, much less so the other regions. Furthermore, in commodity exports depend on bulk shipping, a massive 800 bulk shipping, vessels do not operate on regular lines but are million tons, with a similar geographical distribution between chartered on demand. Services are available from operators in the three coasts as for container shipping (Table 3.1). Bans many countries, including those applying no sanctions or less of Russian-flagged, owned, and operated ships as well as serious ones than the EU, the UK or the United States. > > > TABLE 3.1: Russian Federation - Cargo Throughput in Maritime Ports, Aggregated by Region, 2021 (Million tons) Total Cargo Volume Dry Bulk Wet Bulk Russian Federation (total) 835.2 412.9 422.4 North-West 316.1 143.8 172.3 Black Sea 259.4 116.4 143.0 Far East 225.8 150.1 75.6 Others 33.9 2.5 31.5 Russia has a strong domestic logistics industry serving Impact on shipping connectivity in Russian and Central Asian customers, and its functioning will be affected in the short to medium term. Domestic Ukraine logistics operations and movement of goods is relatively less affected by the exit of Western European operators at least Ukrainian ports are unable to operate commercial in the immediate term. In the short to medium term, the use shipping. Vessel traffic to Ukraine is no longer insured, of western transport and cargo handling equipment as well and most ports are cut off or controlled by the Russian as information technology systems by Russian operators will military. Like the Russian Federation, Ukraine exports large be affected by sanctions. The maintenance of the Russian volumes of commodities, including about 50 million tons civil aviation sector may be compromised as a matter of of grain (2018-19). The export supply chain relies on long- weeks (less than three), as Airbus and Boeing are stopping distance rail to one of the ports on the Black Sea (Figure operations, including spare parts deliveries. Limiting the 3.1 and Figure 3.2). The main Ukrainian sea ports are in the sphere of insurance, another significant restriction included Odessa area: Yuzhny (> 60 million tons throughput in 2020), in the EU sanctions package will mean that planes will not Odessa (> 20 million tons), Chornomorsk (> 20 million tons), be able to take off. This will affect three quarters of Russia’s serving Western and Central Ukraine. The specialized river current commercial air fleet, with planes built in the EU, the port at Mikolaiv (in 2020, total traffic 30 million tons, of which US and Canada. 13 million tons of grain) serves Eastern and Central Ukraine, and is close to Russian-occupied Kherson. Mariupol farther east is under siege. THE IMPACT OF THE WAR IN UKRAINE ON GLOBAL TRADE AND INVESTMENT <<< 40 If the war in Ukraine continues, logistics solutions for grain ● Even if normal traffic resumes, a war-risk premium will exports are few and constraints many (notwithstanding be likely applied by marine insurers, raising the costs of losses in production, such as destruction, unattended fields, imports from both the Russian Federation and Ukraine. etc.). There is limited flexibility to move exports to non-Ukrainian ports given the dependence on the railway system, rail gauge ● Countries increasing exports to compensate for the interruption with EU countries, and the impracticability and decline from Ukraine (e.g., Australia, Canada), may face cost of moving such volumes on trucks over long distances to temporary export logistics capacity constraints to cope EU countries, even from Western Ukraine. with the surge, delaying shipments. ● The status of exports from regions in the hinterland of ports, possibly Russian controlled, is uncertain. This applies to Eastern Ukraine (about half of Ukrainian production). > > > > > > FIGURE 3.1: Average Throughput, 2006-2020 FIGURE 3.2: Localization of Ukrainian Port (Million Tons) Yuzhni Mykolaiv Chornomorsk Odessa Mariupol 0 20 40 60 80 Global and Regional Spillovers of 3 percent of total China-Europe container trade. Volume was about 1.46 million TEU in 2021, corresponding to over 10,000 Logistics Disruptions rail journeys. The lines connect to countries of the European Union at Brest in Belarus, with transloading of containers from A possible interruption of the China-Europe rail one rail gauge to the other. connection would primarily affect EU countries and China. The Eurasian land bridge consists of two main overland rail routes, the Trans-Siberian Rail Link and Trans-Kazakhstan Rail Link. Overland rail routes connecting Europe and Asia through these two routes play a growing role in trade between Asia (mainly China) and Europe. This rail link carries about THE IMPACT OF THE WAR IN UKRAINE ON GLOBAL TRADE AND INVESTMENT <<< 41 > > > TABLE 3.2: Trade between the EU and China in 2021, by Mode (Billion Euro) Sea Air Rail EU to CN 127 84 12 CN to EU 343 112 20 Source: Eurostat. The rail connection occupies an important niche market existing rail route, given performance and capacity bottlenecks. (including industrial products such as mechanical, Finally, an interruption of the land bridge would mean revenue electronics, automotive) which has seen recent growth. It losses for the transit countries. Transit brought approximately has a shorter lead time than maritime transportation (two weeks 35 percent of the revenue of the Kazakhstan railways in 2020. versus six weeks) and is cheaper than aviation. Over the past 18 months in response to supply chain disruptions, shipments Airfreight with the Russian Federation is severed. The by rail via the Eurasian land bridge have grown substantially. EU, Canada, and US closure of airspace to Russian aircraft Rising container shipping costs contributed to a doubling of and the reciprocal closure of Russian airspace to aircraft from the traffic on the route between 2019 and 2021. High-value those countries dramatically reduces international passenger goods and critical components are shipped along this route, and cargo flights with Russia. Aeroflot, the Russian national which is important for the German automotive industry and the carrier, discontinued most international traffic, starting on electronics industry (HP and Samsung). In 2020 alone, some March 8, 2022. Before the sanctions, it served 146 cities in 10 million notebook computers were shipped through this 52 countries. Aeroflot is believed to have feared that its planes network from the southwestern Chinese city of Chongqing. could have been impounded on arrival abroad. The fate of German railways (Deutsche Bahn, Schenker) have been planes leased by Aeroflot from foreign firms now at Russian promoting the route in alliance with Russian, Kazakh, and airports is unclear. Moscow-based AirBridgeCargo (ABC, a Chinese railways. Volga-Dnepr company) is in dire straits after having been one of the fastest growing all-cargo airlines in the world for several Rail connections continue to function, but additional years, adding to strain on the market. procedures to check sanctions compliance when entering the EU may affect lead times. While businesses The closedown of airspace means longer routes and can cooperate with Russian Railways, international payments rising rates between Europe and East Asia. The re-routed may become increasingly difficult to make; the impact of which alternatives easily add five to 10 hours to a one-way leg and remains fluid. How sanctions may be applied to the Russian may require an intermediate stop en route. United-States- Federation as a transit country is yet to be known (e.g., freight Asia routes are affected, but to a lesser extent. The impact on charges could be paid in China). Under the sanctions regime, freight capacity may be limited, considering the small market multinational logistics and industrial operators may opt out, or share of Russian operators (e.g., Volga-Dnepr). However, Russia may extend a “no-transit zone” for railways, as it did longer routes and rising fuel prices are likely to push freight for aviation. The disruption to Europe (and China) would be rates higher. According to experts, air cargo rates between significant, especially for Germany, Poland, and Austria and Europe and East Asia could have risen by around 30 percent could not be absorbed by switching to ocean services, which to 50 percent by the end of March from February. About US$50 are already at capacity. The air freight market also could not billion of trade between Europe and Asia is directly affected. take up the demand, which would add almost 20,000 TEUs a Unlike their competitors, Chinese airlines continue operating week. Other land-based multi-modal routes via the Caspian direct routes to EU or the United States, overflying Russia. Sea (Middle Corridor) are unlikely to fully substitute for the THE IMPACT OF THE WAR IN UKRAINE ON GLOBAL TRADE AND INVESTMENT <<< 42 > > > > > > FIGURE 3.3: Drop in International Flights, FIGURE 3.4: TIR - Russian Federation and Ukraine, 12/2021-3/2022 Number of Carnets issued, 2019-2020 250,000 15% 30% 10% 20% 5% 10% 200,000 0% 0% -10% -5% 150,000 -20% -10% -30% -15% -40% 100,000 -20% -50% -25% -60% 50,000 -30% -70% 01 08 15 22 29 05 12 19 26 02 09 16 23 02 2- 2- 2- 2- 2- 1- 1- 1- 1- 2- 2- 2- 2- 3- -1 -1 -1 -1 -1 -0 -0 -0 -0 -0 -0 -0 -0 -0 0 21 21 21 21 21 22 22 22 22 22 22 22 22 22 Iran Uzbekistan Russia Poland Ukraine Turkey Moldova Lithuania Belarus 20 20 20 20 20 20 20 20 20 20 20 20 20 20 Pax (left) Freighter (right) 2019 2020 Long-distance trucking logistics between the EU and Ukraine has developed a geographic comparative advantage Russia-Central Asia is likely to be affected. The war in directly and indirectly to serve these markets; Polish trucking Ukraine has direct and indirect effects on long-distance companies employ 100,000 Ukrainian drivers. Some traffic to trucking logistics in Europe, including under customs transit and from Central Asia may be rerouted through the Middle systems such as “Transports Internationaux Routiers” (TIR). Corridor and the Southern route (Caucasus or Turkey), which Sanctions will affect the movement of drivers, insurance, transit are much less practical than direct routes through Belarus and guarantees, and payments. TIR supports trade in high-value Russia. In the EU, Germany and Poland are the two countries goods between Europe, Russia, and Central Asia (Table 3.3). most affected by the loss of long-distance trucking connectivity. Russia and Ukraine are among its main users (Figure 3.4). > > > TABLE 3.3: Trade Between the EU and Central Asia, 2021 by mode (Billion Euros) Air Road Multimodal Others EU to CA 2.1 5.8 0.8 0.5 CA to EU 0.0 0.8 14.0 0.2 Source: Eurostat. THE IMPACT OF THE WAR IN UKRAINE ON GLOBAL TRADE AND INVESTMENT <<< 43 4. >>> Effects on Ukraine’s key (non-food) exports and specific GVC1 Ukraine’s integration in global value chains is concentrated in a limited number of sectors Ukraine’s participation in global value chains is at the lower end in ECA and has slightly declined between 2009-2018 (Figure 4.1). Ukraine lags behind the ECA average and participates in a limited number of GVCs. The magnitude of the war’s impact on other countries involved in those value chains will depend on the role Ukraine plays in them, either as an important supplier or user of inputs. Ukraine’s exports are important in three manufacturing sectors. Ukraine is not a large supplier on a world scale. However, it is a large supplier of some specific products in these sectors. Table A1 in the Annex lists Ukraine’s top exports and Ukraine’s share of world markets, while Table A2 lists the products for which Ukraine has the largest shares of world supply. Ukraine’s exports of iron ore and iron products, some metals, semi-finished metal products and transport equipment appear as the most relevant for the supply chains of Ukraine’s trading partners. Ukraine’s balance of payments data show the growing importance of the computer services sector for its exports. These computer services provide inputs to numerous firms abroad: ICT services are therefore also included in this analysis of the key GVCs affected by the war. Information on GVC participation for Ukraine does not allow precise identification of other service sectors in which Ukraine might be an important actor. 