Putin’s war is wreaking economic havoc and destabilizing governments


Chintamba Gama, who runs a small business in the African country of Malawi that is involved in fish farming, cattle raising and growing crops like maize, chillies and beans, is more than ready for the end of the season. Russia’s war against Ukraine. “I hope by the grace of God something will happen,” he said. Fortune.

Gama cannot afford to buy bread for his family, as prices have gone up 100%. He now pays three times as much for fertilizer and fish feed; labor and transportation costs also increased.

“With each passing day, life becomes unbearable,” he said, adding that his biggest fear was seeing his business fail and not being able to support his family.

Russia’s invasion of Ukraine, which began six months ago, has disrupted global trade and production. until recently, Russia has blocked wheat exports from Ukraine, leading to soaring food prices around the world. Meanwhile, Western countries have reduced their imports of Russian energy, causing fuel prices to rise.

And it is the emerging countries of Asia, Africa and the Middle East, already hard hit by the pandemic, which are suffering the most. Economic upheavals have destabilized societies and shaken regimes, and even helped to overthrow governments in Sri Lanka and Pakistan.

With no end in sight for war, the worsening humanitarian crisis unfolding in developing countries has no easy solution. In many cases, due to a lack of safety nets, those most affected have to deal with the repercussions alone.

The first collapse: Sri Lanka

Sri Lanka has become a symbol of deep crisis.

Its problems began long before the Russian invasion. Over the past two years, tax cuts and the pandemic, which have wiped out the country’s thriving tourism sector, have helped to drain the coffers of the Sri Lankan state. An ill-conceived ban on imported fertilizers last year domestic crops decimated and caused Sri Lanka to depend more on food imports than it could afford.

But the war in Ukraine has pushed Sri Lanka to the brink. The island nation’s dependence on imported oil, its large external debt burden and its low foreign exchange reserves made it particularly vulnerable, said Rajiv Biswas, chief economist for Asia-Pacific at the company. S&P Global Market Intelligence Financial Information. Fortune.

The large-scale crisis that followed crippled the economy and overthrew the government. In May, Sri Lanka defaulted on its external debt for the first time, with food inflation climbing to almost 60% and non-food inflation to almost 31% that month.

The government announced a four-day working week to give citizens an extra day to grow food and reintroduced fuel rationing. But the measures were not enough. In June, Sri Lanka had only enough fuel to power essential services like healthcare and public transport for two weeks. Businesses were paralyzed, schools could not function and the country lacked essential goods like medicine. Then Prime Minister Ranil Wickremesinghe admitted that “our economy has completely collapsed”.

Motorists queue along a street to buy gasoline at a gas station in Colombo on July 7, 2022.

AFP via Getty Images

Kularuban Kulsegram, agriculture specialist for the non-governmental organization Palmera, which helps rural people, says farmers have been unable to find fuel for their equipment, or travel to town to access government services, such as Health care. Today, “people are getting into debt again; many had to take out loans to rebuild their lives. Interest rates are now close to 30% in the banks,” he said. Fortune.

In July, Sri Lankans are fed up forced former President Gotabaya Rajapaksa out of power, wiping out his family’s 20-year rule of the island and propelling Wickremesinghe to the presidency. The Rajapaksa regime lost popular support “quickly and completely” because all citizens faced hardship, said Sumudu Watugala, a finance professor at Indiana University. Fortune.

Sri Lankan anti-government protesters shout and wave flags outside the president's office in Colombo, Sri Lanka, July 20, 2022.
Sri Lankan anti-government protesters shout slogans against newly elected President Ranil Wickremesinghe at the President’s office in Colombo, Sri Lanka, July 20, 2022.

Tharaka Basnayaka—NurPhoto/Getty Images

Road signs

Yet the Sri Lankan experience may not be an exception.

The same pattern is emerging across Asia and Africa. Bangladesh closes schools one day a week and cuts office hours to reduce energy consumption. The fuel crisis is hurting its clothing sector, which employs more than 4 million people and accounts for 10% of its GDP; Bangladesh is the world’s second largest clothing exporter after China.

