Transmission Mechanisms of the Russian-Ukrainian Conflict on African Economies

By Dr. Jean Cédric Kouam & Bin Joachem Meh (Download pdf version)

Transmission Mechanisms of the Russian-Ukrainian Conflict on African Economies

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Introduction

On February 24, 2022, a war broke out between Ukraine and Russia. This conflict is unique in that it carries geopolitical, strategic, and economic stakes for the two countries in conflict, as well as for the West, and in general, for the world, through its multiple ramifications.

As such, a series of drastic sanctions (economic, cultural, and sports) have been taken by a coalition of Western countries – including the USA and some European countries – against Russia. Despite the extent of these measures against Russia, the conflict persists, leading to numerous displacements of Ukrainians abroad and, therefore, an unprecedented slowdown in production. Given the economic potential of Russia and Ukraine, the consequences on the world economy were immediately felt, the latter being already weakened by the COVID-19 pandemic. Obviously, the African continent whose economy is strongly linked to the rest of the world has not been spared.

The objective of this article is to analyze the transmission mechanisms of the Russian-Ukrainian conflict on African economies. The article is structured into three main sections. Section 1 presents the transmission mechanisms of the Russian-Ukrainian armed conflict in Africa. Section 2 analyzes the effects of the conflict on Africa’s economic performance. Section 3 concludes with some policy recommendations to strengthen the resilience of African economies.

1. Transmission Mechanisms of the Russian-Ukrainian Conflict on the African Economies

Many African countries have intense trade relations with Russia and Ukraine. Russian exports to Africa are heavily dominated by grains (wheat, corn, soybeans, barley), which account for nearly 30% of total exports. Wheat alone accounts for about 95% of Russian grain exports to Africa, Russia being the world’s largest producer. In addition to wheat and other grains (such as maize), Russia also exports mineral fuels such as coal, oil products, and gas to Africa, which account for nearly 18.3% of African purchases from the Kremlin.

Like Russia, Ukraine, the world’s fifth-largest wheat producer, also supplies to the African continent. In addition to being wheat producers, Russia and Ukraine together account for nearly 80% of sunflower oil. In addition to wheat, corn, and sunflower oil, Ukraine and Russia are also exporters to Africa of other products whose exports are affected by the war, such as sulfur, mineral fuels, chemicals, and fertilizers, which are essential for agricultural production, or iron, steel or copper materials used for infrastructure.

1.1. The Commodity Price Channel

The main channel of transmission of the Russian-Ukrainian crisis on African economies is the price of raw materials. Indeed, the war and Western sanctions have accelerated the rise in commodity prices due to the decline in world supply. African countries are very dependent on exports of a certain number of products from these two countries at war (particularly cereals) and face limited supply alternatives because they only have links with two or three other world exporters of these products. This is the case for Benin, Libya, Madagascar, Sudan, Togo, Angola, Côte d’Ivoire, and Mali. This situation is also observed for products such as corn or sunflower oil. Ukraine and Russia are also “exporters” to Africa of other products whose exports are impacted by the war, such as fertilizers, which are essential to agricultural production.

Given this African dependence on Russian and Ukrainian agricultural products – but also on energy and materials necessary for the production of infrastructure (iron, steel or copper materials, etc.), mineral fuels, chemical products, and sulfur – Africa has experienced since the beginning of this armed conflict a surge in prices on the international markets, which is reflected in the increase in domestic prices of products on local markets. In March of 2022, the Food and Agriculture Organization of the United Nations (FAO) Food Price Index reached its highest level since its inception in 1990, at 159.3 points, more than 34% higher than its value in 2021. This increase is mainly due to the surge in cereals prices (+37%) and vegetable oils (+56%), especially sunflower oil. In May of 2022, international wheat prices rose for the fourth consecutive month. With an increase of 5.6%, they were on average 56.2% higher than a year earlier, 11% above the record recorded in March of 2008 (FAO, 2022). This situation explains the concern of some economists about the surge in wheat prices in the wake of the war in Ukraine and the possible repercussions on African value chains.

Also, following the decision of the 27 countries of the European Union to reduce by 90% their imports of Russian oil by the end of 2022 and to stop, by 2023, their purchases of Russian oil transported by sea (equivalent to more than two-thirds of its imports) in order to dry up the financing of the Russian offensive against Ukraine, the price of black gold on the world markets could rebound upwards to the benefit of many oil-producing countries including those in Africa. It should also be noted that, Russia can create a global shortage at any time by interrupting its natural gas deliveries to Europe, which would affect prices in world markets upwards.

1.2. The Interest Rate Channel

Following the rise in commodity prices on international markets, particularly for wheat, corn, sunflower, oil, and gas, local prices will tend to increase significantly and sustainably on the African continent. This surge in prices, which disproportionately affects households and businesses, particularly the poorest urban households, will undoubtedly result in a reaction from African central banks, whose primary objective is to stabilize prices.