1. This note was produced by J.C. Maur. THE IMPACT OF THE WAR IN UKRAINE ON GLOBAL TRADE AND INVESTMENT <<< 44 > > > FIGURE 4.1: GVC Participation Index2: Ukraine and ECA, 2018 (percent of gross exports) 90% 81 79 78 80% 78 78 75 73 73 73 70 70% 68 66 64 64 64 63 62 60 60 59 60% 56 55 55 55 56 55 54 53 50 50 50% 47 44 41 40% 37 36 33 30% 20% 10% 0% Romania Russia Kyrgyzstan Uzbekistan Slovakia Hungary Slovenia TFYR Macedonia Italy Belgium Latvia Bulgaria Armenia Azerbaijan Georgia Norway Netherlands Estonia Montenegro Albania Ukraine UK Greece Iceland Kazakhstan Ukraine, 2009 Ukraine, 2018 Austria Lithuania Poland France Germany Mongolia Turkey Turkmenistan Tajikistan Backward participation Forward participation GVC Participation Index Source: Calculations based on UNCTAD-Eora GVC database. Markets that are most dependent on Ukraine for imports or as an export destination Countries that are most dependent on Ukraine for imports are primarily in Central and Eastern Europe. Moldova is the most dependent, relying on Ukraine for more than a quarter of its agricultural imports, while Georgia sources nearly one- fifth of its agricultural purchases from Ukraine. Only Moldova relies heavily on Ukraine for industrial products and capital goods. Ukraine’s exports of intermediate goods represent more than 5 percent of external supply for five countries—Moldova, Senegal, Georgia, Belarus, and Russia (Table 4.1). Outside of Europe, Tunisia imports relies heavily on Ukraine for its agricultural imports, while some African and Arab countries rely on it for imports in specific GVCs. 2. Expressed as the sum of Backward GVC participation (upstream), i.e., the use of foreign inputs embodied in gross exports and Forward GVC participation (downstream), i.e., the domestic value-added in intermediate exports to the third country exports. THE IMPACT OF THE WAR IN UKRAINE ON GLOBAL TRADE AND INVESTMENT <<< 45 > > > TABLE 4.1: Top ten countries relying the most on Ukraine for their imports (2018-2020, share of merchandise imports) Agricultural products Industrial products Intermediate goods Capital goods UKR $US UKR UKR $US UKR UKR $US UKR UKR $US UKR Importer Importer Importer Importer % mln rank % mln rank % mln rank % mln rank Moldova 26% 196 1 Moldova 7% 327 7 Moldova 14% 165 1 Moldova 4% 39 5 Georgia 19% 238 2 Belarus 3% 886 5 Senegal 9% 127 4 Belarus 3% 216 6 Tunisia 15% 361 1 Georgia 3% 201 9 Georgia 8% 111 4 Georgia 2% 31 13 Belarus 15% 600 2 Russia 2% 4552 11 Belarus 7% 519 3 Armenia 1% 14 14 Azerbaijan 15% 266 2 Senegal 2% 127 15 Russia 7% 2714 3 Russia 1% 926 22 Armenia 11% 89 2 Azerbaijan 2% 185 14 Bulgaria 5% 450 7 Kyrgyzstan 1% 8 14 Egypt 10% 1437 4 Bulgaria 2% 522 18 Lebanon 5% 157 8 Uzbekistan 1% 76 14 India 8% 1901 5 Hungary 2% 1585 16 Ethiopia 4% 145 7 Azerbaijan 1% 24 21 Turkey 7% 1156 4 N.Macedonia 1% 116 22 Cameroon 4% 54 7 Kazakhstan 1% 106 17 Lebanon 7% 188 2 Serbia 1% 287 19 Egypt 3% 683 9 Tajikistan 1% 4 19 Source: Calculations based on data from UN COMTRADE. Notes: agricultural and industrial products are defined according to the WTO product grouping classification; intermediate and capital goods are defined according to UNCTAD’s SoP definition. Ukraine is not a major export destination. Countries that percent and 4 percent, respectively. In terms of intermediate rely on Ukraine as an export destination are also mainly in goods, Belarus exports 10 percent of its goods to Ukraine, Eastern Europe, Central Asia, and the Caucasus. Ukraine Benin stands at 7 percent (due to cotton), and Georgia at is the second-largest destination for Georgia’s agricultural 4 percent. Ukraine’s largest market share for capital goods exports, at 12 percent, while other countries have a less than exports was for Moldova at 10 percent, Azerbaijan at 9 3 percent share. Belarus exports 14 percent of its industrial percent, and Belarus at 8 percent (Table 4.2). products to Ukraine, followed by Benin and Lithuania at 6 > > > TABLE 4.1: Top ten countries relying on Ukraine as an export destination (2018-2020, share of merchandise exports) Agricultural products Industrial products Intermediate goods Capital goods UKR $US UKR UKR $US UKR UKR $US UKR UKR $US UKR Importer Importer Importer Importer % mln rank % mln rank % mln rank % mln rank Georgia 12% 86 2 Belarus 14% 3633 2 Belarus 10% 945 2 Moldova 10% 6 4 Russia 3% 662 7 Benin 6% 7 7 Benin 7% 7 4 Azerbaijan 9% 8 4 Belarus 3% 151 4 Lithuania 4% 1046 9 Georgia 4% 28 6 Belarus 8% 371 2 Armenia 3% 19 6 Moldova 3% 24 7 Lithuania 3% 226 9 Kyrgyzstan 8% 8 7 Benin 3% 18 9 Georgia 2% 37 11 Poland 3% 1191 10 Russia 4% 794 5 Malawi 2% 19 14 Poland 2% 4622 15 Hungary 3% 436 13 Georgia 3% 2 9 Moldova 2% 26 12 Russia 2% 6820 14 Slovakia 2% 290 9 Armenia 3% 2 7 Latvia 2% 60 10 Guyana 2% 30 10 Russia 2% 1938 15 Lithuania 2% 138 11 Poland 2% 679 13 Hungary 2% 2162 14 Moldova 2% 6 10 Uzbekistan 2% 3 11 Azerbaijan 2% 17 8 Azerbaijan 2% 334 14 Azerbaijan 2% 14 8 Poland 2% 1292 15 Source: Calculations based on data from UN COMTRADE. Notes: agricultural and industrial products are defined according to the WTO product grouping classification; intermediate and capital goods are defined according to UNCTAD’s SoP definition. THE IMPACT OF THE WAR IN UKRAINE ON GLOBAL TRADE AND INVESTMENT <<< 46 Key (non-food) exports that could chain disruption, as iron and steel products are used in many manufactured goods, Ukraine is not a large supplier on a affect GVCs global scale for non-agglomerated iron ore (1.78 percent of world exports) and a second-tier exporter of agglomerated In terms of individual value chains, the war in Ukraine iron ore (7.9 percent of world exports in 2019) with several could cause disruption for the products that are Ukraine’s countries, including Vietnam, sourcing a major part of their largest exports. These products belong to the following imports from Ukraine. However, Russia is also a large GVCs: steel (due to Ukraine’s exports of iron ores, ferro silico exporter of agglomerated iron ore with 8.4 percent of world manganese, pig iron), heavy manufacturing (flat and rolled exports, and thus there is potential for more disruptions for steel products), semiconductors (neon gas), cars (ignition this product if there are capacity constraints for sintering cables), industries using titanium, and the IT industry. (the agglomeration of fine iron dusts) or limited substitution options. In terms of the impact on prices, the iron ore price Trade flows for iron and steel products in the runup to has been generally on the rise since the beginning of the the war show unusual patterns. These could suggest that year while remaining below the last year’s levels. There some industries took preemptive measures to mitigate the was a spike between February 28 and March 15, when the risk of looming conflict. Monthly trade imports from EU27 price rose by 11.7 percent and returned to the same level, countries show a strong increase, with near doubling of remaining significantly below the higher prices in the summer monthly import volumes compared with periods during July- of 2020 and indicating the limited impact of the increase.5 September 2021 for steel products (Figure A4.2), and a large increase for iron ore (Figure A4.3). These increases could Ukraine is the second-largest exporter of ferro-silico have been caused by other factors such as price increases, manganese with 18.2 percent of world’s exports in 2019. but prices of iron ore were stable during this period and Turkey, Germany, Poland, and Egypt are Ukraine’s main below historical levels. Industry specific factors or decisions importers, and overall, Europe imports 49 percent of its ferro- should not be discounted. Other exports (cereals or vehicle silico-manganese from Ukraine. Ferro-silico-manganese is equipment) do not exhibit similar patterns. used as an alloying element in the production of steel and can be used as a substitute for ferro-manganese or silico- Markets are pricing in a significant impact on the steel manganese in the production of different types of steel. and iron value chains. The price of rebar and hot rolled coil has more than tripled since mid-January.3 Iron ore prices Pig iron, the first transformation of iron ore, is an input surged by more than 40 percent and the Dow Jones steel for wrought iron and steel making. Ukraine is among index by 57 percent since early January.4 Arguably the the largest suppliers of pig iron and, combined with economic sanctions on Russia have a compounding effect Russia, accounts for more than half the world’s exports. on these prices, as do have rising energy prices and earlier Ukraine’s main destination is the United States, followed supply chain disruptions. by Europe (Italy and Spain being the top two markets). For non-alloy pig iron, the most important pig iron product exported by Ukraine, the United States imports 41 percent Inputs into the steel industry of its needs from Ukraine. Turkey and Saudi Arabia are also large destinations, with Turkey importing nearly a quarter of Europe relies on Ukraine for inputs into the steel industry, its non-alloy pig iron from Ukraine. such as iron ores, ferro-silico manganese, and pig iron. Europe relies on imports from Ukraine for agglomerated and non-agglomerated iron ores at 16 percent and 15 percent, respectively, with Poland and the Czech Republic being two big importers. While this suggests the potential for supply 3. Bloomberg data quoted by the Washington Post https://www.washingtonpost.com/business/energy/steel-is-the-other-big-commodity-shock-from-the-war-in-uk- raine/2022/03/22/b2cf3508-a9b2-11ec-8a8e-9c6e9fc7a0de_story.html 4. See e.g. https://markets.ft.com/data/commodities/tearsheet/charts?c=Iron+ore 5. https://markets.ft.com/data/commodities/tearsheet/summary?c=Iron+ore THE IMPACT OF THE WAR IN UKRAINE ON GLOBAL TRADE AND INVESTMENT <<< 47 Inputs into other metal industries: Inputs into semiconductor aluminum and titanium production Titanium ore is an input in the aerospace, aviation, Ukraine exports 70 percent of the world’s neon gas, a automotive, and medical industries. Ukraine was the byproduct of the steel industry and an important input fifth largest world exporter of titanium in 2019. It is the main in the production of computer chips. A factory in Odessa supplier of the mineral to several countries (Table A1), with produces 65 percent of the world’s neon. Trade statistics Russia and the Czech Republic being by far the largest do not distinguish between uses of neon, but according importers. Several European countries are large importers to industry sources,10 dependence on Ukraine for highly of titanium, but their sourcing is diversified (South Africa, purified neon used in chip production is large, as Ukraine is Sierra Leone, Australia, and the United States). In addition, the source of 40 percent to 50 percent of the world supply of Norway is a producer of the metal, which could suggest the this critical input. Contingency stockpiles are helping mitigate availability of substitute sourcing. the shock for the moment.11 According to the combined trade statistics for rare gases other than argon (neon, krypton, Ukraine’s supplies of aluminum oxide account for only xenon), Moldova and Slovenia depend on Ukraine for 36 6 percent of world exports. It is almost exclusively percent and 12 percent of imports per product, respectively, exported to Russia, for whom Ukraine is the main although import flows amount to less than US$0.2 million. supplier. Ukraine accounts for 37 percent of Russia’s imports The United States relies on Ukraine for 11 percent of imports of aluminum oxide (Table A3). The importance of Ukraine for per product (US$8.5 million), Austria for 7 percent (US$1.2 other countries is trivial at less than 3 percent of imports. million), and Hungary for 5 percent (US$1 million). Notably, Aluminum oxide6 is the main input in the manufacture of imports of wiring sets from Ukraine are important for Romania aluminum metal, as well as the production of fillers, glass, (22 percent of imported product), Germany (12 percent), and catalysts, gas purification, abrasive substances, paint, body the Czech Republic (11 percent). armor, and electrical insulation. The application is wide across microelectronics, chemicals, aerospace, and other high-technology fields.7 Inputs into transport vehicles Ukraine is not a major world supplier of ignition wiring Inputs into heavy manufacturing sets for transport vehicles, with only 4 percent of world’s exports, it is however an important supplier for some Rolled iron products have many uses in industry European markets (Table A3). Notably, imports of wiring and construction. Europe’s imports from Ukraine are sets from Ukraine are important for Romania (22 percent important for two products (HS codes 7207118 and of imported product), Germany (12 percent), and the Czech 720712,9 see Table A1). Ukraine is a major supplier of Republic (11 percent). these two products in several other markets (Table A1). Because of their variety of uses, it is unclear how important Axles and wheels are inputs for the production of railway they may be for specific supply chains. Among markets vehicles; Ukraine is not a major world exporter but is outside of Europe, Turkey, and Nigeria source heavily from the most important supplier to a few countries in the Ukraine for one category of the product (Table A1). Ukraine region. Ukraine’s exports of axles and wheels12 account for is among the top world exporters for these two products. 8 percent of world’s exports (Table A2). Ukraine is the most important supplier for Bulgaria (61 percent, US$28 million), Russia (49 percent, US$154 million), Belarus (48 percent, 6. 81820 Aluminium oxide (excl. artificial corundum). 7. https://www.sciencedirect.com/topics/materials-science/aluminum-oxide 8. 720711 Semi-finished products of iron/non-alloy steel, containing by weight <0.25% of carbon, of rectangular (incl. square) cross-section, the width measuring < twice the thickness. 9. 720712 Semi-finished products of iron/non-alloy steel, containing by weight <0.25% of carbon, of rectangular (other than square) cross-section. 10. https://www.semiconductors.org/sia-statement-on-sanctions-on-russia/ 11. https://www.wsj.com/articles/russian-attack-on-ukraine-could-dent-chip-maker-supply-lines-11645837830 12. 