No Room for Economic Complacency regarding Ukraine-Russia War

By Frederik Paulus

May 2022 FEATURE
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ABOUT TWO MONTHS ago, Russia shocked the world by launching a full-scale invasion of Ukraine, causing horrible human suffering and destruction. In response, the European Union, the U.S. and others swiftly enacted wide-ranging economic sanctions against Russia, including previously unthinkable steps such as freezing the central bank's assets held abroad. This in turn caused somewhat of a financial and economic panic, and marked a new chapter in the “polycrisis” the world has been dealing with the last few years.

While the battlefields of Kyiv, Kharkiv and Mariupol are a long way away, it would be too easy to conclude that this conflict will have no consequences for Malaysia. The magnitude of it is such that its ramifications are global, both in the short term as well as in the long term. In fact, the World Bank[1] estimates that, overall, the war could shave off one percent of GDP growth for the upcoming year across developing countries. As a small, open economy dependent on trade, these global repercussions will also be felt in Malaysia. The silver lining is that these consequences are not necessarily only negative, they could also have a positive impact.

Read also: The Invasion of Ukraine: Coping at a Distance

The short-term impact will be felt mainly through the global trade and financial systems. The direct impact of the conflict for our trade with Russia and Ukraine will likely be limited. Both countries are not major trading partners for Malaysia, with Russia the destination for 0.31% of total exports in 2020, and Ukraine for 0.05%. Likewise for imports, Russia accounts for 0.40% of the total and Ukraine for 0.12%. However, this comforting fact hides some sectors that are likely to be harder hit. Malaysia sources more than 5% of its cereal imports, like wheat, from Ukraine, and more than 10% of imported fertilisers come from Russia. Although these percentages are significant, they remain well below Russia and Ukraine’s share in global exports (close to 20% in 2020 for wheat), implying that the disruption should be manageable.

Lost Supply

The indirect effects may be more significant. The war and the related sanctions have significantly reduced the supply of the above commodities and others, including oil and gas. The scramble to replace the lost supply from Russia and Ukraine inevitably translates to higher prices. The price of wheat, for example, reached record highs at the beginning of the war, and although it has come off these highs, it is still some 30% higher than before. Without government intervention, local and global producers will have little choice but to pass on those costs to consumers, resulting in higher domestic prices for staple products like flour, cooking oil or even chicken, whose feed is usually grain-based. This will disproportionately hit lower income groups.

Even without taking the conflict into consideration, inflationary pressure has been mounting in Malaysia and many other countries for the past few months on the back of global supply chain shortages. All eyes will therefore be on Bank Negara Malaysia’s interest rate policy in the next quarter as it weighs the risks of higher future inflation amid the country’s nascent economic recovery following the debilitating lockdowns of 2020-21.

A second category of commodity significantly affected by the war is oil and gas. Russia is a major supplier of both, particularly to European countries, and the expected disruption in supply caused prices to surge in late February. However, supply remained stable, and prices also have since stabilised, albeit at a level somewhat higher than before the war. Higher oil prices mean more revenue for Malaysia, given that we are a net exporter of crude petroleum. But higher oil prices also translate into higher expenditure, what with the automatic fuel subsidies that kick in when prices exceed certain thresholds.

Not All Bad

The conflict could end up presenting opportunities though. European countries have been unsettled by their reliance on Russian hydrocarbons, which is now a glaring vulnerability. They can be expected to diversify away from Russia, and hence will be looking for new sources of supply. Moreover, the drastic sanctions on Russia preventing it from acquiring state-of-the-art machines and technology could lead to a long-term decline of its petroleum industry, offering opportunities to take over market share. There are logistical issues that will require investment, such as the availability of shipping capacity for crude oil or facilities to liquefy natural gas, but the sense of urgency currently emanating from Europe indicates that these could be overcome.

Conversely, Russia will also be looking for new suppliers for a broad range of goods that it now cannot import because of sanctions. Enterprising Malaysian companies could look to fill that gap. However, the danger here is to incur so-called "secondary sanctions", and hence trade with Russia at this stage would probably do more harm than good, given Malaysia's integration in global supply chains.

Apart from the probable price increases in staple goods such as bread and cooking oil that should be monitored closely, on balance Malaysia will probably not suffer significant adverse impact from the conflict in the short term. On the contrary, the price increases in commodities could work in our favour. The Institute of International Finance, a trade association of global banks, constructed an “emerging markets impact index” for the war, which shows that Malaysia actually stands to benefit[2] from it.

One last risk to consider is that affecting our public finances, which are already stretched because of the extensive government support necessitated by the pandemic. A crisis such as this usually translates into a flight of capital from emerging markets, causing rising yields and interest rates domestically. We witnessed such a movement since the beginning of the war, but Malaysian government securities have been affected no worse than other markets. Yields did increase, somewhat constraining the government's capacity for fiscal spending, but not to an unmanageable level.

Cyberattack Risks

While this direct quantifiable impact altogether paints a reassuring picture, there are other risks that are harder to quantify. One effectively stems from a new dimension of war and poses a global threat: Cyberattacks. Russia-sponsored hacker groups have been targeting Ukrainian and Western computer systems for years, and they are a weapon in the current war as well. The longer the war drags on, cyberattacks could become more widespread and indiscriminate, targeting a wider group of countries – especially perceived Western allies – or just wreaking havoc by accident. For the institutions on the receiving side, public or corporate, such attacks can be crippling and costly.

Longer term, the consequences of the war are harder to assess. It seems plausible that it could accelerate a green transition, especially in Europe, and the drive for more food self-sufficiency, which already started during the pandemic. Both evolutions hold opportunities and threats for Malaysia.

Read also: The Invasion of Ukraine: Coping at a Distance

But perhaps the most worrying long-term risk is geopolitical, not economic: The crumbling of the "rules-based" international order that this war exemplifies. A return to a world order based on the law of the strongest is likely to harm global trade and the economic growth that it enables. A return to great power competition will also result in a world that is more difficult to navigate for smaller countries.

This is particularly relevant for Malaysia, which is facing an increasingly assertive China in the South China Sea. The sudden re-emergence of armed conflict between nation-states on the European continent forces an urgent rethink of Western defence strategies, which had been shifting towards the Indo-Pacific to manage the rise of China. The war in Ukraine will focus their attention closer to home[3], forcing Asian countries to be more self-reliant in addressing China’s claims in the region.

Regardless of the pros and cons of aligning with one great power over another, this introduces significant uncertainty, which is detrimental to economic development in itself. In other words, although the war is far away and its immediate impact moderate, there is no room for complacency, and Malaysia should urgently start thinking about its position in this newly uncertain world.


[1] Wheatley, Jonathan. ‘Ukraine War Will Increase Poverty in Developing Economies, Warns World Bank’. Financial Times, 29 Mar. 2022,

[2] Ibid.

[3] Rathbone, John Paul, et al. ‘Does the UK Need to Change Its Defence Strategy after the Ukraine War?’ Financial Times, 29 Mar. 2022,

Frederik Paulus

is an economic policy analyst focusing on Malaysia and the region, with a lifelong fascination for global affairs. He was formerly a banker in London and Singapore.