Is there Stagflation in UK?

On September 2021, Liz Truss, former Foreign Secretary swept past former Treasury Chief Rishi Sunak in September to become Britain’s third female prime minister. After taking oath as the Prime Minister, she had several duties on her hand. The Office for National Statistics’ recent data has clarified that the economy has fallen in three months from October to December.

According to the economics term, a period of slow or stagnant economic development and high inflation is referred to as stagflation. Together, they have the potential to have disastrous long-term impacts on our financial situation and the economy.

The threat of stagflation is present due to UK’s weaker-than-expected economic growth and the country’s persistently high inflation rate of 10.7%. Let’s dive into the story of UK – one of the most globalized economies now known for its economic and political crisis.

UK timeline – Past years

In the recent years, rapid changes have been observed in the economic and political spectrum of UK. But given the recent history of the British Conservatives, whose most recent problems have been in the works for years, the leadership change is hardly an exception.

  1. David Cameron (2010-2016)

The leadership crisis had been attributed by some to internal conflicts within the Conservative Party regarding Britain’s involvement in the European Union during the time when David Cameron was the Prime Minister (2010-2016). To address this disagreement, Cameron, who was in favor of remaining in the EU, decided to hold a nationwide referendum on Britain’s membership in the bloc. This referendum, held in 2016, resulted in a close vote with slightly over half of the voters choosing to leave the EU and the other half choosing to remain. The outcome of the referendum was Brexit and ultimately led to Cameron’s resignation.

  • Theresa May (2016-2019)

After David Cameron stepped down, Theresa May became the leader of the Conservative party and the Prime Minister. She was given the task of making sure that Britain left the European Union, which is called “Brexit”. She held this job for over 3 years. During this time, the British government and the EU were trying to work out the details of how Britain would leave the EU, but it was not successful. The agreement that the government came up with was rejected three times by the House of Commons. It was a difficult time with both sides were not able to agree. Due to a lot of pressure and people quitting her government over Brexit, may eventually was pressured to step down from her position as Prime Minister.

Boris Johnson (2019-2021)

In the summer of 2019, Boris Johnson became the new Prime Minister of Britain. He was elected as the third Prime Minister in just a few years. He was someone who supported Britain leaving the European Union and in January 2020 after 4 years of disagreements with the EU, Britain finally left the EU. But shortly after that, a new problem came up, the coronavirus pandemic. Johnson was criticized for not taking the necessary action immediately to stop the spread of the virus. For instance, not stopping travel and not setting up good testing and tracing system. On the other hand, he did receive praises for getting a lot of people vaccinated quickly. But because of the strict rules on businesses and gatherings that the government put in place, it led to the end of his time as Prime Minister.

Liz Truss (44 days)

In September 2021, Liz Truss, who was a supporter of Boris Johnson, became the third woman to be the Prime Minister of Britain and the last leader to meet with Queen Elizabeth II. However, her time in office was very short, she held the position for only 44 days which is the shortest of any Prime Minister in modern British history. Her downfall was quick; the value of the British pound went down after she announced her budget plan which included tax cuts without enough money to pay for them. To try to fix the problem, she changed her plan and replaced Kwasi Kwarteng (Finance Minister). But then Home Secretary Suella Braverman resigned and criticized Truss, and many people in Truss’s own party called for her to resign as well.

UK is wrapped up by an economic crisis of its own making?

After Boris resigned, Liz Truss became the Prime Minister of the UK. She promised to make the country’s economy strong and successful in the long run. But things had not gone as planned. Ever since she took over the office, the cost of mortgages went up, the value of the British currency (pound) dropped to its lowest point ever, and there’s been a lot of confusion and uncertainty in the markets that handle bonds as the rates increased from 3.37% on September 22nd to 4.53%. All of this caused major problems for the country’s financial stability.