860719 Axles & wheels; parts of bogies, bissel-bogies, axles & wheels. THE IMPACT OF THE WAR IN UKRAINE ON GLOBAL TRADE AND INVESTMENT <<< 48 US$48 million), and Latvia (46 percent, US$3 million). Ukraine is also the largest supplier for Moldova (71 percent), Sri Lanka (42 percent), and Saudi Arabia (34 percent), but the trade values are significantly smaller, under US$5 million (Table A3). These exports may be tied to specific types of railway equipment and brand manufacturers, which may mean that finding alternative sources of supply might be more challenging than conveyed by trade figures alone. ICT services Ukraine exported US$6.8 billion of telecommunications, IT, and computer services in 2021, according to the IT Ukraine association,13-14 a 35 percent increase from 2020. This makes it the third-largest sector of exports for the country, accounting for one-third of total services exports in 2020. The sector has been growing rapidly since 2014. It is possible that the actual volume of exports is larger as the activity of many freelancers selling IT services may not be well captured in balance of payment statistics. Ukraine IT services mainly serve North America and Western Europe; 81 percent of Ukrainian IT companies export to the United States. The second-largest buyer of Ukraine’s IT exports is the UK (64 percent of companies), followed by Germany (60 percent). In value, exports to the United States account for 40 percent of the total. E-commerce, banking, and fintech are the main client industries and software development and operations (DevOps), software quality assurance (QA), and user interface and experience design (UI/UX) the most prominent services provided by Ukraine (N-iX, 2021). References N-iX. (2019). Ukraine - the Country That Codes. IT Industry in Ukraine. 2019 Market Report. World Bank. (2020). World Development Report 2020: Trading for Development in the Age of Global Value Chains. Washington, DC: World Bank. Arvis, J.-F., Rastogi, C., & Saslavsky, D. (2022). Effects of the war in Ukraine on Global Logistics and Connectivity. Updates from Trade, Investment and Competitiveness, The World Bank. UNWTO. (2022). UNWTO Dashboard. Retrieved from https://www.unwto.org/country-profile-outbound-tourism 13. https://bank.gov.ua/ua/statistic/sector-external/data-sector-external#1 14. https://itukraine.org.ua/en/ukrainian-it-exports-exceed-$5-billion-in-a-year-for-the-first-time.html THE IMPACT OF THE WAR IN UKRAINE ON GLOBAL TRADE AND INVESTMENT <<< 49 >>> Annex > > > Table A 1. Top 30 products exported by Ukraine and share of world exports, 2018-2020 Share UKR in world Product Exports, Product Description exports per Code avg1820 product, ($US min) avg1820 100590 Maize (corn), other than seed 4526 14% 151211 Sunflower seed/safflower oil, crude 4077 52% 100190 Wheat other than durum wheat; meslin 3413 9% 260111 Iron ores & concentrates (excl. roasted iron pyrites), non-agglomerated 1858 2% 260112 Iron ores & concentrates (excl. roasted iron pyrites), agglomerated 1644 9% 854430 Ignition wiring sets & other wiring sets of a kind used in vehicles/aircraft/ships 1320 4% Semi-finished products of iron/non-alloy steel, containing by weight <0.25% of carbon, 720712 1262 12% of rectangular (other than square) cross-section 120510 Low erucic acid rape/colza seeds, whether/not broken 1085 12% Semi-finished products of iron/non-alloy steel, containing by weight <0.25% of carbon, 720711 1009 14% of rectangular (incl. square) cross-section, the width measuring < twice the thickness Oil-cake & other solid residues, whether/not ground/in pellets, from extraction of 230630 1001 48% sunflower seeds Non-alloy pig iron containing by weight 0.5%/less of phosphorus, in pigs/blocks/other 720110 926 22% primary forms 120100 Soya beans, whether/not broken 896 2% 100300 Barley 757 10% Flat-rolled products of iron/non-alloy steel, of a width of 600mm/more, hot-rolled, 720851 not clad/plated/coated, not in coils, not further worked than hot-rolled, of a thickness 703 8% >10mm Semi-finished products of iron/non-alloy steel, containing by weight 0.25%/more of 720720 586 15% carbon Bars & rods of iron/non-alloy steel (excl. of 72,13), containing indentations/ribs/ 721420 562 5% grooves/other deformations produced during the rolling process/twisted after rolling 720230 Ferro-silico-manganese, in granular/powder form 545 18% Flat-rolled products of iron/non-alloy steel, of a width of 600mm/more, hot-rolled, not 720839 clad/plated/coated, in coils, not further worked than hot-rolled (excl. pickled), of a 521 4% thickness of <3mm 281820 Aluminium oxide (excl. artificial corundum) 511 6% Sunflower seed/safflower oil, other than crude, & fractions thereof , whether/not refined 151219 492 13% but not chemically modified Bars & rods, hot-rolled, in irregularly wound coils, of iron/non-alloy steel (excl. of 721391 342 5% 7213.10 & 7210.20), of circular cross-section measuring <14mm in diameter Wood sawn/chipped length wise, sliced/peeled, whether/not planed, sanded/end- 440710 335 1% jointed, of a thickness >6mm, coniferous THE IMPACT OF THE WAR IN UKRAINE ON GLOBAL TRADE AND INVESTMENT <<< 50 Share UKR in world Product Exports, Product Description exports per Code avg1820 product, ($US min) avg1820 271600 Electrical energy (optional heading) 330 1% 240220 Cigarettes containing tobacco 328 2% Flat-rolled products of iron/non-alloy steel, of a width of 600mm/more, hot- 720852 rolled, not clad/plated/coated, not in coils, not further worked than hot-rolled, 306 10% of a thickness of 4.75mm/more but not >10mm 999999 Commodities not specified according to kind 280 0% 20714 Cuts & edible offal of species Gallus domesticus, frozen 268 2% 860719 Axles & wheels; parts of bogies, bissel-bogies, axles & wheels 262 8% Oil-cake & other solid residues, whether/not ground/in pellets, from extraction 230400 231 1% of soyabean oil Flat-rolled products of iron/non-alloy steel, of a width of 600mm/more, hot- 720838 rolled, not clad/plated/coated, in coils, not further worked than hot-rolled (excl. 224 4% pickled),of a thicknessof 3mm/more but <4.75mm Source: Calculations based on data from UN COMTRADE. > > > Table A2. Ukraine as a share of world exports: Top 30 products Share UKR in world Product Exports, Product Description exports per Code avg1820 product, ($US min) avg1820 1 151211 Sunflower seed/safflower oil, crude 4077 52% Oil-cake & other solid residues, whether/not ground/in pellets, from extrac- 2 230630 1001 48% tion of sunflower seeds 3 250830 Fire-clay 215 45% Glazed ceramic flags & paving/hearth/wall tiles (excl. of 6908.10); glazed 4 690890 76 25% ceramic mosaic cubes & the like, whether/not on a backing Non-alloy pig iron containing by weight 0.5%/less of phosphorus, in pigs/ 5 720110 926 22% blocks/other primary forms 6 720230 Ferro-silico-manganese, in granular/powder form 545 18% 7 841111 Turbo-jets, of a thrust not >25kN 132 17% Antisera & other blood fractions & modified immunological products, 8 300210 21 15% whether/not obt. by means of biotechnological processes Semi-finished products of iron/non-alloy steel, containing by weight 9 720720 586 15% 0.25%/more of carbon 10 100590 Maize (corn), other than seed 4526 14% THE IMPACT OF THE WAR IN UKRAINE ON GLOBAL TRADE AND INVESTMENT <<< 51 Share UKR in world Product Exports, Product Description exports per Code avg1820 product, ($US min) avg1820 Semi-finished products of iron/non-alloy steel, containing by weight 11 720711 <0.25% of carbon, of rectangular (incl. square) cross-section, the width 1009 14% measuring < twice the thickness Sunflower seed/safflower oil, other than crude, & fractions thereof, 12 151219 492 13% whether/not refined but not chemically modified 13 120510 Low erucic acid rape/colza seeds, whether/not broken 1085 12% Semi-finished products of iron/non-alloy steel, containing by weight 14 720712 1262 12% <0.25% of carbon, of rectangular (other than square) cross-section Flat-rolled products of iron/non-alloy steel, of a width of 600mm/more, not 15 720927 in coils, not further worked than cold-rolled (cold-reduced), not clad/plated/ 39 11% coated, of a thickness of 0.5mm/more but not >1mm 16 100820 Millet 18 11% 17 100300 Barley 757 10% Angles, shapes & sections of iron/non-alloy steel, U sections, not further 18 721631 139 10% worked than hot-rolled/hot-drawn/extruded, of a height of 80mm/more Flat-rolled products of iron/non-alloy steel, of a width of 600mm/more, 19 720852 hot-rolled, not clad/plated/coated, not in coils, not further worked than hot- 306 10% rolled, of a thickness of 4.75mm/more but not >10mm Flat-rolled products of iron/non-alloy steel, of a width of 600mm/more, 20 721020 1 9% plated/coated with lead, incl. terne-plate 21 380130 Carbonaceous pastes for electrodes & similar pastes for furnace linings 26 9% 22 261400 Titanium ores & concentrates 140 9% 23 260112 Iron ores & concentrates (excl. roasted iron pyrites), agglomerated 1644 9% Self-discharging vans & wagons, railway/tramway (excl. of 24 860630 69 9% 8606.10/8606.20), not self-propelled Sheets for veneering (including those obtained by slicing laminated wood), for plywood/for similar laminated wood & other wood, sawn lengthwise, 25 440839 29 9% sliced/peeled, whether/not planed, sanded, spliced/end-jointed, of a thick- ness not> 6 mm, of tropical wood s 26 100190 Wheat other than durum wheat; meslin 3413 9% 27 720291 Ferro-titanium & ferro-silico-titanium, in granular/powder form 17 8% 28 860719 Axles & wheels; parts of bogies, bissel-bogies, axles & wheels 262 8% Floor coverings consisting of a coating/covering applied on a textile back- 29 590490 5 8% ing, whether/not cut to shape (excl. linoleum) Flat-rolled products of iron/non-alloy steel, of a width of 600mm/more, 30 720851 hot-rolled, not clad/plated/coated, not in coils, not further worked than hot- 703 8% rolled, of a thickness >10mm Source: Calculations based on data from UN COMTRADE. THE IMPACT OF THE WAR IN UKRAINE ON GLOBAL TRADE AND INVESTMENT <<< 52 Millions Millions > > > > > > €0 € 100 € 200 € 300 € 400 € 500 € 600 €0 € 50 € 100 € 150 € 200 € 250 € 300 € 350 € 400 Jan. 2018 Jan. 2018 Feb. 2018 Feb. 2018 Mar. 2018 Mar. 2018 Apr. 2018 Apr. 2018 May. 2018 May. 2018 Jun. 2018 Jun. 2018 Jul. 2018 Jul. 2018 Aug. 2018 Aug. 2018 Sep. 2018 Sep. 2018 Oct. 2018 Oct. 2018 Nov. 2018 Nov. 2018 Dec. 2018 Dec. 2018 Jan. 2019 Jan. 2019 Feb. 2019 Feb. 2019 Mar. 2019 Mar. 2019 Apr. 2019 Apr. 2019 May. 2019 May. 2019 Jun. 2019 Jun. 2019 Jul. 2019 Jul. 2019 Aug. 2019 Aug. 2019 Sep. 2019 Sep. 2019 Oct. 2019 Oct. 2019 Nov. 2019 Nov. 2019 Dec. 2019 Dec. 2019 Jan. 2020 Jan. 2020 Feb. 2020 Feb. 2020 Mar. 2020 Mar. 2020 Apr. 2020 Apr. 2020 May. 2020 May. 2020 Jun. 2020 Jun. 2020 Jul. 2020 Jul. 2020 Aug. 2020 Aug. 2020 Sep. 2020 Sep. 2020 Oct. 2020 Oct. 2020 Nov. 2020 Nov. 2020 Dec. 2020 Dec. 2020 Jan. 2021 Jan. 2021 Feb. 2021 Feb. 2021 Mar. 2021 Mar. 2021 Apr. 2021 Apr. 2021 May. 2021 May. 2021 Jun. 2021 Jun. 2021 Jul. 2021 Jul. 2021 Aug. 2021 Aug. 2021 Sep. 2021 Sep. 2021 Oct. 2021 Oct. 2021 Nov. 2021 Nov. 2021 Dec. 2021 Dec. 2021 Jan. 2022 Jan. 2022 FIGURE A4.3: Ukraine monthly exports of iron ore products from top 10 European trade partners FIGURE A4.2: Ukraine monthly exports of iron and steel products to top 10 European trade partners Malta Latvia Malta THE IMPACT OF THE WAR IN UKRAINE ON GLOBAL TRADE AND INVESTMENT Poland Austria France Cyprus Latvia Croatia Finland Greece Estonia Belgium Czechia Sweden Bulgaria Poland Austria France Portugal Cyprus Slovakia Croatia Slovenia Finland Greece Estonia Romania Denmark Lithuania Belgium Czechia Sweden Bulgaria Portugal Slovakia Slovenia Romania Denmark Lithuania Netherlands Luxembourg Ireland (Eire) Netherlands Luxembourg Ireland (Eire) <<< 53 > > > Table A 3. Ukraine exports of (non-food) products: Top ranked importers for each product, and share of supply from Ukraine average 2018-2020 UKR share in UKR rank the market’s Product Importer from UKR $US mln among imports per suppliers product (%) Inputs into 261400 Titanium ores & Czech Republic 32 100% 1 aerospace, concentrates Egypt, Arab Rep. 2 93% 1 aviation, Belarus 2 82% 1 automotive, and medical Russian Federation 81 75% 1 industries Romania 2 65% 1 Hungary 1 46% 1 Vietnam 1 40% 1 Turkey 6 39% 2 Kazakhstan 8 22% 2 Mexico 11 18% 2 Inputs in the 281820 Aluminium oxide Russian Federation 686 37% 1 manufacture (excl. artificial corundum) Uzbekistan 0.1 3% 5 of aluminium metal United States 0.2 0.03% 22 Inputs into the 260111 Iron ores & Belarus 4 100% 1 steel industry concentrates (excl. Czech Republic 387 78% 1 roasted iron pyrites), non- Poland 332 75% 1 agglomerated Slovak Republic 143 60% 1 Serbia 45 56% 1 Hungary 34 40% 1 Romania 73 32% 1 Belgium 20 4% 4 Vietnam 39 4% 4 United States 7 2% 7 260112 Iron ores & Czech Republic 89 82% 1 concentrates (excl. roasted Romania 49 78% 1 iron pyrites), agglomerated Poland 91 66% 1 Serbia 126 66% 1 Hungary 71 63% 1 Slovak Republic 97 35% 2 Vietnam 21 27% 2 China 645 16% 2 Korea, Rep. 69 16% 2 Turkey 79 12% 4 THE IMPACT OF THE WAR IN UKRAINE ON GLOBAL TRADE AND INVESTMENT <<< 54 UKR share in UKR rank the market’s Product Importer from UKR $US mln among imports per suppliers product (%) Inputs 720110 Non-alloy pig iron Russia 54 99% 1 into heavy containing by weight 0.5%/ Egypt 18 81% 1 manufacturing less of phosphorus, in pigs/ blocks/other primary forms Canada 7 78% 1 Bulgaria 4 66% 1 UAE 36 61% 1 USA 641 32% 2 Spain 31 32% 1 Romania 4 30% 2 Finland 4 25% 2 Turkey 99 22% 2 720711 Semi-finished Russia 82 100% 1 products of iron/non-alloy Bulgaria 191 88% 1 steel, containing by weight <0.25% of carbon, of Costa Rica 6 48% 1 rectangular (incl. square) Ethiopia (excl. Eritrea) 13 46% 1 cross-section, the width Bosnia and Herzegovina 16 43% 1 measuring < twice the Cameroon 22 41% 1 thickness Qatar 48 39% 1 Nigeria 21 22% 3 Turkey 175 22% 2 Colombia 4 21% 3 720712 Semi-finished Slovak Republic 5 89% 1 products of iron/non- Italy 1009 69% 1 alloy steel, containing by weight <0.25% of carbon, North Macedonia 26 59% 1 of rectangular (other than Hungary 47 53% 1 square) cross-section United Kingdom 130 45% 1 Turkey 346 36% 2 Malaysia 15 18% 3 