We’re going to take you through our analysis of the impact of the Ukraine and Russia Conflict on the Australian economy. Now, before we jump into it, we acknowledge this is a very distressing and sad time for many people, not to mention it has become a huge humanitarian crisis. Like everyone, we hope very much that this conflict will soon be over.
Now, in terms of HSC Economics, it is worth staying up to date and understanding the impact the conflict could have on the Australian economy in terms of confidence, trade and other areas.
Why? Well, the conflict has recently emerged which means you can bring in timely examples to a number of parts of the HSC Economics course including Topic 1: The Global Economy and Topic 2: Australia’s Place in the Global Economy.
Let’s take a closer look.
Context
Consumer and Business Confidence
Declining Stock Market
Improved Terms of Trade
Political Ramifications of the Conflict between Ukraine and Russia
Context
Let’s start with some background info to help set the scene. There’s no doubt that Russia is quite a big player in the global economy.
In terms of GDP, it is the 11th largest economy in the world. To put that into context for you, Russia is just behind South Korea and in front of Brazil and Australia is #13. Russia is a big exporter of commodities such as oil, gas, coal, metals and wheat.
The EU relies quite heavily on energy imports from Russia: 41% of natural gas and 27% of crude oil. So, it’s pretty clear how Russia is globally important in terms of the supply of these commodities. After Russia invaded Ukraine, countries around the world started placing heavy sanctions on Russia for its actions.
So, let’s take a look at how all of this impacts Australia and the Global Economy.
Consumer and Business Confidence
It’s important to realise how fundamental a lot of Russia’s exports are. Let’s use the example of fuel — whatever industry you are in, you will rely on some sort of transportation.
So businesses are going to experience rising costs at least short term when it comes to logistics which ultimately has a dampening effect on confidence. In the last two years, we’ve seen a huge rise in fuel costs and this is likely to continue for however long both the conflict and sanctions last. What that means is that it’s going to keep driving the costs of logistics and transportation.
As we’ve said before, the EU heavily relies on Russia for energy supply. However, the sanctions placed on Russia mean they can’t export as much of their natural gas, so perhaps there is an opportunity for Australia, who also is a big natural gas exporter, to benefit.
However, one major problem is that Australia is just too far away and that’s when supply constraints come into play and will potentially limit the opportunity for Australia in terms of exporting natural gas.
So what does this mean in terms of confidence? Well, there’s going to be supply constraints which leads to increasing costs, especially in regards to transportation and fuel which is also going to impact confidence levels.
Declining Stock Market
When confidence is dampened, one of the first things that falls is usually the stock market. Now, that’s because the stock market relies heavily on speculation, meaning it’s more risky.
When Russia invaded Ukraine on 24 February, almost 74 billion dollars was wiped off the ASX. However, a lot of those losses were quickly recovered. This can happen, there can be an immediate shock and then depending on what happens, confidence can come back.
However, as this is a fairly uncertain time in the world and as the conflict continues, people might be less certain about what’s going to happen. So, that means if there are supply shocks and we’re expecting more increases in prices, people tend to spend less because they might be concerned about how they will afford things.
A consequence of this for Australia could be that dampening of consumer confidence and especially business confidence as businesses have only just started to recover from the impacts of Omicron.
At the end of day, we don’t actually know what will happen. It is all speculative and depends on a number of things, like as to whether Australia will get some trade benefits. We are in the early stages of the conflict so we need to see how it develops.
Improved Terms of Trade
Russia is the world’s largest wheat exporter and Australia sits at number six, just after Ukraine. So, there is an opportunity for Australia when it comes to wheat exports.
This is good for Australia because it will most likely support an improvement in terms of trade where we see an improved price for our exports. This is what happened back in 2014 when wheat prices rose after Russia annexed Crimea. If it doesn’t end up improving terms of trade, it will at least soften the damage.
Political Ramifications of the Conflict between Ukraine and Russia
The federal election is on the horizon so we can’t not mention the possible political ramifications. Now, we are connected to one of Russia’s closest allies — China.
Looking at the Liberal Party, they are taking a very strong stance against China. The Labour Party is taking a softer stance, focusing on a point of national security.
Weeks before the invasion, Putin and Xi Jinping met and formed an agreement which is ultimately against NATO expansion. The concern here is that Putin’s invasion of Ukraine can be seen as a “test-case” for China with Taiwan.
China is looking on to see what happens, how the world reacts, what sanctions are being placed on Russia and perhaps, whether they will do the same with Taiwan. Now, this is important because it’s a lot closer to Australia.
That means it could have a greater trade impact on Australia. But none of that is certain, we can only see how things develop.
Final Thoughts
In terms of economic impacts, there are constant developments with various sanctions continuing to be placed on Russia and we will see more of those economic impacts over time.
If you’re an Economics student, it’s worth paying attention to it because if the conflict continues (of course, we hope it doesn’t), then it does relate to different areas throughout the course and you can bring it in as an example.
And that’s our analysis of the impact of the Ukraine and Russian Conflict on Australia done! We all are really hoping for peace and an end to this conflict.
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Tanna Nankivell is a Senior Content Writer at Art of Smart Education and is currently in Germany completing a year of study for her double degree in Communications (Journalism) and Bachelor of Arts (International Studies). She has had articles published on Central News – the UTS Journalism Lab and wrote a feature piece for Time Out Sydney during her internship. Tanna has a love for travel and the great outdoors, you’ll either find her on the snowfields or in the ocean, teaching aqua aerobics or creating short films.