Although this price increase is more of a structural phenomenon than a monetary one (shortages in various sectors – raw materials, agricultural production, industrial components), its persistence over time would force the monetary authorities to take rational measures to curb it. In this sense, they may decide to raise interest rates with the sole aim of breaking inflationary expectations, in order to avoid triggering a price-wage spiral. Moreover, a rise in interest rates on a global scale would have significant negative effects on African countries, especially those dependent on financial markets.

1.3. The Exchange Rate Channel

In case of a continued rise in commodity prices (cereals, vegetable oils, fuel, etc.) on international markets, which would lead to imported inflation in African countries (the latter being price takers), central banks will be forced to raise their interest rates to curb the general rise in prices. As a result, assets denominated in domestic currency will become more attractive as investments compared to assets denominated in foreign currency. The immediate consequence of this situation is the rise in the exchange rate, resulting in an increase in the demand for domestic currencies relative to their supply.

As a result, this exchange rate appreciation makes domestic products relatively less competitive in international markets, which depresses exports. On the other hand, the exchange rate appreciation

reduces the price of imported goods (and thus curbs imported inflation), which leads to an increase in imports. More broadly, the appreciation is expected to shift aggregate demand toward foreign products, which depresses domestic production.

2. Consequences of the Russian-Ukrainian War on the Economic Performance of African Countries

The African continent hosts more than 65% of the world’s poorest people. As such, disruptions in global supply and rising food inflation will undoubtedly aggravate the food insecurity (due to the disruption of major supply chains) already exacerbated by the COVID-19 pandemic (Gourdon and De Ubeda, 2022).

It should be noted that this continent-wide price spike comes at a time when extreme weather conditions, such as the drought in the Horn of Africa, are already causing food shortages. Moreover, this situation would result in higher import costs and consequently higher wholesale and retail prices. In other words, the inflationary pressures already recorded on wheat flour and its derivatives (bread, pasta, etc.) could increase. The same applies to other products imported from these countries, such as fertilizer and certain construction materials.

The consequences of the war in Ukraine will also be felt in the budgetary balances of African countries, both those that are net exporters of hydrocarbons and net importers of oil products. For net oil-exporting countries, the increase in oil prices on world markets will lead to budget surpluses, while for net oil-importing countries, the Russian-Ukrainian war will further increase budget deficits and public debt (to finance the budget deficit). In addition to the consequences for budgetary balances, the rise in energy prices on international markets will also lead to an increase in the cost of living and transport throughout the continent.

Therefore, due to the high dependence of African countries on Ukrainian and Russian cereals and the soaring prices on continental and national markets, African countries are facing rising consumer prices for poorer households and the need to support the productive sector in the face of rising input costs, particularly in the agricultural and infrastructure sectors.

However, the rise in oil prices because of this armed conflict could benefit some African countries, particularly those that are net exporters of black gold, to overcome a number of production difficulties and give them the means to boost their economic growth. Obviously, a halt in Russia’s

supply to European countries, particularly its natural gas supply, could help a number of African countries to benefit from the energy diversification of the European continent.

This is the case for Nigeria, Senegal, Mozambique, and Tanzania, which cumulate more than 10% of the known natural gas reserves in the world. Finally, Africa could benefit from a demand effect in the face of possible problems in the transportation of Russian mineral and gold exports or in the event of an embargo on Russian metals. Sub-Saharan African countries such as South Africa, Ghana, and Tanzania could also benefit from the rise in the price of metals such as nickel and platinum. All of these consequences are likely to have a significant impact on the gross domestic product of all countries and will undoubtedly influence the achievement of Sustainable Development Goals at the continent level.

Conclusion and Policy Implications

African countries, because of their heavy dependence on terms of trade and their “extroverted” nature, are far from being spared the effects of the crisis caused by Russia’s invasion of Ukraine. The effects of this war are being transmitted to the African economy through three main channels: the commodity price channel, the interest rate channel, and the exchange rate channel.

This war in Ukraine will undoubtedly intensify the economic pressures and scars that millions of households and businesses were already facing as a result of the COVID-19 pandemic. Overall, the pressures on household and business spending generated by soaring market prices will only increase as food insecurity increases and growth slows. In addition, the global financial turmoil would affect the ability of many African countries to finance their deficits, which could result in a high risk of debt distress.

To cope with the disastrous consequences of this armed conflict, which has the particularity of disrupting global supply chains for basic commodities, Africa could rely on import substitution policies and take advantage of this situation to promote the consumption of substitutable local African products within the framework of the African Continental Free Trade Area (AfCFTA)