Sudan 1 8% 3 Thailand 51 7% 4 China 84 6% 5 THE IMPACT OF THE WAR IN UKRAINE ON GLOBAL TRADE AND INVESTMENT <<< 55 5 UKR share in UKR rank the market’s Product Importer from UKR $US mln among imports per suppliers product (%) Inputs into 854430 Ignition wiring Romania 161 20% 2 automotive sets & other wiring sets of Poland 64 14% 2 value chains a kind used in vehicles/ aircraft/ships Hungary 81 12% 3 Germany 553 11% 3 Czech Republic 141 10% 3 Slovak Republic 92 6% 5 Austria 29 6% 8 Russian Federation 11 5% 8 China 6 1% 18 Turkey 3 1% 16 860719 Axles & wheels; Moldova 0.2 71% 1 parts of bogies, bissel- Bulgaria 28 61% 1 bogies, axles & wheels Russian Federation 154 49% 1 Belarus 46 48% 1 Latvia 3 46% 1 Sri Lanka 1 42% 1 Saudi Arabia 5 34% 1 Pakistan 1 30% 2 Georgia 1 29% 2 Lithuania 2 24% 2 Source: Calculations are based on UN Comtrade. Note: Highlighted countries are those who are not high income. THE IMPACT OF THE WAR IN UKRAINE ON GLOBAL TRADE AND INVESTMENT <<< 56 5. >>> The Effects of Russia’s global value-chain participation1 Context and outlook A large share of Russia’s exports are raw materials (inputs used upstream in GVCs), while its imports are dominated by semi-final or final consumer and capital goods. By international comparison, Russia’s high forward GVC participation (Figure 5.1, left panel) stands out, indicating that it is especially important as an exporter of primary and intermediate goods and services used in other countries’ exports at an early stage of production. The commodities that drive this upstream link into GVCs are energy (coke and petroleum), metals, chemicals, as well as transport and certain business services (right panel) (see also appendix Figure A 5.1). By contrast, Russia is far less important as a “buyer” in GVCs, relying less on imported inputs to produce its exports (backward GVC participation), but it is more relevant as an importer of semi-final and final goods further downstream for domestic consumption. A wide range of financial, trade, and private-sector sanctions and restrictions have disrupted Russian trade and have led to logistics disruptions, input shortages, and commodity price hikes that reverberate through GVCs. Specific bans on exports to Russia are disrupting Russia’s production capabilities, notably in electronics, automobiles, iron and steel, and aviation. Logistics disruptions affect almost all trade flows between Russia and Europe, resulting in delays and inflating already high global freight prices and delays between East Asia and Europe.2 The revocation of most-favored nation (MFN) tariff treatment on Russian exports by G7 and EU countries means that these countries are now free to raise import tariffs sharply on Russian goods, implying higher prices for such goods. Globally, supply constraints and price hikes are being felt, notably for wheat, corn, and vegetable oils (which has led several countries to restrict their own exports of such goods), fertilizers, metals, and energy commodities. 1. Prepared by Deborah Winkler (Senior Consultant, ETIRI), Lucie Wuester (Consultant, ETIRI) and David Knight (Lead Economist, EECM1), drawing on findings in Winkler, Wuester, and Knight (2022). The authors thank Ana Fernandes, Sandeep Mahajan, Antonio Nucifora, Michele Ruta and Daria Taglioni for valuable comments and suggestions. 2. A more detailed assessment of the logistics and connectivity disruptions is provided in chapter 3 by Arvis, Rastogi and Saslavsky (2022). THE IMPACT OF THE WAR IN UKRAINE ON GLOBAL TRADE AND INVESTMENT <<< 57 > > > FIGURE 5.1: Russia’s forward and backward GVC participation, total and sectoral decomposition, 2018 a. GVC participation in Russia and comparators, 2018 b. GVC participation 2018, sectoral decomposition 40 35 30 Backward 25 20 Forward 15 10 0 5 10 15 20 25 30 35 40 5 5 Agricu lture Mining Food & beverages Coke & petroleum Chemicals Metals 0 Electronics Machinery Transport equ ip. Brazil China EU28 India Russia S. Africa USA Trade Transport Accomod. & food services Forw ard Backward Information & comm. serv. Rest Source: Own computations. Data: OECD-WTO TiVA 2021 release. Note: Forward GVC participation = Domestic value added embodied in third country exports (% of exports). Backward GVC participation = imported inputs in exports (% of exports). The disruption of Russia’s exports will feed into GVCs via major global production hubs for trade and will especially affect regional economies that are highly dependent on these exports. While virtually all GVCs are affected by rising energy prices, GVCs that are especially reliant on other (notably metals and fertilizer) commodity inputs from Russia for their export production include transport equipment, machinery, electronics, agribusiness, transport, and business services (Figure 5.2). The GVC production hubs of China (and to a lesser extent Japan and South Korea), Germany (and other Western European countries), and the United States are among Russia’s largest trade partners, both as importers of Russian commodity inputs and as exporters of GVC goods. Examples of high regional dependence include imports of cereals and fertilizer from Russia, metals (nickel and iron and steel), wood products, and mechanical goods (e. g. Kazakhstan imports over 90 percent of hydraulic turbines/water wheels from Russia) and vehicles (especially in the Eurasian Economic Union (EAEU3)). These countries also export high shares of products to Russia across many sectors including apparel, food products, transport equipment, machinery, and electronics.4 3. The EAEU is a customs union which consists of Armenia, Belarus, Kazakhstan, Kyrgyzstan, and Russia. 4. CIS countries are also highly exposed to Russia in terms of their inward foreign direct investment stock (see chapter 6 by Liu 2022). THE IMPACT OF THE WAR IN UKRAINE ON GLOBAL TRADE AND INVESTMENT <<< 58 > > > FIGURE 5.2: Russia as a seller, key sectors and products, and implications for supply chain partners Russia as a seller Key Global / Regional Largest direct Most dependent Sector Key Products Value Chains partners partners CHN, DEU, NDL, MNG, BLR, SVK, Crude oil Many POL, BLR EST, KAZ Petroleum USA, TUR, DEU, MNG, KAZ, KGZ, Fuels Many products GBR, KOR BLR, TJK ITA, JPN, BLR, BLR, SVK, EST, Natural Gas Many SVK, CZE LVA, SRB Transp. equipment USA, JPN, DEU, CAN, JPN, USA, Palladium (catalytic converters) CHN, ITA ITA, KOR Transport equipment, TUR, USA, BLR, KAZ, BLR, KGZ, Iron and steel machinery ITA, BEL AZE, UZB Metals Copper, Electronics, trans. CHN, DEU, TUR, BLR, KAZ, ARM, aluminum equip, machinery JPN, USA UZB, AZE Metal (alloying), auto CHN, FIN, DEU, FIN, BLR, UKR, Nickel (batteries), electronic NLD, USA LVA, MDA BRA, USA, CHN, MNG, BLR, AZE, Chemicals Fertilizers Agribusiness IND, MEX KAZ, MDA Cell phones, BLR, KAZ, AZE, BLR, ARM, GEO, Electronics Electronics receivers, etc. CHN, GEO TJK, KAZ Metal, auto Transport equipment, CHN, FIN, DEU, FIN, BLR, UKR, Transport Equipment parts machinery NLD, USA LVA, MDA Transport, Business services, DEU, NLD, JPN, LIT, LVA, EST, Services business serv. agribus., transport AUT, USA, FIN SLV, FIN Source: Own compilation. Note: Based on analysis in Winkler, Wuester, and Knight (2022). Countries reliant on Russia as an export market will also be affected, as Russian imports of goods and services are disrupted directly through trade and logistics and indirectly through macroeconomic channels and diminished consumer demand. Export sanctions and logistics bottlenecks will make it more difficult for Russia to import goods, while ruble depreciation and declining domestic demand in Russia will reduce import demand even if goods are available. This will have an effect on exporters of these goods to Russia, as well as transport and business services providers who depend on these activities (Figure 5.3). Countries dependent on Russia as an export market include EAEU and CIS countries5 (apparel, food and beverage goods) as well as the Faroe Islands (fish) and Paraguay (oil seeds and meat). 5. The countries in the CIS are Azerbaijan, Armenia, Belarus, Kazakhstan, Kyrgyzstan, Moldova, Russia, Tajikistan, Turkmenistan, Uzbekistan, and Ukraine. THE IMPACT OF THE WAR IN UKRAINE ON GLOBAL TRADE AND INVESTMENT <<< 59 > > > FIGURE 5.3: Russia as a buyer, key sectors and products, and implications for GVCs and trade Russia as a buyer Key Global / Regional Largest direct Most dependent Sector Key Products Value Chains partners partners DEU, JPN, KOR, TJK, BLR, KGZ, Transport Equipment Auto parts Transport equipment CHN, BLR KAZ, UKR Cell phones, CHN, DEU, BNM, BLR, ARM, TJK, Electronics Electronics comput,, parts NLD, POL KAZ, UZB Final mechanical CHN, DEU, ITA, BLR, ARM, KAZ, Machinery Machinery goods, parts POL, NLD LTU, UKR Professional, Mining, manufacturing, NDL, IRL, USA, CYP, LVA, SRB, Services technical services FRA, UK, DEU FIN, IRL, NDL Source: Own compilation. Note: Based on analysis in Winkler, Wuester, and Knight (2022). While a country’s GVC risk depends largely on its direct well as increasing commodity and logistics prices. trade links with Russia, the availability of alternative inputs Trade disruptions can have ripple effects for countries further plays an important role. The substitutability of inputs from downstream or upstream in GVCs, even though they are not Russia depends on whether products are differentiated or directly trading a specific product with Russia. Rising logistics homogeneous. Several of Russia’s key export products (e.g. costs in the region are exacerbating the impact. The shock rare metals) are difficult to replace in the short run, suggesting may also be transmitted globally via effects on the pricing of a severe impact on GVCs. Power relations also matter, with internationally traded commodities and price hikes of inputs certain GVCs consisting of many competing suppliers globally (e.g., energy), triggered by protectionist measures in other (e.g., apparel), while in others global suppliers have large market countries. Higher prices especially affect the profitability of power (e.g., semiconductors). For example, pig iron exports energy-intensive activities. Metal producers in ¬Germany, are dominated by three countries (Russia, Brazil, and Ukraine) for instance, have stopped production due to inflating energy together accounting for over three-quarters of global exports; prices, rendering production unprofitable. hence, replacing imports from Russia will be more difficult than for products in which the global market is less concentrated. The rest of this chapter illustrates Russia’s participation in In an effort to secure access to critical inputs, countries could GVCs as a seller of metals, chemicals, and transport and put in place restrictive trade measures (e.g. price or export business services, and as a buyer of electronics, transport controls) or begin stockpiling, which would further add to the equipment, and business services. It identifies key GVCs ongoing supply chain distress. While this chapter emphasizes that could be affected, as well as Russia’s largest direct trade GVC risk, it is crucial to also highlight one key benefit of GVC partners and most dependent countries. For Russia’s largest participation in the context of shocks: Countries and firms and most dependent export markets overall and their sectoral relying on a more diversified global supplier base have shown import shares from Russia, see appendix Figure A 5.2 and to be more resilient to idiosyncratic shocks, including during the Figure A 5.3. The following analysis does not include fuel and COVID-19 pandemic.6 The high dependence of some countries food exports. While fuel is Russia’s main export, it is used on imports from Russia highlighted in this analysis reveals their virtually in all manufacturing sectors downstream and goes lack of substitutes and suggests stronger negative effects. beyond the analysis of specific GVC effects.7 Food exports have a smaller weight in Russia’s export basket, although it is Importantly, even countries that do not directly trade an important global wheat exporter.8 with Russia experience ripple effects along GVCs as 6. Brenton, Ferrantino, and Maliszewska (2022). 7. Detailed analysis for fuel, wood and GVC-intensive sectors is provided in Winkler, Wuester and Knight (2022). 