Liz Truss Parliament’s Economic Plan

When Liz Truss became Prime Minister, the country was already facing a lot of problems like high living costs, a war in Ukraine and the ongoing effects of the COVID-19 pandemic. To try and fix these problems, she announced a big plan to cut taxes and spend more money, but she didn’t say how the government would pay for it. This made people worried about how the government will pay its bills, and it made them question the Prime Minister’s ability to manage the economy as she was elected as PM when there was a lot of infighting among the members of the ruling Conservative Party to choose a new leader. The leader of the country’s financial department, Kwasi Kwarteng, announced a plan: a mini budget to decrease taxes by 45 billion pounds and make it easier for businesses to invest and grow. He also stated that the government will borrow at least 60 billion pounds to control the high energy prices that have been causing problems for families and businesses living expenses. The aim of the government is to improve the economic growth rate to an average of 2.5% per year, which they believe will generate more revenue from taxes and provide more funding for public services

Reactions of the financial markets

The value of the British currency (pound) dropped to its lowest point ever compared to the US dollar, going as low as $1.038 on September 26th. This is because the investors were not confident in the British currency. Even though it has recovered a bit, it is still down about 2% since the announcement of the economic plan.

This drop in the value of the pound also made it more expensive for the government to borrow money. The rate at which the government borrows money (called yield on government bonds) increased from 3.37% on September 22nd to 4.53% on September 27th.

To try and fix this, the Bank of England, which controls the country’s funds, announced an emergency plan on September 28th to buy a large amount of long-term government bonds to stabilize the market and protect pension funds.

Interest Rates and Inflation Level

Inflation rate in the UK is one of the highest among G7 countries like Germany, Spain, and France. The consumer prices index (CPI) rate was 10.7% in the past 12 months and the older Retail Prices Index measure was 14%. Some of the main reasons for the high inflation are: increased energy costs, food prices and the high cost of home repairs and improvements, according to the Office for National Statistics.

As a response to high inflation, the Bank of England, which controls the country’s funds, has raised the base rate of interest from 0.1% in December 2021 to 3.5% just a year later. This is the ninth consecutive increase in the base rate. The idea behind raising the interest rate is that if borrowing money becomes more expensive, people will spend less. This will reduce the demand for goods and services and help to bring down prices and slow the inflation rate.

The base rate had been at a very low 0.1% between March 2020 and December 2021 to encourage households to spend money and get the economy moving. It also helped businesses to borrow money cheaply to survive the economic shock caused by the pandemic.

Is UK economy heading for stagflation?

The United Kingdom is currently facing a high rate of inflation, which is when prices for goods and services increase. Some of the reasons for this include higher energy costs, food prices, and the cost of home repairs and improvements. Additionally, the current economic situation is complicated by factors such as Brexit, the ongoing Covid-19 pandemic, and conflicts in other countries affecting global supply chains. As a result, businesses are struggling to find enough workers and are having to pay higher wages, which in turn drives prices up even further. This is a difficult situation for the country, as the economy is not growing at the same pace as prices are increasing.


In summary, the United Kingdom looks like it is currently advancing towards stagflation due to a combination of factors such as high inflation, a decline in the value of the pound, and a rise in interest rates. The rise in inflation is being driven by factors such as energy costs, food prices, and the cost of home repairs and improvements. The government has attempted to address this issue by announcing plans to cut taxes and reduce red tape to promote economic growth, but these plans have had limited success. The country is also facing a shortage of labors and a decline in the workforce due to the impact of the Covid-19 pandemic as well as Brexit. Businesses are demanded to pay higher wages to attract skilled staff, which is pushing up prices. The economic crisis is being further aggravated by a global shortage of gas supplies and the Ukraine conflict, which is pushing up the price of oil. Overall, it is a challenging time for the UK economy and it is unclear when the situation will improve. The economy, UK and the citizens now depends on Rishi Sunak to navigate the country through the current economic crisis in the right directions.


– Editor TJEF

Bhagavath Manickavasagam


War, Venezuela’s saving grace:

Sanctions are a common tool used by governments and international organizations to exert economic pressure on countries or individuals. They can take many forms, such as trade embargoes, financial restrictions, or travel bans. Sanctions can significantly impact the global economy by disrupting trade, investment, and financial flows. However, sanctions can also be effective in achieving their intended goals, such as changing the behavior of a government or regime. We have encountered many sanctions that have been issued in recent years because of the ongoing conflict in Europe. But who has benefitted from the war?

Let’s dive into the story of Venezuela – a nation with a population of more than 30 million people, known for winning global beauty pageants and its brutal economic condition over the past decade.

