The Ukraine War's Multifaceted Economic Fallout

While the Russian and Ukrainian economies are being hit the hardest by Russia's invasion, the economic consequences of the war will not be confined to the countries fighting it. To mitigate the risks, countries must start developing their recovery plans now.

CAMBRIDGE – Russia’s invasion of Ukraine, and the sweeping sanctions the United States and Europe have imposed on Russia in response, have triggered economic disruptions at four levels: direct, blowback, spillover, and systemic. To contain their longer-term consequences, we must start working on recovery plans now.

Needless to say, the Ukrainian and Russian economies are being hit the hardest. Economic activity in Ukraine is likely to contract by well over a third this year, aggravating the rapidly escalating humanitarian crisis. Already, the war has led to more than 750 civilian casualties and driven 1.5 million Ukrainians to flee to neighboring countries, with millions more on the move internally.

While Russia is not enduring large-scale human suffering or physical destruction, its economy is set also to contract by about a third, owing to the unprecedented severity of the sanctions it is now under. In particular, a freeze on the central bank’s assets and the exclusion of selected Russian banks from SWIFT, the financial messaging system that enables most international bank payments, are bringing the economy to its knees, with “self-sanctions” by households and companies, from Apple to BP, compounding the damage.

Russia is now headed toward severe foreign-exchange constraints, massive goods shortages, a collapsing ruble, mounting arrears, and the expectation among households that things will get worse before they get better. This picture has much in common with what I saw when visiting Moscow in August 1998.

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