8. Implications of disruptions of Russia’s food (wheat) exports are covered in chapter 2 by Ruta, Rocha and Espitia (2022). THE IMPACT OF THE WAR IN UKRAINE ON GLOBAL TRADE AND INVESTMENT <<< 60 Russia’s participation as a seller Russia’s largest markets for metals are Turkey, China, Germany, and the United States, while the most dependent of metals, chemicals, and business countries are mainly non-EU ECA economies, including services Turkey, and also EU members Finland and Latvia. Russia’s top export partners for metals over the period 2018-20 include Russian metal exports are dominated by aluminum, Turkey, China, Germany, and the United States, importing copper, iron, steel, and nickel. These are mainly used in metals worth between US$3 and 5 billion, respectively (Figure the construction, transport, machinery, electronics, and metals 5.4, left panel). Turkey is the most dependent of these four, with sectors abroad. Over half of Russia’s metal exports over the an import share of over 17 percent, while import shares only period 2018-20 were iron and steel, representing over 5 percent range from 2 percent to 4 percent in the other top four markets. of world exports (over 30 percent of global exports of specific Among the ten most dependent countries, we find mainly semi-finished products), while related products made up another non-EU ECA countries, including all EAEU members and 10 percent. Copper and aluminum exports represented another Uzbekistan where Russian import shares exceed 40 percent, 15 percent and 14 percent, respectively, of Russia’s metal as well as Turkey, but also two EU members (Latvia and exports, with world export-market shares of 3.3 percent and Finland), which strongly depend on metals from Russia (right 3.6 percent. While nickel constitutes only 7 percent of its metal panel). Finland relies on nickel imports, related to a Finland- exports, Russia’s world market share is 12 percent. Russia’s based Norilsk Nickel’s plant, which largely delivers inputs for EV metals are used in a variety of final-demand sectors abroad, batteries (German BASF SE battery company has a long-term most notably construction (20 percent of final demand), but agreement with the company). also motor vehicles, other transport and machinery absorbing another 20 percent, while electronics and metals consumed almost 10 percent, respectively (Figure A 5.4). > > > FIGURE 5.4: Russia’s metal exports, top export markets and most dependent countries, 2018-20 avg. a. Russia’s top 10 export markets, metals b. 10 most dep. markets on imports from Russia, metals 5 70% 5 70% 60% 60% 4 4 Partner's import share (%) Partner's import share (%) Russia's export value (b. $) Russia's export value (b. $) 50% 50% 3 3 40% 40% 30% 30% 2 2 20% 20% 1 1 10% 10% 0 0% 0 0% TUR CHN DEU USA BLR KAZ ITA FIN POL JPN BLR KAZ KGZ ARM UZB AZE LVA MNG FIN TUR Russian export value Import share of partner Russian export value Import sha re of pa rtner Source: Own computations. Data: UN Comtrade. Note: Mirror data for exports used. Bright blue bars = EAEU countries. THE IMPACT OF THE WAR IN UKRAINE ON GLOBAL TRADE AND INVESTMENT <<< 61 ECA countries are most dependent on Russia’s largest percent of fertilizer from Russia, and the former two largely exported metal products. Semi-finished iron and non- depend on fertilizer imports from Kazakhstan and Turkmenistan. alloy steel exports (now under EU sanctions) from Russia are especially important for Denmark (sourcing 99 percent In transport and other business services, Russia is from Russia), Belgium (82 percent), and Brazil (79 percent) more strongly integrated with EU countries. The bulk of (appendix Table A 5.1). For the former two this is likely linked to Russia’s transport services is exported to European countries, the mining and steel company NLMK’s plate mills in Denmark most importantly Germany, Austria, Finland, Lithuania, and and joint venture in Belgium, producing steel for construction, Switzerland, as well as Canada. Unlike Russia’s goods shipbuilding, pressure vessels, as well as steel plates for wind exports, the top 10 most dependent countries in transport energy equipment. Exports of unwrought aluminum largely services include many Eastern European EU countries, with reach CIS countries with shares above 90 percent, as well as the highest dependence in Lithuania, Latvia, and Finland Norway (84 percent). Belarus imports 99 percent of unwrought (Figure A 5.6). Similarly, Russia’s buyers of business services copper from Russia, the Netherlands 53 percent on average. are mainly Western EU countries but also include Japan and Both products are used in a range of manufacturing activities, the United States, while its most dependent export partners including power, construction, consumer electronics, and are Eastern EU countries. transportation. Except iron and steel products, these exports are not currently sanctioned for trade with Russia, but the sectors will be affected by price hikes and logistics bottlenecks. Russia’s role as a buyer of Russia has a large global market share in precious metals electronics, transport equipment, such as palladium and platinum. Russia exported palladium and business services worth US$4.5 billion over the period 2018-20, representing a global export market share of 24 percent. The largest use for Russia’s top three import partners are the GVC hubs of palladium is in the production of catalytic converters. Canada, China, Germany and the United States ( Figure A 5.7), with Japan, the United States, Italy, and South Korea import select other countries important in certain GVCs.9 The between 34 percent and 48 percent of their palladium from United States, Germany, and Japan had a similar weight in Russia. Russia’s platinum exports were worth US$650 million Russia’s imports of transport equipment over the period 2018- (8.7 percent of global market share), with import shares largest 20, with import values ranging from US$3.5 to US$4 billion for Italy (29 percent), the Czech Republic (16 percent), and for each (Figure A 5.8). However, Russia makes up only a China (14 percent). Platinum is used in jewelry making and small share in these countries’ transport exports: 2.4 percent dentistry and also serves as an input for electrical contacts, fine in the United States and Japan and 1.4 percent in Germany. resistance wires, and medical and laboratory instruments. In machinery and electronics, Russia’s dominant source of imports is China, exporting goods worth over US$25 billion. Russia’s exports of fertilizers are globally important, and Other relevant import partners include Italy, the United States, many neighboring and low-income countries are highly and Japan, followed by Vietnam and South Korea. dependent on them. The largest buyers of Russia’s chemical exports include Brazil, the United States, Kazakhstan, Belarus, Russia’s major imports along GVCs are final electronics, and China, while India is another important non-European intermediate and final vehicles, and apparel, coming buyer. The most dependent countries are mainly non-EU ECA largely from East Asia and the EU (Figure 5.5). The goods countries, with the exception of Estonia and Finland (Figure A in these GVCs together account for 35 percent of Russia’s 5.5). Forty-three percent of Russia’s chemical exports consist imports, and final electronics account for 10.8 percent, a much of fertilizers, representing over 13 percent of world exports. more substantial share than exports. Just over half of final Belarus, Mongolia, and Moldova import between 81 percent and electronics imports come from China, in large part consisting 98 percent of fertilizers from Russia; Honduras and the Central of cellphones and computers. From the EU, final electronics African Republic between 57 percent and 60 percent. Except imports include computers and related equipment and machines Tajikistan and Uzbekistan, all CIS countries import at least 30 and mechanical appliances used for manufacturing. 9. This section focuses on the implications of economic sanctions imposed on Russia for its direct trade partners, drawing on gross import data in Russia. While analysis based on import data does not allow to identify the origin of value added nor their final use – i.e. if imports are used for export production or domestic consumption in Russia – our first-order concern is to identify the top and most dependent partner countries exporting to Russia. THE IMPACT OF THE WAR IN UKRAINE ON GLOBAL TRADE AND INVESTMENT <<< 62 > > > FIGURE 5.5: Russia’s imports of intermediate vehicle parts and final electronics, 2018-20 avg. Final electronics 851712 847150 847170 Telephones for cellular Units of Units CHN DEU networks or for other automatic of China wireless networks data 847330 POL 847130 Automatic data processing machines; VNM 851762 USA Viet Nam Communication USA Region Product Sector Other N/A European Union North America MachElec East Asia & Pacific Latin America & Caribbean South Asia Miscellan Europe & Central Asia, other Middle East & North Africa Sub-Saharan Africa Intermediate vehicles 870710 870829 870840 840734 Vehicles; Vehicles; Vehicle Engines; KOR JPN bodies parts and parts; (including accessories, gear boxes Rep. of Korea Japan cabs) for the of bodies, and parts motor vehicles other than thereof of heading no. safety seat CHN China 870899 870870 Vehicle parts Vehicle parts; and DEU CZE USA accessories; Germany Czechia USA 870830 Vehicle parts; 870880 SVK Vehicle Slovakia parts; 870850 Region Product Sector Other N/A European Union North America MachElec Transport East Asia & Pacific Latin America & Caribbean South Asia Metals Europe & Central Asia, other Middle East & North Africa Sub-Saharan Africa Miscellan Source: Own computations. Data: World Bank MC-GVC database. THE IMPACT OF THE WAR IN UKRAINE ON GLOBAL TRADE AND INVESTMENT <<< 63 The top 10 exporting countries most dependent on Russia include all EAEU countries, Georgia, Moldova, Uzbekistan, and Tajikistan, as well as the Faroe Islands and Paraguay. Dependence of these countries on exports to Russia, however, is relatively low, in particular in electronics and transport equipment. Their largest export shares to Russia are in apparel, food and beverage goods (Figure A 5.9), that are all likely to fall in line with lower consumer demand in Russia, affecting in particular neighboring and EAEU countries’ exports. Paraguay depends heavily on Russia for its meat and oil seeds exports, whereas Faeroe Islands export over a fifth of their fish to Russia. Russia’s imports of services exceed its exports, with trade deficits largest in travel and other business services; the largest imports are other business services (especially architectural, engineering, scientific and other technical services) and transport services sourced from Europe and the United States. Of ‘other business services’, around 21 percent were used in manufacturing and professional/scientific/ technical activities, respectively, 17 percent in mining and quarrying, and 14 percent in transportation and storage in 2020. Other business services are predominantly sourced from the United States and EU countries, most importantly Netherlands, Ireland, France, the UK and Germany. Almost a third of other business services imported by Russia consist of architectural, engineering, scientific, and other technical services which are predominantly sourced from the UK, Italy, Germany, the United States, and Finland (Figure A 5.10). Transport services imports are dominated by freight and air transport services. Russia’s top transport services import partners include mostly smaller European countries, especially Switzerland, Lithuania, Denmark, and Cyprus, but also Germany. Eastern EU countries, especially Cyprus, are the most dependent on Russia in both other business services and transport services, while Switzerland has some dependence in transport services exports (9 percent). References Arvis, Jean-François, Cordula Rastogi, and Daniel Saslavsky (2022), “Effects of the war in Ukraine on Global Logistics and Connectivity.” Chapter 3 in The Impact of the War in Ukraine on Global Trade and Investment. Michele Ruta (Ed.). The World Bank. Brenton, Paul, Michael Ferrantino, and Maryla Maliszewska (2022), Reshaping Global Value Chains in Light of COVID-19 Implications for Trade and Poverty Reduction in Developing Countries, Washington, D.C.: The World Bank. Liu, Yan (2022), “Implications of the war in Ukraine on Global FDI,” Chapter 6 in The Impact of the War in Ukraine on Global Trade and Investment. Michele Ruta (Ed.). The World Bank. Ruta, Michele, Nadia Rocha and Alvaro Espitia (2022), “Effects of the Conflict in Ukraine on Food Trade,” Chapter 2 in The Impact of the War in Ukraine on Global Trade and Investment. Michele Ruta (Ed.). The World Bank. Winkler, Deborah, Wuester, Lucie and David Knight (2022), “Russia’s global value chain participation: Implications of Russia’s invasion of Ukraine for its trade partners and key value chains,” The World Bank. THE IMPACT OF THE WAR IN UKRAINE ON GLOBAL TRADE AND INVESTMENT <<< 64 >>> Annex > > > FIGURE A5.1: Sectoral decomposition of Russia’s gross exports, 2018 7% 3% Agriculture & forestry 2% 1% Mining 7% Food & beverages Coke & petroleum 31% Chemicals Metals 13% Electronics Machinery 2% Transport equip. 