Venezuela’s Timeline

Venezuela was considered a relatively wealthy country prior to 1998, due to its oil resources. The country has the largest proven oil reserves in the world, and the oil sector accounted for a large portion of the government’s revenue and the country’s overall GDP. This wealth was used to fund social programs and infrastructure development, and Venezuela had a relatively high standard of living compared to other countries in Latin America.

So, what happened to the country with the world’s largest Oil reserves? Where did it go wrong?

By looking at the above graph, we can analyse the various events that took place, that brought this wealthy Latin country to the pits.

1998 – Under the leadership of President Hugo Chavez, Venezuela implemented a series of socialist-inspired policies aimed at reducing poverty and income inequality. This included the nationalization of key industries, such as oil and telecommunications, as well as land redistribution and the creation of communal councils to provide basic goods and services to poor communities.

In 2004, you notice the first slump in the trend line, owing to increasing pressure to address concerns about environmental impact and to invest in alternative energy sources. But this didn’t come as a surprise, the oil shocks were often cyclical in nature and the global economies anticipated the surge to adapt accordingly. Post 2005 oil prices rose, from which the Chavez-led government of the time sought to derive maximum revenues on the global market. Its dependency on the oil sector became more apparent, and Venezuela became a “petrostate” – a nation whose income is largely reliant on the export of Oil.

2006, Chavez took to Government again, re-inventing the economic structure towards its economic gold mine – Petroleum. This along with the increase per barrel paved a way for large inflows of foreign capital, which leads to an appreciation of the local currency making imports comparatively cheaper.  This move proved to be a great move, but at what cost? Chavez was able to initiate this by rooting labour and capital away from other sectors of the economy, such as agriculture and manufacturing, to work on building pipelines and better filtration processes for crude oil. This also came at a cost as more resources and expertise were required to handle such a task. 

2008- 2012, you may notice a particular dip in 2008 and a revival post that, which proved even during “The Great Recession”, Venezuela was able to bank on its foreign reserves and global demand to withstand the economic disruption. Chavez was known for his people-oriented reforms and demanded the nationalization of major sectors like banking, electricity, transportation, tourism etc for the betterment of employees. This caused extensive government spending, to which the government didn’t flinch owing to its oil prowess. Below is a graphical chart stating the import spending as a percentage of the GDP.

Venezuela’s imports for 2011 were $62.33B, 2012 – $92.40B (48.23% Increase), 2013 – $109.49B (18.51% Increase), 2014 – $151.45B (38.31% Increase). This substantial spending was only being offset by the export of crude oil which didn’t diversify but concentrated all its revenue towards a single sector, peaking at 95%.

The Downfall of Venezuela:

Many associate the downfall of the Venezuelan economy post the death of Chavez and the election of his successor and current president Nicholas Maduro. But what we need to understand is a country’s overall spending and prospects. In 2012, Maduro was handed over an economy that functioned solely on the government’s enormous spending. It imported electronics, medicine, agricultural products, cars, metals and essential food and beverages. The first mistake was to continue with the policies engraved by his predecessor which was based on socialism, focusing on public opinion, and continuing with the imports of necessities.

The Oil Shock:

The image below shows the oil prices from 2005-2022

The very defining moment that changed the economic outlook for Venezuela was the 2014 oil price collapse. This was due to the oversupply of global oil and reduced consumption by major importers. But another element to investigate is something known as shale oil, which used advanced drilling methods to extract Crude oil directly from the source, these advancements were in the works from the 2003 boom in oil prices. The US was able to develop this technology, taking the market to new heights and surpassing major producers like Saudi Arabia and Venezuela. This led to one of the highest drops in prices. But if you notice, a similar drop took place in 2008, when the economy was able to recover. The difference this time was the increasing fiscal deficit laid on the country. As the revenue went down, they were not able to pay their large import bills, which led to the carrying of debt through the years. As spending grew, the deficit widened, and foreign inflows took a slump due to the enormous spending and political instability in the country. As debt grew, necessities in the country garnered high prices causing inflation across the nation. The temporary solution and a dire error to this deficit, was to temporarily print more notes increasing the supply of the “Bolivar” (local currency) allowing for money flow within the economy. This was only short-term, and the concurring effects could so be seen in the forthcoming years.


