PARIS - Amidst the recovery from the impact of the COVID-19 pandemic, Russia’s war of aggression against Ukraine has resulted in new challenges to international trade and the global economy. What are they? Find out in the latest report of OECD, which relies on detailed trade data to assess the impact of these two overlapping shocks on international trade and supply chains.
In February 2022, global trade was approaching pre-Covid levels in absolute terms, but with a different product and geographical composition resulting in a continued sense of tension in the trading system.
Russia’s war of aggression against Ukraine has added a new dimension of challenges as it has led to deliberate radical interruptions of trade linkages between Russia, Ukraine and many industrialised economies, with significant repercussions on prices of key commodities in the energy and agricultural sectors.
Executive Summary
Amidst the recovery from the impact of the COVID-19 pandemic,The Russian Federation’s (hereafter “Russia”) war of aggression against Ukraine resulted in new challenges to international trade and the global economy.
This report assesses these recent two big shocks to international trade. While the first part discusses the state of trade recovery before the war, the second is dedicated to the trade and supply chain impacts of the war.
The main insights are:
Before Russia’swar of aggression against Ukraine
•Global merchandise trade had largely recovered from the COVID-19 pandemic, while industrial production was still lagging behind.
•Trade in goods had recovered, but services trade was slow to catch up.
•Recovery was unequal across products and trade partners and the structure of trade was different compared to trade before the pandemic.
•The shift towards imports from the People’s Republic of China(hereafter “China”) observed in early stages of the pandemic was becoming less strong towards the end of 2021.
•Maritime transport disruptions were slackening.
•Semiconductors trade continued to grow.
•Commodity prices and energy were high and volatile.
Russia in the global economy
•Russia is a small player in international trade, specializing in exports of some agriculture commodities, energy and minerals, while importing more technologically advanced products.
•In the last two decades, Russia had been re-orienting its trade away from Europe and Central Asia towards East Asia Pacific, particularly as far as its imports are concerned.
•Foreign affiliates established in Russia accounted for 4.8% of gross output in 2016 (worldwide foreign affiliates account for an average of 11%of gross output).OECD countries that have implemented sanctions in the wake of Russia’s invasion of Ukraine in 2022 were the main foreign investors in Russia, with companies from the United States, Germany and France most prominent.
•In a few product categories,Russia is a dominant supplier for global markets, such as asbestos, pig iron, uranium, nuclear reactors, sunflower seed and sunflower oil, mineral fertilisers and coal.
•However, there are many cases where Russia holds a dominant position in bilateral trade with specific countries for specific products.
•While countries in the east and north of Europe are among the most exposed to imports from Russia, for a large number of products substitution from other suppliers from within the OECD membership might be possible. In the top 10 most exposed countries with the exception of Türkiye, the joint share of products that can be considered ‘somewhat replaceable’ or ‘replaceable’ typically exceeds 55%.
•Products where substitution within the OECD membership may be more problematic are imported fromRussia include some specific fuels, most notably natural gas, but also several kinds of metals, including pig iron and numerous steel-related products, as well as aluminium and platinum.
Possible effects of Russia’s war of aggression and resulting sanctions
•Departure of foreign-owned firms from Russia is expected to lead to very substantial percentage drops in output in the motor vehicles industry in Russia, followed by publishing, audiovisual and broadcasting activities and chemicals. In absolute terms, however, wholesale & retail trade is the most exposed sector, followed by finance and insurance, and mining.
•According to our modelling results, the short run cost of sharply reducing oil imports by G7 countries and other European countries from Russia are estimated to be high and unevenly distributed across OECD countries with real income losses ranging between 0.4%and 2.9%across European countries. In the short term (when other suppliers do not step up production), the income loss would be three or more times higher than in the medium term (when global oil markets will have adjusted to the drop of supplies from Russia), emphasising the importance of easing the adjustment where possible.
•The cost differences range from 2.9% of household income loss in the short-term to 0.8% in the medium-term for Germany, and from 2.1% to 0.5% for Italy. In relative terms, Russia is impacted the most negatively in medium term. Countries that are most directly depending on Russian oil urgently need to plug short-term shortfalls and find energy alternatives for the most acutely affected countries and industries. Close international co-operationis key to addressing this challenge.
•Reducing bilateral trade with Russia more broadly by 40% on all goods and services is estimated to have a larger negative effect on Russia than an oil embargo. In this case, household real income losses in Russia is roughly double the loss under the oil embargo(-2.6%and -1.2% respectively), suggesting that measures related to energy trade are important, but they are not the only lever that can be used.
•Restrictions on exports of goods and services to Russia adds at least as much economic pressure as oil sanctions. Reducing exports of technologically advanced products throttles the capacity of the Russian economy.
To download the report, visit: https://www.oecd-ilibrary.org/docserver/5c561274-en.pdf?expires=1674769038&id=id&accname=guest&checksum=AAC543E17FC2BCD85EC7A52CD13A8F4B