1% 1% Trade 2% Transport 9% Accomod. & food services 4% 17% Information & comm. serv. Rest Source: Own computations. Data: OECD-WTO TiVA 2018 release. Note: Agriculture & forestry also includes hunting and fishing. > > > FIGURE A5.2: Russia’s goods exports, top export markets and most dependent countries, 2018-20 avg. a. Russia’s top 10 export markets, totals b. 10 most dep. markets on imports from Russia, totals 25 60% 60 60% 50% 50 50% 20 Partner's import share (%) Partner's import share (%) Russia's export value (b. $) Russia's export value (b. $) 40% 40 40% 15 30% 30 30% 10 20 20% 20% 5 10 10% 10% - 0% - 0% CHN DEU TUR USA BLR NLD GBR POL ITA KOR BLR KAZ ARM KGZ MNG UZB AZE SUD LTU FIN Russian export value Import share of partner Russian export value Import share of partner Source: Own computations. Data: UN Comtrade. Note: Mirror data for exports used. Bright blue bars = EAEU countries. THE IMPACT OF THE WAR IN UKRAINE ON GLOBAL TRADE AND INVESTMENT <<< 65 > > > FIGURE A5.3: Ten most dependent markets on imports from Russia, import share of key products, 2018-20 avg. 100% 94.8 89.9 49.1 89.3 40.0 33.3 70.7 51.6 20.9 51.3 Products Iron and steel products Share of product in imports from Russia 80% 29.6 39.5 77.3 Fertilizer 16.9 8.2 Nickel Plastic 60% Wood 86.6 Iron and steel Cereals Electrical machinery 40% 57.5 Vehicles (excl rail) 59.3 82.9 Machinery, reactors, mechanical Other 96.7 20% 72.7 78.7 Energy 80.2 37.7 38.7 0% BLR KAZ ARM KGZ MNG UZB AZE SDN LTU FIN Note:Label shows share of Russia in reporters total imports of the product Source: Own computations. Data: UN Comtrade. > > > FIGURE A5.4: Top ten final demand sectors of Russian basic metals value added in other countries, 2018 Russia's basic metals, top 10 final demand sectors abroad 3.2% Other 3.4% 3.4% 3.8% Construction 28.8% 3.9% Motor vehicles, trailers and semi-trailers Machinery and equipment, nec 5.6% Fabricated metal products Electrical equipment 5.7% Basic metals Computers, electronic and optical equipment 9.0% Wholesale and retail trade; repair of motor vehicles Manufacturing nec; repair and installation of machinery 21.9% and equipment 11.2% Other transport equipment Source: Own computations. Data: OECD-WTO TiVA 2018 release. THE IMPACT OF THE WAR IN UKRAINE ON GLOBAL TRADE AND INVESTMENT <<< 66 > > > Table A 5.1. Russia’s largest metal export products and most dependent markets, 2018-20 (avg.) # of # of Rus share Russia partners partners Top markets in terms of HS Product in world export, with with share of imports from code imports ml. US$ share share Russia >90% 50-89% Aluminium; unwrought, (not Armenia, Kazakhstan, 760110 19.0 4886.5 4 5 alloyed) Ukraine, Belarus, Norway Copper; refined, unwrought, 740311 7.0 4002.3 1 1 Belarus, Netherlands cathode Iron or non-alloy steel; semi- Denmark, Belarus, Brazil, 720712 30.5 3581.2 1 6 finis Czech Rep, Poland 750210 Nickel; unwrought, not alloyed 21.6 2110.9 0 2 Belarus, Ukraine Iron; non-alloy pig iron Azerbaijan, Belarus, Saudi 720110 42.1 2092.8 2 8 containing Arabia, Korea, Italy 760120 Aluminium; unwrought, alloys 7.4 1971.5 2 1 Armenia, Belarus, Greece Iron or non-alloy steel; semi- Ukraine, Kazakhstan, Poland, 720711 23.9 1644.5 2 5 finis Turkey, Georgia Latvia, Kazakhstan, 720839 Iron or non-alloy steel; in coils, 10.6 1457.3 3 6 Azerbaijan, Ukraine, Belarus Ferrous waste and scrap; n.e.c. 720449 6.0 1332.5 1 2 Kazakhstan, Belarus, Ukraine in 750110 Nickel; nickel mattes 25.6 1070.0 1 2 Finland, Belarus, Ukraine Ferrous products; obtained by Belarus, Uzbekistan, Sweden, 720310 35.8 945.0 4 4 direc Belgium, Italy Source: Own computations. Data: UN Comtrade. Note: Includes trade flows larger than 1 million US$. > > > FIGURE A5.5: Russia’s chemicals exports, top export markets and most dependent countries, 2018-20 avg. a. Russia’s top 10 export markets, chemicals b. 10 most dep. markets on imports from Russia, chemicals 2.5 45% 1.4 45% 40% 40% 1.2 2.0 Partner's import share (%) 35% Partner's import share (%) 35% Russia's export value (b. $) 1.0 Russia's export value (b. $) 30% 30% 1.5 25% 0.8 25% 20% 0.6 20% 1.0 15% 15% 0.4 0.5 10% 10% 5% 0.2 5% - 0% - 0% BRA USA KAZ BLR CHN POL FIN IND TUR DEU BLR KAZ MNG KGZ ARM AZE UZB MDA EST FIN Russian export value Import share of partner Russian export value Import share of partner Source: Own computations. Data: UN Comtrade. Note: Mirror data for exports used. Bright blue bars = EAEU countries. THE IMPACT OF THE WAR IN UKRAINE ON GLOBAL TRADE AND INVESTMENT <<< 67 > > > FIGURE A5.6: Russia’s transport services exports, top export markets and most dependent countries, 2018-20 avg. a. Russia’s top 10 export markets b. 10 most dep. countries on imports from Russia 800 14% 700 14% Russia's export value (m. $) 700 12% 600 12% Russia's export value (m. $) Partner's import share (%) 600 Partner's import share (%) 10% 500 10% 500 8% 400 8% 400 6% 300 6% 300 4% 200 4% 200 2% 100 2% 100 0 0% 0 0% ,… d a a a r ia a d ia ia a ly y d a a nd ce k nd ,… tri an i an ni ad ar tri an ad tv on an ni ch Ita ga la an s ua la s m ua La l nl an m ze an nd nl Au Po t Au Po er Es l Fr Fi en th Bu er Fi th C C C la itz Li G Li D er Sw itz Sw Russian export value Import share of partner Russian export value Import share of partner Source: Own computations. Data: UNCTAD. Note: Mirror data for exports used. > > > FIGURE A5.7: Russia’s goods imports, top import partners and most dependent countries, 2018-20 avg. a. Russia’s top 20 import markets, total b. 10 most dependent countries on exports to Russia, total 60 60% 14 60% 50 50% 12 50% Partner's export share (%) Partner's export share (%) Russia's import value (b. $) 10 Russia's import value (b. $) 40 40% 40% 8 30 30% 30% 6 20 20% 20% 4 10 10% 10% 2 - 0% - 0% DEU JPN NLD FIN USA ITA UKR VNM BLR ARM FRO GEO KGZ KAZ MDA PRY UZB TJK CHN IND FRA CZE ESP CHE KAZ POL TUR BLR GBR KOR Russian import value Export share of partner Russian import value Import share of partner Source: Own computations. Data: UN Comtrade. Bright blue bars = EAEU countries. > > > FIGURE A5.8: Russia’s goods imports, top import partners and most dependent countries, 2018-20 avg. a. Russia’s top 10 import partners, transport equipment b. Russia’s top 10 import partners, machinery/electronics, 4.0 70% 30 90% 3.5 80% 60% 25 Partner's export share (%) 70% Partner's export share (%) 3.0 Russia's import value (b. $) 50% Russia's import value (b. $) 20 60% 2.5 40% 50% 2.0 15 30% 40% 1.5 10 30% 20% 1.0 20% 5 0.5 10% 10% - 0% 0 0% USA JPN DEU CHN KOR BLR FRA S VK CZE GBR CHN DEU ITA USA JPN VNM KOR BLR CZE FRA Russian import value Export share of partner Russian import value Export share of partner Source: Own computations. Data: UN Comtrade. Bright blue bars = EAEU countries. THE IMPACT OF THE WAR IN UKRAINE ON GLOBAL TRADE AND INVESTMENT <<< 68 > > > FIGURE A5.9: Ten most dependent markets on exports to Russia, export share of key products, 2018-20 avg. 100% 2.1% 0.4% 0.2% 4.7% 0.8% 3.7% Products 5.3% 0.9% Iron and steel 1.1% 1.4% Precious metals, stones 80% 0.0% 15.7% 2.1% Apparel and clothing accessories Share of product in exports to Russia 1.4% 2.0% 3.0% 1.5% Oil seeds 6.8% 1.9% Cotton 4.3% 60% 1.5% 3.7% Pharmaceutical 1.7% Fruits and nuts 4.3% Apparel and clothing acc, knitted Beverages 40% 1.5% 1.3% Inorganic chemicals 36.6% 0.5% 4.4% Meat 2.4% Fuels 20% Oers, slag, ash 8.9% Vehicle (excl rail) Dairy products 0% Other Belarus Armenia Georgia Kazakhstan Kyrgyzstan Paraguay Rep. of TajikistanUnU zbekistan Moldova Source: Own computations. Data: UN Comtrade. > > > FIGURE A5.10: Russia’s other business services imports, top and most dependent import partners, 2018-20 avg. a. Russia’s other business services imports by category, b. Russia’s top 10 import partners, architectural, 2018-20 avg. engineering, scientific and technical services, 2018-20 avg. Research and development (R&D) 250 7% 1.0% 0.8% 6% Russia's import value (m. $) 200 Advertising, market research, and Partner's export share (%) 5% public opinion polling services 14.9% 150 4% Other professional and 24.3% management consulting services 3% 100 16.5% Architectural, engineering, scientific, 2% and other technical services 50 12.4% 1% Waste treatment and de-pollution, 0 0% agricultural and mining services 30.2% ly SA K a el nd y s en ia an nd ri U Ita ra ch Operating leasing services st a ed U m rla Is nl ze Au Sw Fi er he C G et N Other business services n.i.e. Russian import value Export share of partner Source: Own computations. Data: UNCTAD. Note: Russian imports based on its partner’s export data. THE IMPACT OF THE WAR IN UKRAINE ON GLOBAL TRADE AND INVESTMENT <<< 69 6. >>> Effects on Global FDI1 Russia and Ukraine in Global FDI Networks Russia and Ukraine are not major players in global FDI networks. Russia was the 22nd largest FDI destination in 2020 among 202 countries, and the 22nd largest outward investor among 172 countries. Its inward and outward FDI stock represented 1 percent of the global stock. A network analysis of global FDI stock shows that Russia is a second-tier node in the global and regional FDI network, clearly below par given the size of its population (Figure 6.1). Cyprus appears to be the largest FDI source and destination for Russia due to “round-tripping” funds from Russia. Ukraine accounted for 0.1 percent of global inward FDI stock in 2020, and its outward FDI stock is negligible. Eastern European and Central Asian economies are the most dependent on Russia for bilateral investments. Russia’s top FDI source and destination countries include several advanced European countries, though FDI into and from Russia makes up a tiny share of total FDI from and in these countries. About one-third of total inward FDI stock in Armenia and Belarus come from Russia. Moldova, and the Kyrgyz Republic also received nearly a fifth of their total inward FDI stock from Russia in 2020. Austria, Tajikistan, Montenegro, Burkina Faso, Seychelles, and Latvia are also highly dependent on Russian inward FDI, which accounted for about 10 percent of their total inward FDI stock (Figure 6.2 and Figure 6.3). Russia hosted 77 percent of Belarus’ total outward FDI stock. Kazakhstan and North Macedonia had around 10 percent of their outward FDI stock in Russia, followed by Slovenia, Latvia, Azerbaijan, Estonia, and Poland, though these countries’ outward FDI stock in Russia was generally less than US$1 billion. 1. This note has been prepared by Yan Liu (Economist, ETIIC). THE IMPACT OF THE WAR IN UKRAINE ON GLOBAL TRADE AND INVESTMENT <<< 70 > > > FIGURE 6.1: Russia and Ukraine are marginal players in global FDI networks Source: Author’s calculation based on IMF CDIS database. Node size represents the sum of a country’s total inward and outward FDI stock in 2020. Node color by World Bank region. Thickness of connecting lines represent bilateral FDI value (absolute value of inward stock plus absolute value of outward stock). Countries with stronger FDI ties are positioned closer. > > > FIGURE 6.2: Share of each country’s total inward FDI stock from Russia (10,100] (1,10] (.1,1] [0,.1] No data THE IMPACT OF THE WAR IN UKRAINE ON GLOBAL TRADE AND INVESTMENT <<< 71 > > > FIGURE 6.3: Share of each country’s total outward FDI stock in Russia (10,100] (1,10] (.1,1] [0,.1] No data Note: Darker green means higher share of FDI from/in Russia. Source: Author’s calculation based on IMF CDIS database 2020. MNCs are important players in Russia’s economy, especially in knowledge-intensive manufacturing industries, where MNCs contribute as much as 40 percent of output. Foreign MNCs accounted for 9 percent of total fixed-asset investment and 7 percent of employment in Russia’s modern sectors in 2012-2018. Foreign MNCs contributed 40 percent of output in the automotive industry and nearly 30 percent in chemicals in 2016 (Figure 6.4). Coal, oil and gas is the largest greenfield FDI receiving sector in Russia, followed by real estate, food and beverages, automotive OEM, and transportation (Figure 6.5). China, the United States, Germany, France, and Finland are main investors in Russia’s energy sector. THE IMPACT OF THE WAR IN UKRAINE ON GLOBAL TRADE AND INVESTMENT <<< 72 > > > > > > FIGURE 6.4: Total output breakdown by firm FIGURE 6.5: Greenfield FDI in Russia by sector ownership Coal, oil & gas 100% 12% 90% 80% Output breakdown 70% 60% Real estate 50% Others 12% 40% 41% 30% 20% 10% 0% Food & Beverages Publish & broadcast Mo tor vehicles Ma ch. & equip. Electronics Textile & apparel Chemicals Rubber & plastic IT Min eral Wh olesale & retail Electrical equip. Food & beverages Financial Furniture Paper Fabricated metal 11% Automotive Consumer OEM Foreign DMNC Dothers products Metals Transp. 8% 5% 5% 6% Figure 6.4 source: OECD AMNE database. DMNC = domestically owned MNCs in Russia. Dothers = other domestic firms. Figure 6.5 source: fDi Markets database. 2003-2021. The figure shows cumulative amount of greenfield FDI Russia received during 2003-2021 by sector. Many European and Central Asian countries rely heavily Uzbekistan, Iraq, Jordan, Vietnam, Syrian Arab Republic, on bilateral investment with Russia in the energy sector. Germany, Venezuela, Bulgaria, and Indonesia. Jordan, More than half of Russia’s outward greenfield FDI amount is Uzbekistan, Egypt, and Iraq rely on Russia for 30-60 percent of in coal, oil, and gas; the cumulative amount during 2003-2021 inward energy greenfield FDI. Some European countries also exceeded US$120 billion and accounted for 5 percent of global depend on Russia for inward and outward energy investment, greenfield FDI in the sector. Top destinations for Russia’s including Bosnia and Herzegovina, Ukraine, Serbia, Bulgaria, outward greenfield FDI in coal, oil, and gas include Egypt, Germany, Finland, and Norway (Figure 6.6 and Figure 6.7). > > > > > > FIGURE 6.6: Countries with highest share of energy FIGURE 6.7: Countries with the highest share of greenfield FDI from Russia energy greenfield FDI in Russia 35 100% 16 30% Energy greenfield FDI from Russia (bn USD) % in total energy greenfield FDI Energy greenfield FDI from Russia (bn USD) 90% 30 % in total energy greenfield FDI 14 80% 25% 25 70% 12 20 60% 20% 10 50% 15 40% 8 15% 10 30% 20% 6 5 10% 10% 4 0 0% 5% Namibia Jordan Uzbekistan Bosnia and Herzegovina Syrian Arab Republic Ukraine Serbia Egypt, Arab Rep. Iraq Bulgaria Germany 2 0 0% Finland China Germany Norway Qatar Italy United States France Netherlands United Kingdom Japan FDI fro m Russia % of total energy greenfield FDI FDI in Russia % of total energy greenfield FDI Note: % indicates Russia’s share in reporting countries’ total energy greenfield FDI Note: % indicates reporting countries’ share of energy greenfield FDI amount in amount during 2003-2021. Russia during 2003-2021. Source: Author’s calculation based on fDi Markets database. Source: Author’s calculation based on fDi Markets database. THE IMPACT OF THE WAR IN UKRAINE ON GLOBAL TRADE AND INVESTMENT <<< 73 Impact of the conflict through FDI investment losses, disruptions in energy supplies, and higher energy prices. BP is among several foreign energy The United States, UK, EU, and other allies