With the rising tension in the political stability of the country, protests spurred out of control. The government was being accused of extrajudicial killings, human rights violations and political repression. In the Elections of 2017, Maduro faced opposition from local as well as foreign counterparts (US), however, Maduro had the upper hand, as he appointed loyalists in major positions sealing his victory in future elections and that’s exactly how he was able to take office in 2018 for another term of presidency. But little did he know what the US had planned for him. Firstly, they requested him to retire from his position in government to which he didn’t comply and blamed US sanctions for the economic crisis. He was able to secure the presidency in 2018, to which the US, European Union and neighbouring states ceased to consider his presidency as they believed it was a faulty election.

The Trump administration took immediate measures to impose sanctions on the world’s largest oil reserve and PDVSA (Petróleos de Venezuela, S.A.) is the Venezuelan state-owned oil and natural gas company) which held up the exports to major global customers.


Due to these sanctions, the revenue stream was made minimal, the In-house output was never considered to be relevant as most of the country was dependent on imports. This caused a fall in the value of the bolivar, causing the highest inflation to this day.

To put things into perspective in 2018 –  1 US dollar = 248566.537 bolivares, so to consume one breakfast in Venezuela you need to be a millionaire.  The irony of it all was the ATM withdrawal limit set was 10,000 Bolivars. Which almost made it impossible for citizens to even access local currency. And even if they could, they would need denominations to value millions which aren’t pocket or wallet friendly rendering the currency to almost no value. This moved the economy to the black market for currency. De-facto dollarization took place, which meant the use of a foreign currency for daily transactions instead of the local currency. In Venezuela’s case, the printing of notes became more expensive that the actual value of the note. The economy was shattered and almost 70% of the population faced extreme poverty. This led to Hyperinflation, where prices increase out of control under shorter periods. It’s a difficult situation for Venezuela having no in-house production, ever-increasing debt, tough sanctions, theft, corruption, and no means for policy change.

Things took a turn for the worse, with the Covid-19 Pandemic causing even more damage like shortage of medical supplies, inadequate resources, and delay in containment and detection of cases.

There aren’t too many economists or economic books or policies that can form a structure to revive the Venezuelan economy. Unless the political standpoint of the country opens to global regulations and aid. But that would mean Maduro to give up control and open the country’s borders through social reforms and infrastructure to entice foreign investors.

Venezuela’s, prospering neighbours:

With the situation turning downside since 2015, almost 7+ million people looked to migrate to neighbouring countries, which proved to be difficult as nations hosting migrants would need to develop infrastructure, healthcare, education and jobs. For example, Columbia which received the highest number of migrants (2 million) recorded costs of 550 dollars+ per migrant, which amounted to about 0.5% of the country’s GDP. Although in the long term, it can prove to be beneficial in the overall output of their respective economies.

Venezuela’s ray of hope:

Now as mentioned in the title of this article, the word war refers to the ongoing conflict between Russia and Ukraine. A lot of countries have suffered due to the sanctions being imposed on Russia which is a major player in the oil Space. These countries also include major giants like the US which has been a dominant force in sanctions imposed on Venezuela. Since Russia has been imposed with sanctions, the current Biden administration has looked to Venezuela as its source of oil. They have done this by lifting sanctions allowing Chevron Corporation, an American energy corporation to drill and pump oil in Venezuela. This puts Venezuela in a vulnerable position, where they have no other choice than to abide by the agreement that can bring some source of revenue into the country. By signing this deal, they were able to capture some growth in the economy. Through this they were able to peg their currency against the oil Commodity resource, so where 1 USD = 248,480.0646 in 2018, was now 2722.7569 VEF in 2021-22 and 19.9595 VES in 2023. Notice the change in currency codes from VEB, VEF and VES which was the gradual change each time the currency pegged a smaller denomination. The increase in GDP can be observed in the below graph.

