Notes

Russia Ukraine war: how could it affect the UK economy?
Unfortunately, the attacks on Tuesday morning were just the latest of a series of acts of wanton destruction by Russia in Ukraine since we last gathered for a Permanent Council in December. Over the Christmas period, Russia launched hundreds of missile and drone strikes across cities in Ukraine including Kyiv, Odesa, Kharkiv, Dnipro and Lviv. This culminated on 29 December, when Russian unleashed its largest aerial assault against Ukraine since the war began.

Mr Zelenskyy has called for public officials to disclose their incomes to increase transparency and eliminate corruption as Ukraine tries to meet the stringent requirements for its bid to join the European Union. The manufacturing trade body Make UK said about 3,800 firms exported goods to Russia while 1,200 brought in materials, despite only accounting for 0.8% of total UK goods exports and 2.1% of imports. The war that erupted in eastern Ukraine in 2014 has already left 14,000 dead and an estimated 1.4 million displaced. This included £2.5 billion in military support and a historic long-term security agreement. Security concerns have grown in recent days after Russia started huge military drills with neighbouring Belarus and was accused of blocking Ukraine's access to the sea.
Analysts had hoped the cost-of-living squeeze would fade as pandemic restrictions are removed, although now warn the Russian invasion and western sanctions will add to inflationary pressures. Even sectors without direct trade links will be hit by supply chain disruption and rising prices if they depend heavily on Russian and Ukrainian production of inputs. UK manufacturers are facing a sharp rise in costs as the Russian invasion of Ukraine undermines the progress made towards fixing global supply chains before the conflict broke out, economists have warned.

Where does the UK get its energy from?
European countries have largely outsourced much of their military capacity and thinking on strategy and security to the States through NATO. Phillips P OBrien, professor of strategic studies at the University of St Andrews, wrote in an analysis piece that the potential return of Donald Trump to the White House could see the US "neuter" the Western military alliance. A senior European Union official has denied member states are discussing financial coercion to force Hungary to agree on financing for Ukraine. There is some suggestion that a renewed focus on the so-called Minsk agreements - which sought to end the conflict in eastern Ukraine - could be used as a basis to defuse the current crisis. Russia has been backing a bloody armed rebellion in Ukraine's eastern Donbas region since 2014.

The latest data for January 2022 shows that the UK economy is now stronger than it was before the pandemic. In his speech Jon Cunliffe talks about the impact that the Russian invasion of Ukraine has had on the UK economy and on UK financial stability. "The nightmare scenario would be that the states close to Russia double down on aid to Ukraine while those farther west decide to force a deal on Putin's terms. Then Europe itself could fracture," he says. If the US abandons the military alliance, it will fall to European countries to ensure a Ukrainian victory, Mr OBrien says. A prominent war expert says the US is on the verge of lessening its support for, or even withdrawing from, NATO - with potentially catastrophic consequences for Europe.
The Western defence official said that if Russia chose to carry out an attack now it could do so. But he said Russian forces massed on the border were still missing some crucial elements - such as full logistical support, ammunition stocks, field hospitals and blood banks. A senior Western intelligence official has warned that if Russia decides to invade Ukraine, a conflict could spill over further into Europe.

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So, price increases and potential shortages in these non-energy commodities represent additional upside risks to our inflation forecast and downside risks to our real GDP forecast. Russia’s invasion of Ukraine in the run-up to our March 2022 Economic and fiscal outlook represented a significant adverse shock, primarily via a sharp rise in gas and oil prices. In this box, we considered where the UK gets its energy from and the channels through which higher energy prices raise inflation.

The UK government is providing a range of economic, humanitarian and defensive military assistance to Ukraine, and is imposing additional sanctions on Russia and Belarus. Dan Wallis, who runs Rookery Farms in Newbury, Berkshire, said he decided this week to sow spring wheat on land that was not due to be planted on until next autumn. The UK, US and EU also announced sanctions against the Russian Central Bank, which involve freezing its assets held in sterling, dollars and euros.
The impact of the Russian invasion of Ukraine on our forecast for the UK economy comes primarily via the impact of higher energy prices on inflation, real incomes, consumption and imports. Higher oil prices feed into the fuel component of CPI prices directly, while the household utility component is adjusted for expected changes in wholesale gas and electricity prices every six months via the Ofgem price gap. We assume that wages do not rise to compensate for this bout of higher inflation which is driven by external forces. We already expected firms’ profit margins to be squeezed by other cost increases that were expected before the invasion. The UK does not have significant direct trade links with either Russia or Ukraine, so our economy’s most direct exposure to Russia’s invasion of Ukraine is via its impact on the global price of energy. The UK’s total energy demand fell by 22 per cent between 2000 and 2019, reflecting both a shift away from more energy-intensive industries and improvements in economy-wide energy efficiency.

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If gas and electricity prices stay at the current levels, the Resolution Foundation predicts that the energy price cap next winter will be almost £1,000 higher than the elevated level set to be introduced in April (£1,971). "We are all going to suffer, but it will hit poorer people more than the average person as they spend proportionately more on heating and food." Mr Sunak said that Russia's invasion "is creating significant economic uncertainty", but "it is vital that we stand with the people of Ukraine to uphold our shared values of freedom and democracy and ensure Putin fails". Computer programming and film and TV production also had a good start to the year, said Darren Morgan, ONS director of economic statistics.

While a line may now thankfully be drawn under the pandemic's economic hit, the inflationary cloud is now looking very dark indeed. "There is no prospect of food shortages at any point in the future, and Defra are working with Treasury to try and make sure that that continues to be the case," he said. A spate of Ukraine-linked attacks on Russia's oil infrastructure have reportedly led Moscow's energy ministry to propose restricting flights over energy facilities. President Biden's virtual meeting with President Putin earlier this week was a start and will be followed up by more talks with other Nato members. The UK gets just 5-6% of its gas imports from Russia, according to analysis of government data by think tank ECIU, so supplies are not likely to be so directly affected. Moscow has claimed its forces have taken control of the village of Tabaivka in Ukraine's northeastern Kharkiv region.
Laurence Boone, the thinktank’s chief economist, said the UK was being hit by a combination of factors, including higher interest rates, higher taxes, reduced trade and more expensive energy. Balazs Orban, chief political aide to the prime minister, said Hungary sent a proposal to the EU over the weekend showing it was open to using the budget for the aid package if other "caveats" were added. Earlier today, a Russian official said air defences had thwarted a drone attack on the Slavneft-YANOS oil refinery in the city of Yaroslavl. "A frank and constructive dialogue is expected to improve relations between states," the Ukrainian president's office said on its official channel on the Telegram messaging app alongside a photo of Mr Szijjarto, Mr Kuleba and Mr Yermak.


So, as a net energy importer with a high dependence on gas and oil, higher global energy prices will still weigh heavily on the UK economy. But Russia is a major producer in global energy markets, accounting for 17 per cent of gas and 12 per cent of oil production globally in 2019 (Chart B, bottom-right panel). And both the UK’s domestic and foreign supplies of oil and gas are purchased at market prices which, as described elsewhere in this chapter, have risen sharply following the Russian invasion and international response. https://notes.io/wiNv8 would be amplified by falling UK consumer confidence,[25] which had weakened even before the invasion because of the cost of living crisis and impact of the Omicron variant.


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