Currently, tension is growing on the border of Ukraine and Russia. Whether or not it will develop into a military confrontation, the situation is likely to affect economy in Europe and around the world. Even if inflation does not skyrocket, already existing trends might accelerate.
Russia is vast, and it is a major provider of various resources
If there is a military conflict between Ukraine and Russia, supply chains will most probably be disrupted. The disruption might not be caused by the war itself, but sanctions might be introduced against Russia, meaning that countries might simply refuse to buy resources from there. However, since Europe relies on Russia so heavily, crippling sanctions cannot be imposed on Russia without crippling the EU and a large chunk of the global economy as well.
Moreover, not every country can be expected to comply with the sanctions. China is a major buyer of Russian resources, so if China neglects the international sanctions, that would further strengthen its position while Europe had to struggle with inflation and shortages.
1. Oil and natural gas
Russia is a major supplier of oil and natural gas in Europe, providing about 30% of the oil and 35% of the natural gas imported into the EU. While the price of oil is already very high at USD 90 / barrel, different projections predict prices between USD 125 or even 250 in the not too distant future.
2. Food inflation
The prices of foodstuff have already displayed a 28% inflation worldwide due to the pandemic. Food prices are likely to increase further not only because oil and gas are essential to transport food – but also because Russian and Ukraine are among the top exporters of various grains worldwide, including wheat, corn, barley, rapeseed, and sunflower. Russia is also a prominent exporter of fertilizers such as ammonia, potash, and phosphates, which are all essential for efficient agriculture.
3. Metals and manufacturing
Russia is also a primary exporter of various metals worldwide. These are essential for the manufacturing of numerous commodities and tools, the shortage of which could interfere with production and construction as well as the daily life of people.
- nickel (49% of global exports): used in kitchenware, mobile phones, medical equipment, vehicles, buildings, power generation
- palladium (42%): used in catalytic converters, electrodes, electronics
- aluminum (26%): used in vehicles, constructions, machinery, packaging
- platinum (13%): used in catalytic converters and pacemakers
- copper (4%): used in electrical equipment, especially for wiring
4. Stock exchange
Whenever there is a risk event, investors tend to direct their funds towards assets they deem more stable, such as bonds or gold. This will push up prices – a trend that has already been conspicuous in the prices of gold, silver, platinum, or crude oil over the last months. While bond prices go up, interest rates might start to lower.
What if Russia backs down?
Even if the tension de-escalates around Ukraine and Russia backs down, some global trends that have already been underway because of the pandemic might accelerate, mostly to make supply chains, economies, and countries less vulnerable.
- Supply chains to become shorter
- Manufacturing to be moved back / closer to where the products are intended to be used (instead of outsourcing to foreign factories)
- Tightening controls on sharing / exporting technology
- Demands for more access to or control over raw materials
- Central banks to act more (geo)politically
Effects on your Hungarian business
With the international tension around Ukraine, now it is especially important to keep an eye on your costs, prices, and margins to ensure that your Hungarian business operation remains profitable. Even if the full-scale military conflict is avoided, changes to supplier changes worldwide seem inevitable.
Precise bookkeeping can help you stay on top of the daily performance of your business and make informed decisions to keep your company growing even in turbulent times. Helpers Finance offers just that, with invaluable experience in working with foreign-owned companies in Hungary. Get in touch with us today through our form, in email or on the phone, and let us discuss how we can benefit your business.
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