Concluding statement:

Well, one wouldn’t say war should be the solution to solve the economic problems of other countries. But one major player that stands out is a nation’s power over another. In this case, it was the US who imposed sanctions in the first place based on corruption and political grounds almost ruining the only source of revenue for Venezuela, indirectly affecting an already diminishing economy. But who is to blame? Is it political instability or the poor decision to induce money supply to temporarily sustain the economy? War in this case was coincidental and global players have taken large steps in dealing with this war. Whether it is the US imposing sanctions on one hand and tightening sanctions on the other hand, who is to gain other than the country imposing sanctions? Observe the global powerplay in how Venezuela was basically a pawn on the global chessboard. Yes, the US didn’t anticipate the war and sanctions on oil, but does gain give enough valid reason to lift a sanction? If so why was it put in the first place? It’s the strategic moves that take place across the globe that make countries dependent on each other.

Lessons can also be learned on how economies must cooperate with each other, diversify portfolios to not rely on only one source, keeping a well-balanced BOP (balance of payments). In the case of India, although running in a deficit, have been able to maintain trade as well as focus on “Make in India” to improve the in-house capability of the nation. Venezuela on the other hand should consider this as mere luck, they should now focus on improving growth within the economy, bringing in investors and stabilizing reforms for trade to take place. The market for oil might change soon as the world moves to an Electric and clean energy interface. Venezuela must look to utilize current revenue to clear debt, open borders and invest in technology to have a chance of future survival.


-Editor TJEF

Aaron Cardozo

The Middle East and the “Dutch Disease”

After long periods of lockdown and covid-19, here we are again talking about a disease related to the mid-east that has a “Dutch” in its name. What is it? Another pandemic to leave the health system devastated? No, it is deadlier. It is her to leave the international economies devastated.

What is a Dutch Disease?

The term “Dutch disease” refers to the negative consequences that can result from a rise in the value of a country’s currency. In simpler words,  “Dutch disease” refers to the paradox that occurs when good news, such as the discovery of large oil reserves, harms a country’s overall economy.

Eventually, it comes down to this economic crisis: A decrease in the value of the domestic currency. Foreign investment may increase demand for the country’s currency, causing it to appreciate. The country’s exports in other industries will become more expensive as the domestic currency rises, while imports will become cheaper.

These factors, in the long run, may contribute to unemployment as manufacturing jobs migrate to lower-cost countries. Meanwhile, non-resource-based industries suffer as resource-based industries generate more wealth.

 Fig: A brief overview of the term. 

Over these economic impacts, is a basic question of how all of this started. What is the origin of this term? Is it the first time anything like this is happening? To discuss this in more detail let’s move to the next section.


Economists have long recognized that large resource discoveries can be harmful to economies in the long run, a phenomenon known as Dutch disease after the effects of the Netherlands’ North Sea gas discovery. The term “Dutch disease” was coined in 1977 by The Economist magazine. The newly discovered wealth and massive oil exports caused the value of the Dutch guilder to skyrocket, making Dutch exports of all non-oil products less competitive on the global market. Unemployment increased from 1.1% to 5.1%, while capital investment in the country fell.

The dutch disease is a phenomenon where the wealth of the country is not managed effectively and efficiently. Many countries around the world have experienced this syndrome, including but not limited to resource-rich commodity exporters. Although Dutch disease is commonly associated with the discovery of natural resources, it can occur as a result of any development that results in a large inflow of foreign currency, such as a sharp increase in natural resource prices, foreign assistance, or foreign direct investment. The Dutch disease model has been used by economists to investigate events such as the flow of American treasures into 16th-century Spain and gold discoveries in Australia in the 1850s.


Dutch Disease struck the United Kingdom in the 1970s, when the price of oil quadrupled, making it commercially feasible to excavate for North Sea oil off the coast of Scotland. Britain had become a net exporter of oil by the late 1970s, after previously being a net importer. Despite the fact that the value of the pound skyrocketed, the country experienced a recession as British workers started demanding higher wages and Britain’s other export markets became sluggish.

In 2014, economists in Canada reported that the inflows of capital associated with the enslavement of the nation’s oil sands may have resulted in a mispriced currency and decreased manufacturing competitiveness. Simultaneously, the Russian ruble was appreciated for similar reasons.

Fig: Graphs showing the wording conditions in Russia in 2016.

The price of oil fell significantly in 2016, and both the Canadian dollar and the Russian ruble were brought back to lower levels, allaying fears of Dutch disease in both countries.

