Two weeks of war in Ukraine: The consequences for the economy and consumers

Created: 03/11/2022, 10:20 am

The German auto industry is also feeling the effects of the Ukraine war.

(Iconic image) © Hendrik Schmidt/dpa

The West has responded to Russia's attack on Ukraine with unprecedented sanctions.

The first economic consequences are becoming visible.

Frankfurt/Main – War has been raging in Europe for a good two weeks.

The western community of states reacted to Russia's attack on Ukraine with tough sanctions.

All Central Bank of Russia assets in the European Union, UK, US and Canada are frozen.

The EU has excluded seven Russian banks from the Swift financial communications system.

The airspace over the EU countries is closed to Russian aircraft.

The controversial gas pipeline Nord Stream 2 is on hold.

The first economic consequences of the Ukraine war* and the sanctions can be seen.

Ukraine-News: Consumers are feeling the consequences here

The people in Germany are currently feeling the effects of the rapidly increasing energy prices.

This week, fuel prices broke the two euro mark for the first time and continue to rise.

"In the short term, the federal government should consider a temporary reduction in VAT on fuel and heating oil," demands ADAC Transport President Gerhard Hillebrand.

Even before Russia's attack on Ukraine, fuel and heating costs had risen as a result of strong demand for oil and gas as the global economy recovered, fueling inflation.

In February, the annual inflation rate in Europe's largest economy was 5.1 percent.

Higher inflation weakens the purchasing power of consumers, they can then buy less for one euro than before.

News about the Ukraine war: Production at German car manufacturers is faltering

Some of the lines only run to a limited extent or stand still because important supplier parts such as cable harnesses from the Ukraine are missing.

"The industry will once again have to prepare for a very difficult year," predicted the Association of International Motor Vehicle Manufacturers.

Nevertheless, manufacturers such as Volkswagen* or Mercedes-Benz are going beyond the sanctions and are stopping their exports to Russia and production in the country.

Other international corporations are also putting their Russian business on hold.

"On the one hand, companies have their image in mind and have to reassess business with Russia," says the foreign trade expert at the Ifo Institute*, Lisandra Flach.

On the other hand, many companies assumed “that Russia will not be an attractive market in the future”.

Ukraine-News: Russia has several billion euros in debt

Despite a full state coffers, Russia is threatened with insolvency.

The country has billions in government bonds outstanding in dollars and euros.

Because of the Western sanctions, there is a high risk that Russia will not service its debts to international creditors, fears the President of the Berlin DIW Institute, Marcel Fratzscher.

Some German investors would also suffer from a default.

According to the latest data from the Deutsche Bundesbank, German banks' claims against Russia in November 2021 amounted to around 6 billion euros, including the claims of their foreign branches and subsidiaries, the figure was around 7.5 billion.

That was just under 0.4 percent of the total foreign receivables of German institutions.

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Only 119 million euros were invested in public sector securities in Russia, which also include government bonds.

The value of receivables is likely to have fallen since November.

According to the Association of German Banks (BdB), most financial institutions have “restrained themselves from their involvement in Russia in recent years” due to the sanctions that have been in place since 2014 following the annexation of Crimea.

Ukraine News: Lufthansa & Co. are faced with rising costs

The European Union and Russia have closed their airspaces to each other's airlines.

For airlines like Lufthansa, this means that Far East machines to China, Japan and Korea have to take lengthy alternative routes in the south.

This consumes additional kerosene.

“Ultimately, however, airlines have little leeway for rising costs as they continue to face lower revenues due to the effects of the corona pandemic,” says Christiane von Berg, economist at credit insurer Coface.

Ukraine-News: Russia sanctions burden foreign trade

According to a survey, almost a third of wholesalers and foreign traders see themselves affected by sanctions against Russia and the counter-sanctions.

Relations with Russia account for only three percent of German foreign trade.

"But in a networked economy, the effects often go further," explains Dirk Jandura, President of the BGA industry association.

For example, companies reported restricted trade in aluminum or a lack of grain deliveries, interrupted supply chains or a lack of truck drivers, many of whom came from Ukraine.

Ukraine-News: Rising energy prices are hitting the chemical industry particularly hard

The energy-intensive chemical industry has been suffering from high energy prices for a long time.

It does not process crude oil directly as a raw material, but raw petroleum, which is distilled from oil by the refineries.

According to the Association of the Chemical Industry, many companies in the industry could not or only partially pass on the massive price increase for oil and gas to customers.

Crude oil is found in many goods such as plastics, medicines, detergents, toys and textiles.

Special assets for the Bundeswehr: Arms industry benefits

German armaments companies want to expand their production after the federal government wants to provide the Bundeswehr with a special fund of 100 billion euros and wants to permanently invest more than two percent of economic output in defense.

However, financing via a special fund is controversial.

The Düsseldorf-based company Rheinmetall has already offered the federal government a project list worth 42 billion euros and containing tanks, ammunition, military trucks and other goods.

The small arms manufacturer Heckler & Koch, the defense electronics group Hensoldt and the missile manufacturer Diehl are preparing for more business.

Ukraine war will burden German economy

According to economists, the war and the sanctions will weigh on economic development in Germany this year.

"We are currently assuming that growth will have to cope with a serious setback* at least until the middle of the year," expect economists at DZ Bank.

For the year as a whole, they are assuming economic growth of 1.9 percent after initially predicting 3.0 percent.

The Hamburg research institute HWWI sees it similarly: "Uncertainty has increased noticeably and the resulting further strong increase in energy prices increases inflation and reduces real purchasing power."