have imposed firms exiting Russia; the estimated cost of disinvestment can be unprecedented and expansive sanctions on Russia in up to $25 billion. Engie (France), Eni (Italy), Equinor (Norway), response to its invasion of Ukraine. These sanctions Neste (Finland), OMV (Austria), Shell (UK and Netherlands), include freezing the assets of Russian politicians, officials, TotalEnergies (France), and Uniper (Germany) either have and oligarchs; removing seven Russian banks from the major stakes in Russian oil fields or are financially tied to Nord Swift payments system; banning transactions between most Stream 2. Russia supplied 27 percent, 47 percent, and 41 Russian financial entities and US counterparts; freezing percent of crude oil, solid fuel, and natural gas EU imported the assets of the Russian central bank; restricting exports in 2019 respectively (Eurostat 2022). Many EU countries with of products used in electronic, automotive, aviation and oil large shares of energy greenfield FDI in Russia —including refining value chains, among others, to Russia; and other Finland, Germany, and Norway —could experience disruptions financial and economic sanctions. The United States, UK in energy supplies and higher energy prices. and EU have either banned imports of Russian oil and gas or plan to scale down purchases. The list is growing as countries While the war’s direct FDI effects are limited to more announce new sanctions. As firms’ operations are severely exposed countries, the indirect effects on FDI and MNCs disrupted by the sanctions, many foreign MNCs are leaving, could prove much more profound and far-reaching. The further depressing economic activity in Russia. negative effects on MNCs more exposed to Russia will also ripple through value chains. Sanctions may affect bank liquidity Eastern European and Central Asian economies, including and solvency and tighten global financial conditions, possibly Armenia, Belarus, Moldova, the Kyrgyz Republic, Tajikistan, leading to increased EMDE borrowing costs and financial and Montenegro, will be affected through multiple strain. Soaring commodity prices and rising inflation could channels: (1) The conflict and Western sanctions will take a toll prompt more rate hikes in advanced economies, slowing down on existing Russian MNCs in these economies by complicating global growth and suppressing private investment. Elevated cross-border transactions, weakening their parent companies, uncertainty and geopolitical risks will damp investor confidence, and disrupting logistics. Eventually Russia may whittle down its deter new investment, and force some MNCs to limit their existing investment in these countries. (2) A shrinking Russia operational footprints. Developing countries are still reeling from economy and depreciating ruble will reduce FDI inflows and the COVID-19 pandemic; both output and investment in EMDEs remittances in these countries, depress domestic demand and are projected to remain significantly below pre-pandemic levels weigh on economic growth. (3) Currencies in some of these for years while advanced economies will achieve full recovery by economies have depreciated against the US dollar, resulting in 2023 (World Bank 2022). High risks and uncertainty, exchange- a contraction in their FDI stock and probably triggering capital rate volatility, slower growth, and tightening global liquidity will outflows. (4) Countries like Belarus and Kazakhstan with large accelerate capital flight from developing countries as investors shares of total outward FDI stock in Russia will likely suffer flock to safer assets in advanced economies. This will add to losses on their investments in Russia due to ruble depreciation, the vulnerabilities caused by COVID-19 and further discourage difficulty of transferring funds, and Russia’s deteriorating FDI in EMDEs. In the longer term, Russia and other countries economy. The direct losses will have a limited impact on the might set up their own banking networks or reduce their economies of Belarus and Kazakhstan as their outward FDI reliance on the dollar to conduct international transactions. The stocks in Russia are below US$2 billion. sanctions on Russia may also prompt some countries to seek tech self-reliance. Eventually, the long-term fallout of the war European countries dependent on bilateral energy and sanctions could be a further debilitation and fragmentation investment with Russia may face elevated risks, potential of the global financial system and global value chains. References World Bank. 2022. Global Economic Prospects. Eurostat. 2022. From where do we import energy? https://ec.europa.eu/eurostat/cache/infographs/energy/bloc-2c.html#carouselControls?lang=en THE IMPACT OF THE WAR IN UKRAINE ON GLOBAL TRADE AND INVESTMENT <<< 74 7. >>> Effects on Global Tourism1 Outbound Tourism The war in the Ukraine has severely affected outbound travel from Russia and Ukraine, which makes up a sizeable proportion of global tourism. Russians took an estimated 45 million trips abroad in 2019 (4th most in the world), generating US$36 billion in tourism receipts at an average of US$798 per trip (UNWTO, 2022). Ukrainians took 29 million trips in 2019 (7th most in the world), generating US$8.9 billion in receipts and spending an average of US$295 per trip. Russia and Ukraine’s outbound tourism and expenditure have been increasing in the past decade in absolute and relative terms. The conflict is expected to lead to a decrease in both volumes and expenditures (absolute and per trip). 1. This chapter was produced by Alex Pio, Andrew Beath and Ryan Chia Kuo from the TIC Global Tourism Team. THE IMPACT OF THE WAR IN UKRAINE ON GLOBAL TRADE AND INVESTMENT <<< 75 > > > FIGURE 7.1: Russian and Ukrainian Shares of Tourist Arrivals (2018) and Contribution of Tourism Gross Exports to Current Account Balance (2020) 90% 4.0% Share of overall tourism arrivals (2018; %) 80% 3.5% 70% Percent of GDP (2020) 3.0% 60% 2.5% 50% 2.0% 40% 1.5% 30% 1.0% 20% 10% 0.5% 0% 0.0% va ia s ia nd ia d ia el s o lia a an y lic ia n . n ep ru ru ke an gr ni ta ta tv ar rg an ra is ub go do la st ua la yp is R ne is n La r lg eo nl Is Po om Tu kh ep Tu on ek ol Be ik Bu Fi C ab th te G M j za Ta R zb M R Li on Ar Ka yz U M t, rg yp Ky Eg Russian visitors Ukrainian visitors Gross current account contribution of inbound travel services exports (right axis) Note: Chart shows top 20 countries in terms of combined share of Russian and Ukrainian visitors of total tourist arrivals in 2018. Source: World Bank staff analysis based on data from UNWTO and IMF. Effects within ECA Russian and Ukrainian travelers made up a substantial proportion of commercial air passengers to Azerbaijan (33 The war is likely to have the most severe effects on Eastern percent in 2021), Belarus (49 percent), Georgia (28 percent), European and Central Asian countries, both due to a loss Moldova (25 percent), Montenegro (23 percent), Kazakhstan in tourism from Russian and Ukrainian markets as well (15 percent), Turkey (15 percent), and Turkmenistan (15 as a drop in global visits to the region. The magnitude of percent). these effects will depend on the scope and scale of the war. Comparisons are difficult; however, data from previous conflicts points to a potential reduction in tourism firm revenues of 16 percent to 23 percent due to reduced global visitation, as was the case for Croatia during the 1999 Kosovo conflict (Tkalec, and Žilić, 2017). Tourism flows to Eastern European and Central Asian destinations were dominated by Russian and Ukrainian visitors both before and during the pandemic. In 2019 and 2021, for instance, more than half of commercial air passengers visiting Armenia (58 percent in 2021), Kyrgyz Republic (71 percent), Tajikistan (78 percent), and Uzbekistan (54 percent) originated in Russia or Ukraine. As of 2021, THE IMPACT OF THE WAR IN UKRAINE ON GLOBAL TRADE AND INVESTMENT <<< 76 > > > FIGURE 7.2: Top 10 Countries with the Greatest Change in Air Travelers Originating from Russia and Ukraine (2019 and 2021) Share of Int'l Air Passengers Originating from Russial or 80% 60% 70% 50% Tourism Share of GDP (2019) 60% 40% 50% 40% 30% 30% Ukraine 20% 20% 10% 10% 0% 0% Maldives Cub a Alb ania Georgia Kyrgyz Rep. Egypt Turkey Armenia Azerb aijan Tanzania ECA LCR MNA SAR SSA 2019 2021 Tourism % of GDP (2019) Note: Graph displays low- and middle-income countries (excluding Russia and Ukraine) Source: World Bank staff analysis based on data from OAG and WTTC. Effects in regions beyond ECA Numerous highly tourism-dependent destinations turned to Russian and Ukrainian visitors to offset pandemic-related Outbound tourism from Russia and Ukraine will be declines from other markets (Figure 7.2). In 2021, travelers substantially affected, barring a quick end to the war. from Russia and Ukraine made up 26 percent of commercial Outbound flows and expenditures from the two countries were air passengers visiting Cuba, 10 percent to Egypt, 14 percent to growing in prominence pre-pandemic, a structural trend that the Maldives, and 17 percent to the Seychelles. had been accelerated during COVID and was likely to persist. > > > BOX 7.1: The Dominican Republic’s Pivot to Russian and Ukrainian Markets In the Dominican Republic, where > > > tourism makes up 16 percent of its FIGURE 7.3: Air Passengers Arriving in the Dominican Republic GDP (2019), the importance of the 700,000 6% Russian and Ukrainian markets increased significantly during the 600,000 Proportion of total international arrivals 5% pandemic and particularly so since 500,000 July 2021 (Figure 7.3). During 2021, Air Passenger Arrivals 4% Russia and Ukraine were the 2nd 400,000 3% and 9th largest inbound markets 300,000 respectively, collectively representing 2% 5 percent of non-resident arrivals. 200,000 This shift contributed to the country 1% 100,000 recovering faster than its peers and achieving its highest visitation ever 0 0% J-19 M-19 S-19 J-20 M-20 S-20 J-21 M-21 S-21 recorded in December 2021 (Central Monthly Air Arrivals Proportion Russian or Ukrainian Bank of Dominican Republic, 2022). THE IMPACT OF THE WAR IN UKRAINE ON GLOBAL TRADE AND INVESTMENT <<< 77 Global Impacts a result, capacity on routes between Europe and East Asia —which often fly over Russian or Ukrainian airspace— will Analysis of previous wars, such as the Gulf War and be affected, as airlines have cut flights scheduled between the Balkan conflict of the 1990s, suggests that the war March and June 2022 (Figure 7.4). Further cancellations in Ukraine will have only a short-term impact on global may occur as the war evolves. tourism. However, if the war is long-lasting, or spills across borders, global tourism may see a sharper drop and longer ● Consumer confidence has dropped. The online booking recovery, more akin to the post-9/11 period. At least in the short- tool, Kayak, reported that global searches for international term, the war will contribute to the sector’s uneven recovery flights fell 8 percentage points overnight on February 25, from the pandemic and the Omicron variant. Key channels the day of the Russian invasion of Ukraine. Travelers may through which the war may affect global tourism include reconsider whether to visit Europe this summer and decide airspace restrictions and security concerns, drops on consumer to stay closer to home. confidence, and higher fuel prices: ● Higher prices, particularly fuel prices, may affect the ● Airspace restrictions and security concerns have disrupted financial viability of airlines and price-sensitive segments routes over Russian, Ukrainian, Moldovan and Belarusian and destinations. Although most airlines are well hedged airspace. On February 28, Russia closed its airspace to with forward contracts for fuel at fixed prices, airlines may airlines from 36 countries, including all of the EU. Security come under financial distress and global airfares may rise concerns are also causing airlines to avoid overflying if oil prices remain elevated for extended periods. In this Ukraine and neighboring countries. Some flights will be re- case, connectivity may decline as a result of airlines cutting routed, resulting in higher fuel costs and crew block hours, unprofitable routes or going out of business altogether. while others may be cancelled altogether. Rerouting flights Global jet fuel prices have risen to 14-year highs as of around Ukrainian and Russian airspace generally entails March 8, 2022. This will likely affect more price-sensitive increased travel times and fuel costs, rendering some markets and destinations, particularly long-haul ones, with routes unfeasible or otherwise economically unviable. As visitors limiting travel to shorter distances. > > > FIGURE 7.4: Schedule Adjustments for Overflights and Flights to Neighboring Countries 2% Published Schedules on 2/21 vs. 2/28 Change in Scheduled Seat Capacity - 0% -2% -4% -6% -8% -10% 3/2022 4/2022 5/2022 6/2022 7/2022 8/2022 9/2022 10/2022 11/2022 12/2022 Departure Month Flights to Poland, Slovak Rep., Hungary & Romania Flights btw. Europe & East Asia Note: Flights originating from Russia, Ukraine, Moldova, and Belarus excluded from analysis to isolate indirect effects from direct effects from airspace closures. Data period- icity is monthly. Source: World Bank staff analysis based on data from OAG. THE IMPACT OF THE WAR IN UKRAINE ON GLOBAL TRADE AND INVESTMENT <<< 78 Inbound Tourism Inbound tourism to Russia and Ukraine has been severely affected and is likely to remain so until the conflict is fully resolved and beyond, in Ukraine’s case. In 