Examples from the past point fingers at the current conditions of the middle-east. The picture seems to a take similar shape even now.

Condition of Middle-East

As we talk about middle east countries, also called MENA Countries, comprise Algeria, Bahrain, Egypt, Iran, Iraq, Israel, Jordan, Kuwait, Lebanon, Libya, Morocco, Oman, Qatar, Saudi Arabia, Syria, Tunisia, United Arab Emirates, and Yemen.

The region is typically thought to consist of around 19 countries, but the definition can be expanded to include up to 27. The World Bank classifies MENA as 21 countries, and according to their 2020 population reports, the area represents about 6% of the world’s population.

The MENA region holds over half of the world’s oil reserves and two-fifths of the world’s natural gas reserves, according to OPEC data. MENA is an important source of international energy and economic resources due to the region’s significant petroleum and natural gas production.

Fig: Map for the MENA Countries.

The MENA region’s excessive on a single export earner, equivalent to the Dutch Disease spree, is particularly intriguing. A broad, but precise, the generalization would be that MENA countries have always relied on one or more export earners since independence, even before independence. While some relied on agriculture exports, tourism, and services, others relied on various natural resources discovered and later exported.

Whatever the source of income for any of these countries, it is this over-dependence that has hampered economic diversification and kept countries vulnerable to global market prices and international events.

For instance, Egypt and Sudan stopped exporting cotton and other agricultural products between the 20th and 21st centuries. While Sudan relied on oil exports to generate income and pay for government expenses, Egypt has expanded into the tourism and other service sectors. The latter’s Dutch Disease was short-lived and is primarily mirrored in a development strategy that was restricted to areas inside the borders of Khartoum.

Contrarily, Egypt, which relies heavily on tourism to generate foreign currency, went from being food self-sufficient before it had large cotton plantations in becoming completely vulnerable to increases in world food prices. Even though it is financially sound compared to a few years ago, the country is still far from having fully diversified sources of income.

MENA nations are currently at a crossroads in their economies. The main sources of foreign exchange are exports of agricultural products, oil, gas, remittances, and tourism. Even though a few nations have developed a variety of manufacturing sectors, those have experienced ups and downs depending on the performance of the primary exporter, with economic reforms being barely implemented and put off when the consequences could be more severe.

In addition, capital-intensive industries predominate in MENA countries’ revenue-generating sectors. In other words, they demand significant investments without necessarily generating sufficient employment for each dollar spent.

Even jobs generated in manufacturing and agriculture have not kept pace with those generated by other export-generating industries, with the number of jobs generated in agriculture declining further as urbanization rates rise. A few MENA nations have been stuck in the lower middle-income category for as long as anyone can remember when looking at the income status of the majority of MENA nations.

The same nations have maintained their status quo despite plans for economic development and diversification that were never fully carried out, with a few, like Algeria, reaching upper middle-income status as a result of their oil and gas exports.

Mitigating the Effect

Most assets in the Middle East are held by a small number of ultra-high-net-worth individuals. The region’s high concentration of wealth provides wealth management and private banking firms with a unique opportunity to service a small number of ultra-high net worth clients without incurring the costs of servicing a large number of clients. Furthermore, the region’s political uprisings are unlikely to slow the accumulation of wealth.

The MENA region’s wealth management industry has grown because of higher-than-average returns on oil investments. During this time, oil prices nearly doubled at their peak in 2008 before halving again around the same time. Global equity prices, on the other hand, did not fall as much. Oil had a 1.6 times higher standard deviation than equities. Higher standard deviations for oil prices, and thus income based on oil, imply that the Middle East’s wealthy require wealth managers who can help them navigate these uncertain waters. Because of these dramatic changes in the sources of Middle Eastern wealth — and relatively low returns on equities in global financial markets — Western broker-dealers are likely to enter Middle Eastern markets more vigorously, rather than waiting for the Middle East’s ultra-wealthy to arrive to them in Europe.

As the country is not suitable for sectors like agriculture and plantation because of the sand, the country has to utilize its excess wealth in some ways to reduce its over dependence on the oil industries. The shift in the investment patterns has pushed the MENA countries to invest in hefty ambitious projects to boost their economies once their oil reservoir is exhausted through tourism to balance out the Dutch disease effect. UAE, Qatar, and Saudi Arabia have all started focusing on this concept, spending billions of dollars on impressive projects and subsidizing Global Airlines to bring tourists into their cities, even if only for a brief stopover. 

