The battle for Ukraine will not be decided on the battlefield alone. We asked a lieutenant colonel and an economist to take us through possible war scenarios.
The war combined with a highly accelerated post-pandemic economy has hit the economy in Norway and elsewhere in Europe and the West with a combination of high inflation and record high energy prices.
The result was that growth in the global stock market slowed down, before we witnessed the worst downturn in the stock market since the financial crisis.
Will this continue? What will happen if the war escalates? We ask the experts.
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This is how a year of war in Ukraine affected the economy
compared to World War II
Palle Ytdstebø is a Principal Instructor in the Department of Ground Energy at the Norwegian Military Academy. He followed developments closely since the war broke out last year. He says
This is what we call a war of attrition, a war of resources. It shifts resolution from the battlefield to the communities that support the two warring parties. It is affecting the economy, industry and the willingness to fight on both sides, and the battle is now to put this into practice on the ground, he says.
Ydstebø compares to World War II, when the United States joined the Allied side after the attack on Pearl Harbor. Then suddenly the Allied Powers had the American economy and industry behind them, and the Axis powers had little to contend with in the long run.
In terms of resources, Ydstebø believes there is no doubt which of the parties to the conflict is the strongest.
– Ukraine has two of the three largest economies in the world behind the United States and the European Union, with a corresponding war industry. Russia’s economy is on a par with Italy. Economically, this is a blunt pro-Ukraine party, as long as the West continues to provide support, he said.
In comparison, the Russian economy has been severely punished, and they have lost the gas export market in Europe.
Three possible outcomes
Danske Bank’s chief strategist Anders Johansen outlined three possible scenarios for what could happen in the conflict.
He has tried to make an analysis of how the three scenarios will affect the economy in the next year, or years to come.
- You fight the conflict without major battles and at the same time without a permanent solution
- A major attack from one of the parties when spring arrives and frost sets in on the ground
- conflict resolution
If the conflict is resolved, it will have to happen either by overthrowing Russian President Vladimir Putin, or by forcing the West to the negotiating table.
Johansen believes that this can happen if Russia reduces oil exports, so that the energy crisis becomes so economically painful that Europe and the United States will be willing to negotiate.
For Europe, it is the energy market that suffers from the ice front against Russia anyway. If the war continues, it will also increase the risk of higher oil prices.
At the same time, in Europe there are now very few safe gas suppliers.
– Norway now accounts for about 20 percent of gas exports to Europe, and is the only constant. Others have to come via LNGs (liquefied natural gas), which is not safe.
In the short term, Europe’s worst energy crisis has been postponed by a mild winter. However, the ghost could rise again in 2023/24 if reopenings in China and Asia lead to a battle for LNG, and the conflict over gas is not resolved.
But the big elephant in the hall is whether China will get involved.
– If China supported Russia, it would be different. Johansen says he keeps the war machine going.
China could provide a turning point
The war in Ukraine put the potential romantic relationship between Russia and China to the test, while the world watched.
Just before Christmas, China indicated that it wanted to strengthen relations with Russia. At the same time, China’s trade with Russia increased by $190 billion last year.
The two countries promised each other stronger relations. US President Joe Biden responded by assuring allies that the US would defend “every inch” of NATO.
Ydstebø believes the relationship could play a very important role in the ongoing conflict, as the Chinese economy could be the key to keeping Russia’s war machine alive.
– If Russia does not have access to financial resources other than those that it itself has, it will be drowned out by the efforts that are being directed at Ukraine from the West, he says.
However, he is not convinced that China wants to strike the mast and risk joining the Russian ship in a full confrontation with the West.
– Uncertain. They are not happy that Russia started a war that kicked legs under their most important markets, namely the EU and the USA. Ydstebø says the war has also affected many other markets in Asia.
Wang Yi, China’s top diplomat, visited Moscow and Putin this week. According to those involved in the meeting, the possible path to peace was not discussed, but the meeting was interpreted as a signal from China in the ongoing conflict.
Johansen believes that the intervention of the Chinese side will be a game-changer. This will also have a significant impact on the global economy.
– The moment they get support, it completely changes the dynamic. There is indeed a trade war going on between the US and China, but for now it is only a trade war.
Escalation will increase uncertainty
Johansen believes that a prolonged and closed conflict will not necessarily be a problem for the global economy.
However, if the conflict escalates and NATO becomes involved, it is impossible to predict what will happen, apart from the fact that the consequences will be significant.
Now the price of energy has come down, and we’re in many ways back where we were. If NATO gets involved, things will become closer again, which will clearly have an impact.
He says it is very difficult to predict what will happen in such a scenario, but if it does, it will be difficult to see the end of the energy crisis.
– It will provide immediate relief, but in the long run it will depend on what kind of solution we get. If Putin retains power, no Western country will import Russian gas. Then I think there will be relief, but the energy problem will continue, he says.
– Away
He also believes that the stock market will then see a recovery.
– The solution is almost certainly very positive, especially for European stocks. Gas prices will likely continue to rise, as they likely won’t bring Russia back to normal, but the green transition may go more as originally planned, he says.
Although the solution would be better both humanly and economically, Ydstebø asks that the outlook be moderate.
– It’s a long way. Most obviously, it is the military victories that will lay the groundwork for a political solution. They have fundamentally conflicting political goals. He says Russia wants to control Ukraine, and Ukraine is fighting an existential battle for self-determination.
Now he sees only three potential long-term opportunities.
– Either Ukraine completely expels Russia from Ukraine, or Russia managed to occupy a significant part of Ukraine to say that they are satisfied. The third option is that they have to sit down to the negotiating table because they are completely exhausted, he says.
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