2019, tourism made up 6.3 percent of Ukraine’s economy and 6.9 percent of its total employment, with international visitor expenditures making up 3.7 percent of total exports (WTTC, 2022). For Russia, tourism contributed 4.9 percent of GDP and 5.6 percent of total jobs in 2019, with international visitor expenditures making up 3.4 percent of Russia’s total exports (WTTC, 2022). As observed with other post-conflict states, Ukraine’s tourism sector is likely to take years to recover after the conflict’s resolution. Russia’s tourism sector is being affected by sanctions, airspace restrictions, traveler confidence, and traveler solidarity. Its sector is likely to pivot to domestic and politically friendly source markets for the near future. References Dominican Republic Central Bank (2022). Tourism Statistics International Monetary Fund (2022). IMF Data: Macroeconomic and Financial Data OAG (2022). Flight Database and Statistics The World Bank (2021). Russia Tourism Rapid Sector Assessment ASA The World Bank (2022). Databank. https://data.worldbank.org/indicator/ST.INT.DPRT The World Bank (2022). Aviation Dashboard Tkalec, M., & Žilić, I. (2017). Does Proximity to Conflict Affect Tourism: Evidence from NATO Bombing. Radni materijali EIZ-a, (4), 1-22. UNWTO. (2022). UNWTO Dashboard. Retrieved from https://www.unwto.org/country-profile-outbound-tourism World Travel & Tourism Council. (2022). Economic Impact. THE IMPACT OF THE WAR IN UKRAINE ON GLOBAL TRADE AND INVESTMENT <<< 79 8. >>> Long term effects of the war in Ukraine on global value chains The long term effects of the war in Ukraine on globalization will depend on how government policies and firms’ trade and investment decisions adjust in a world of higher geopolitical risks. As discussed in previous chapters, the war has direct effects on the firms operating in Russia and Ukraine and on firms relying on suppliers from those markets. But the shock caused by the war goes well beyond these two countries, as geopolitical risks have increased globally. The global Geopolitical Risk Index (Caldara and Iacoviello, 2022) more than doubled since the beginning of the year, reaching levels not seen since the outset of the war in Iraq in March 2003 (Figure 8.1). The data also show substantial changes in geopolitical risks in several economies that are more integrated than Russia and Ukraine in world trade and global value chains including China, Finland, Sweden, Taiwan China, among others, pointing to changing perceptions on the risks of future conflicts and sanctions. How governments’ policies and firms’ trade and investment decisions will adjust to these broader geopolitical risks will ultimately determine the longer-term impact of the war on globalization. > > > FIGURE 8.1: Geopolitical Risk Index (GPR), January 2000 – March 2022 Geopolitical Risk (GPR) Index 600 500 400 300 200 100 0 2000-01-01 2000-07-01 2001-01-01 2001-07-01 2002-01-01 2002-07-01 2003-01-01 2003-07-01 2004-01-01 2004-07-01 2005-01-01 2005-07-01 2006-01-01 2006-07-01 2007-01-01 2007-07-01 2008-01-01 2008-07-01 2009-01-01 2009-07-01 2010-01-01 2010-07-01 2012-01-01 2012-07-01 2013-01-01 2013-07-01 2014-01-01 2014-07-01 2015-01-01 2015-07-01 2016-01-01 2016-07-01 2017-01-01 2017-07-01 2018-01-01 2018-07-01 2019-01-01 2019-07-01 2020-01-01 2020-07-01 2021-01-01 2021-07-01 2022-01-01 2011-01-01 2011-07-01 Source: Geopolitical Risk Index (Caldara and Iacoviello, 2022) THE IMPACT OF THE WAR IN UKRAINE ON GLOBAL TRADE AND INVESTMENT <<< 80 The war in Ukraine, just like the COVID-19 pandemic of some GVCs does not imply sudden deglobalization. First, in 2020 and the Japan earthquake in 2011, exposes cost differentials between countries are not affected by the risks associated with the interconnected nature of geopolitical risk. This makes reshoring to high-cost countries global trade. The reliance on foreign input producers can unlikely. Second, relocating production is expensive, due to lead to the disruption of production when source countries the sunk cost of building new infrastructure and the search experience a negative shock, be it a natural disaster, a cost of establishing new relationships in a different country. pandemic, or a war that leads to economic sanctions. Many observers argue that firms will respond to these shocks Sectors with higher fixed costs, such as capital-intensive by reconsidering the balance between efficiency and sectors, and sophisticated intermediate products, where resilience in production, leading to long term changes in specific relationships are more important, are less likely the structure of GVCs in the form of reshoring, nearshoring to relocate in response to higher geopolitical risks— and diversification or even the end of globalization (e.g. unless policy intervenes. The model also illustrates that Javorcik, 2020 and Lund et al., 2020 on COVID-19; Posen, the reshaping of GVCs may affect different sectors and 2022 on the war in Ukraine). products differently. Firms in an industry like autos, which requires high upfront investment in infrastructure, and firms At the same time, the technological and economic that rely on sophisticated intermediate products, which factors that have underpinned the international rely on relationship specific investment, face higher costs fragmentation of production in the recent decades of relocating production and are thus less likely to leave a make a retrenchment of GVCs unlikely, unless policies country in presence of higher geopolitical risk. Even if the radically change. The structure of GVCs is determined nature of the shock differs, this intuition is confirmed by by fundamentals—technology, endowments, distance, evidence on the reconfiguration of GVCs in the aftermath of etc.—and by policies that affect the cost of trade (World the 2011 Japan earthquake (Freund et al. 2021). Firms in Bank, 2020). Factors such as technological innovations those sectors and products may not reorganize production that reduce the costs of communication and wage based only on market incentives, but rather if they expect a differentials across countries are still present even after a change in the policy stance that affects trade costs. negative shock. Firms will adjust their trade and investment decisions in the new environment, but these factors will The world economy would be hurt by the reshaping continue to stimulate the international fragmentation of of GVCs induced by higher geopolitical risks and a production as firms seek to improve efficiency and maintain fragmentation of the trade system, but some countries competitiveness. A retrenchment of GVCs therefore seems would gain and others lose. In response to higher unlikely, unless there is a change in the policy environment geopolitical risks, firms adjust their production and trade that radically affects trade costs (Antràs, 2021). structure in the pursuit of economic efficiency. In this process, they may seek new suppliers in developing countries that The war in Ukraine may reshape GVCs, particularly for have a latent comparative advantage and lower geopolitical firms that rely heavily on countries where geopolitical risks. While the high-risk economies, and the global economy risks have surged, but this does not imply the end of as a whole, are worse off in a more uncertain and fragmented globalization. A simple model based on Freund et al. world, the new suppliers would benefit from the increased (2021) can help explain the main forces at play (see Box investment and trade opportunities. Indeed, the evidence 1). A higher geopolitical risk raises the insurance premium from the 2011 Japan earthquake shows that firms did not re- that firms need to pay to cover the risk of future production shore or nearshore production, but rather replaced suppliers disruptions in a foreign country that could be caused by from earthquake-stricken Japan with new suppliers from economic sanctions or the breakout of a conflict. For a firm, developing countries. In this context, rather than aiming at the risk of disruption rises alongside its reliance on imports reshoring or nearshoring, government policies should focus from the country at risk, so more exposed firms are more on defusing tensions and strengthening global value chains likely to leave to avoid paying higher insurance costs. But against future disruptions. several factors create inertia, suggesting that a reshaping THE IMPACT OF THE WAR IN UKRAINE ON GLOBAL TRADE AND INVESTMENT <<< 81 > > > BOX 8.1: A simple model of geopolitical risk and GVCs To guide our thinking of the long-term effect of the war in Ukraine on global value chains, we rely on a simple framework based on Freund et al. (2021). To fix ideas, we focus on the choice from the perspective of a multinational firm, but a similar logic applies to arm’s length trade. Assume that the multinational imports key inputs from a subsidiary in a foreign country and that a geopolitical shock creates security concerns in that country (say, the risk that the country will be involved in a conflict or be subject to economic sanctions in the future). Under what conditions does the surge in geopolitical risks leads the multinational firm to move its subsidiary to a new location (either at home or to a different foreign country)? Define the cost of relocation, C, as the sum of the cost of building a new factory, F, and the cost of establishing new relationships in the new production location, S. The benefit of relocation, B = (c + i) q, depends on the scale of production, q (assumed for simplicity to be the same in the two locations), the per-unit cost difference, c, which captures factors like the wage differential between the different locations, and the per-unit insurance premium difference, i, which captures the insurance cost that a firm must pay to cover the risk of production disruptions due to geopolitical or other shocks. In this environment, a firm would relocate production if the benefit is larger than the cost of moving: (c + i) q > F + S. Figure 8.2 shows that before the geopolitical shock, when the security concern is low, any multinational firm that imports from the foreign economy q*(low risk) or less has no incentive to leave. > > > FIGURE 8.2: Benefits and costs of switching import sources induced by changes in geopolitical risks B (high risk) B (low risk) C q* (high risk) q* (low risk) q How does a geopolitical shock that raises security concerns changes this equilibrium? The shock raises the per unit insurance premium difference i. As the old location is suddenly riskier, relocating to a new low-risk location becomes more attractive. In Figure 8.2, the benefit schedule shifts from B(low risk) to B(high risk) where the latter depicts the upward shift in benefits due to the upward revision in perceived riskiness, and hence the insurance premium differential, after a shock. For any given level of dependence, an increase in the perceived riskiness of the source increases the benefit from switching away from it. The other factors, cost differences (c) and the relocation costs (C), are not changed by the shock. In the new equilibrium, when the security concern is high, any multinational firm that imports from the foreign economy more than q*(high risk) has an incentive to leave. Those that import less than q*(high risk) have no incentive to leave even after the geopolitical shock. THE IMPACT OF THE WAR IN UKRAINE ON GLOBAL TRADE AND INVESTMENT <<< 82 This simple framework has several insights on the forces that affect GVCs in response to a geopolitical shock: ● First, the geopolitical shock leads to partial exit from the country at higher risk. This is captured by the lower threshold at which firms would choose to switch suppliers from q*(low risk) to q*(high risk) in Figure 8.2. ● Second, only firms that are more dependent on the source country switch to a different supplier (i.e., a firm leaves if imports are higher than q*(high risk); firms with imports lower than q*(high risk) have no incentive to replace the source). ● Third, capital intensive sectors, where the fixed costs of building a factory (F) are higher, and intermediate goods, where the costs of investing in new relationships (S) are higher, would display more inertia. In Figure 8.2, higher F and/ or S increase the cost of relocation C, moving to the right the threshold q*(high risk). References Antràs, P., 2021. De-Globalisation? Global Value Chains in the Post-COVID-19 Age. 2021 ECB Forum: “Central Banks in a Shifting World” Conference Proceedings. Caldara, D. and M. Iacoviello (2022), “Measuring Geopolitical Risk,” American Economic Review, April, 112(4), pp.1194-1225. Freund, C, A Mattoo, A Mulabdic, M Ruta (2021), “Natural Disasters and the Reconfiguration of Global Value Chains”, World Bank Policy Research Working Paper n. 9719. Javorcik, B., 2020. Global supply chains will not be the same in the post-COVID-19 world, in: COVID-19 and Trade Policy: Why Turning Inward Won’t Work. CEPR Press. Lund, S., Manyika, J., Woetzel, J., Barriball, E., Krishnan, M., Alicke, K., Birshan, M., George, K., Smit, S., Swan, D., 2020. Risk, resilience, and rebalancing in global value chains. McKinsey Global Institute. Posen, A. (2022). The End of Globalization? What Russia’s War in Ukraine Means for the World Economy. Foreign Affairs, March 17, 2022. World Bank, 2020. World Development Report 2020: Trading for Development in the Age of Global Value Chains, World Development Report. The World Bank. https://doi.org/10.1596/978-1-4648-1457-0 THE IMPACT OF THE WAR IN UKRAINE ON GLOBAL TRADE AND INVESTMENT <<< 83