Impact of the Russia-Ukraine crisis

The Russia-Ukraine war has undoubtedly impacted world economies and remains top of mind for many people everywhere. Global financial markets have experienced remarkable volatilities and foreign exchange pricing has been heavily affected, affecting traders and investors worldwide.

On 25 February, S&P downgraded Russia from BBB- to BB+, followed by downgrades to junk by Moody’s and Fitch on 2 March. By March 2022, the Russian rouble reportedly lost in excess of 64% to the dollar year-to-date to reach an unprecedented low. It also showed significant weakness against other forex majors. This was largely attributed to the severity of western sanctions imposed on the country and its financial system, which intended to isolate Moscow from the global economy.

As the crisis extended, so too did the impact on international markets. This included supply chain and logistics disruptions, dramatic increases in energy and food prices, and severe fluctuations in the world’s commodity, currency and share markets. Europe (including the United Kingdom) was particularly vulnerable due to its reliance on Russia for natural gas.

In this article, we’ll look at some of the key implications of the Ukraine-Russia war over the course of the last year and developments in 2023.

Strength of the US dollar

In September 2022, the US dollar climbed to a new two-decade high after the partial mobilisation of 300k reservists in Russia.  This announcement pushed the dollar up 0.4% against several major currencies to its strongest level since 2002. This may be attributed to investors seeking safe haven in US dollar assets during times of geopolitical tension.

Effect of a stronger dollar on global economies

A strong dollar has several effects on world economies. Commodities are typically priced in dollars (such as oil and wheat). A rise in the dollar prices of these goods would have a major impact on countries whose currencies have devalued against the dollar. Particularly hard-hit would be EMs (emerging markets) and low-income countries. This is not only because of higher food and fuel prices but also due to the repayment of dollar-denominated loans that become more expensive as the dollar appreciates. A higher dollar in these regions also results in higher import prices and an increased probability of financial instability.

Currency market volatility

As the Ukraine crisis took hold, currency markets saw steep losses and severe swings, much in the same way as other asset classes. While there was a sharp fall in the EUR/USD in March 2022, the euro held relatively strong against the Polish zloty (PLN), Swedish krona (SEK), U.S. dollar (USD), Hungarian forint (HUF) and British pound (GBP), while slightly weak against the Swiss franc (CHF). It was also reported that EUR/CHF had been highly responsive to Ukraine developments at the time, owing to the Swiss franc’s status as a traditional safe haven.

Supply chain and logistics challenges

The Russia-Ukraine war saw global supply chains severely impacted due to rising commodity prices and the dependency on Russia and East Europe for raw materials. Price hikes in resources like key metals, crude oil, natural gas, petrol, and diesel hit hard, causing unprecedented logistical disruptions across industries. This included airlines, ocean freight, and rail freight, resulting in major backlogs and stranded containers. Ukraine and Russia were also top exporters of wheat and corn, accounting for more than a quarter of global wheat trade and nearly a fifth of corn. The outbreak of what is now an ongoing conflict saw the prices of both grains swinging wildly, increasing concerns about food inflation and hunger. This saw countries reliant on imports from the region sourcing alternative supplies elsewhere.

New developments in 2023

With 2023 in full swing, the Russia-Ukraine war shows little signs of abating. The economic fallout that comes because of this crisis continues to have rippling effects across the globe, with some countries facing threats of recession, historic inflation hikes and massive energy costs.  

Oil price caps

In December 2022, the G7+ Price Cap Coalition finalised the implementation of an oil price cap on Russian seaborne crude oil. EU Member States in the Council approved this implementation in parallel within the EU. The cap was set at a maximum price of US$60 per barrel for crude oil, adjustable in the future based on market developments. In February 2023, further price caps on Russian crude oil (like diesel and fuel oil) were implemented by the EU together with G7 partners. This will complement the EU’s full ban on the import of seaborne crude oil and petroleum products into the region. It has been speculated that these decisions will slash Russia’s fossil fuel earnings and decrease its ability to continue its war effort in Ukraine. It is anticipated that the cap will also aid in stabilising energy markets worldwide but will be monitored continually and adjusted when deemed necessary.

A weakening US dollar

According to the Financial Times, now in February 2023, the US dollar is at its lowest point since April 2022. There are various reasons that may explain the drop including falling commodity prices improving terms of trade for countries heavily dependent on commodity imports (e.g., the UK, Japan, and Europe), and the slowing down of interest rate hikes by the Federal Reserve. Other factors include a stronger euro and, more recently, the reopening of China. In addition, EM debt and equities have, since the latter part of January, been attracting inflows of approximately $1.1 billion a day, easing the pressure on emerging markets, and impacting the dollar rate.

Supply chain trends

Supply chain disruptions are said to continue in 2023, impacting access to goods and surging prices, but opinions vary widely on this topic. Governments are looking to possible domestic self-sufficiency or trade links with other countries to secure the supply of various key goods and combat future disruptions. Companies will seek to adapt to the changes, potentially leveraging technology to improve logistics and value chains.

Looking ahead

The Russia-Ukraine war has undoubtedly affected global financial markets and economies. Countries worldwide are still reeling from major supply chain disruptions and foreign exchange volatilities. As the war continues into 2023, the future impact is still up to speculation, and uncertainty is ongoing, particularly in regard to the cost-of-living crisis and global economic impact.

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