Pakistan, which is currently going through a summer heat wave, is implementing power outages = blackout more than 12 hours because it lacks energy. Its problems date back to the pandemic, when prices for food and other necessities soared.

But it was post-war price spikes and double-digit inflation that “made [an] already bad situation for Pakistan,” said Shahrukh Wani, an economist at the University of Oxford’s Blavatnik School of Government. Fortune. Pakistani lawmakers ousted Prime Minister Imran Khan from power in April. Khan, the former cricket star, has fallen out of favor with the country’s military establishment, but opposition parties have also taken advantage of inflation and economic hardship to rally the masses against him, Wani said.

Today, Pakistan, among other emerging economies, is compete with Europe for liquefied natural gas (LNG) supplies as Russia limits gas supplies to Europe and the bloc scrambles to exit Russian energy. This means that Europe outbids the nations of Asia and Africa for gobble up the world’s LNG at inflated prices.

“This has made the cost of LNG imports increasingly prohibitive,” said Biswas, economist at S&P Global Market Intelligence.

People rest on beds on a rooftop during a power outage in Jacobabad, Pakistan, Friday, May 27, 2022.
People rest on the roof of a guesthouse during a power outage in Jacobabad, Pakistan, May 27, 2022.

Asim Hafeez—Bloomberg via Getty Images

Across Africa, protests are intensification-of South Africa from Kenya to Guinea, as citizens see no respite from soaring fuel and food prices.

In landlocked Malawi, inflation rose almost 10% last year due to the pandemic. But Malawians are increasingly frustrated with what they say is a corrupt government unable to solve the economic problems of the country.

Temwa Desi, who runs an agribusiness in Malawi, buys rice and honey from local farmers to resell across the country. Soaring fuel prices mean she can’t reach customers in some cities and has cut her income from $391 a month to just $117. “We are forced to close,” she said Fortune, and, with so many like her, it is inevitable that there will be “more unemployed in an economy that is already struggling to create job opportunities”.

A man buys a sachet of cooking oil from an outdoor vendor in Lilongwe, Malawi on March 16, 2022.
A man buys a sachet of cooking oil from a vendor at Arae 23 market in Lilongwe, Malawi on March 16, 2022.

Amos Gumulira—AFP/Getty Images

More shocks to come

Emerging economies are now looking for outside help. But getting that support and reinvigorating hard-hit economies will be painful, if possible.

“Many emerging markets, especially smaller ones, are at risk of a debt crisis,” said Gabriel Sterne, head of global emerging markets and strategic research at Oxford Economics. Fortune.

Sri Lanka’s foreign exchange reserves have decreases at $1.82 billion—a 99% drop compared to 2019 — and the government must over $50 billion to foreign creditors. The central bank expects inflation, now at 61%, to hit 70% before finally falling.

Sri Lanka is pinning its hopes on an agreement with the International Monetary Fund (IMF) to extend its line of credit, which is “essential to put the economy on a more secure footing”, Gareth Leather, senior economist for Asia at the research firm Capital Economics, writing in July. Still, any aid from the IMF will come with strings attached and will dampen the country’s economy even after the worst of the crisis is over, he said.

Sri Lanka too must negotiate debt relief with China, its largest national lender. But so far, China has seemed reluctant accept a “haircut” on the Sri Lankan debt. Such deal with creditors are required by the IMF before it can give money to the government.

A huge crowd of protesters gathers in the evening in Islamabad, Pakistan on July 2, 2022.
Huge crowds of protesters gather as Pakistan’s former Prime Minister Imran Khan delivers a speech in Islamabad, Pakistan, July 2, 2022.

Muhammed Semih Ugurlu—Anadolu Agency/Getty Images

Recently, Pakistan ran out of money reached an agreement with the IMF resume loans. But he still needs more dollars, probably from China and the Middle East, Wani says. The new Pakistani government led by Arif Alvi is still facing an unstable situation. As Wani put it, “the very measures the government has taken to stabilize the economy are fueling political instability.”

Ultimately, the shocks of the war against Ukraine will make the situation even more difficult for governments and for small emerging markets above all. “We are likely to see a wave of sovereign crises bigger than anything we have seen since the 1980s,” Sterne of Oxford Economics said.


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