These mega project will cost nearly a trillion dollars and will provide no significant quality of life advancements over a traditional city that could be built for a tenth of the price. This is true because the Gulf States have very small native populations and, prior to selling oil, very limited capital. Additionally, their land is mostly inhospitable deserts, limiting their production potential. When they discovered oil on their land, the value of that land skyrocketed because it contained a highly sought-after source of energy, but the problems of a small unskilled workforce and limited capital resources remained untouched. Therefore, the problem came down to Gulf states inability to find enough workers to fill the employment created by the nation. Initially, the nation overcame this limitation by inviting the foreign oil countries to use their own capital and labor. However, those companies were only interested in doing this to produce oil, so while their economy grew, it became completely dependent on this one resource. Fortunately, the Gulf States received oil revenue, which is another form of capital. Unfortunately, regardless of how much the government invested in their country’s traditional. They would never be able to compete with oil production in any industry.

Before oil, Dubai was primarily a port for non-industrial fishing, and Saudi Arabia was largely composed of Bedouins with a tourist industry that relied almost entirely on pilgrimages to Mecca. The countries didn’t have regular businesses that they could develop out to compete with oil, so they had to build them from the ground up. Now, because oil is so profitable, there aren’t many modern sectors that can pragmatically compete with it.

However, Vacationers are not the top focus of these projects. The UAE, in particular, has stretched some fairly generous incentives to businesses to develop themselves in the country. Businesses bring workers, and workers spend money in the local economy on things ranging from housing to snack food. However, tax incentives alone are insufficient to entice the types of businesses that the Gulf States want to a region of the globe that most people associate with turmoil and war.

Even if that isn’t a completely fair judgement, industries need to see that they can earn profit before low tax rates matter, and that’s where these mega projects show up . Building something like the Palm German required the cooperation of hundreds of companies and millions of workers, and even after they’re finished, international hotel chains, real estate development companies, law firms, landscapers, and everything in between are required to keep these advancements looking fantastic. This creates an industry worth it for businesses to import their capital and labor into the country to take edge of once big businesses get established smaller service businesses can form around them and the country can quickly develop a vibrant business ecosystem. Where there seemed to be once only silt, big projects and the promise of even greater projects in the future is a very effective method to persuade companies to set up workplaces that will ideally operate long after the oil has dried up.

Closing words

To summarize, if a MENA country has environmental capital or not, MENA’s Dutch Disease has been its over-reliance on one or a few export earners. The limited revenues were funneled reluctantly to economic reforms that were not accompanied by a consistent basis. As a result, various countries remain stuck in various stages of development, as evidenced by their headstrong middle-income status.

This is in comparison to countries that began with a similar or lower economic base around the time of MENA’s independence but exceeded them by substantial economic strides in the absence of a natural resource base.

From an economist’s perspective, a learning curve for other countries would be how to avoid it. The two simplest ways to avoid it is by decelerating the domestic currency. Decelerating currency appreciation is a simpler and more feasible strategy for mitigating the effects of Dutch disease. It is sometimes possible to achieve this by leveling the spending of revenues earned from natural resource exports. The second would be the diversification of the economy. Diversification of the economy is an approach that can almost completely eliminate the negative economic impact of Dutch disease. Economic diversification can be accomplished by subsidizing laggard sectors of the economy or imposing tariffs to sustain domestic producers.


Editor, TJEF

Prachi Shree

Future Commerce and the Impact of manipulating commodity

Commerce is defined as “the buying and selling of things”. This holds in concept even today. If we were to see the past, we would see commerce as the trading of goods, i.e., the barter system. Moving further down the timeline humans began to trade with currency such as valuable stones. Your gold, silver, diamonds, rubies, etc. Soon later came the industrial revolution which brought with it what had found its roots in China. But was given more importance when America declared the dollar as the currency on which all currency rates would be based.

But now the current situation is quite different. Owing to the financial and economic literacy boom the definition of commerce has come to encompass a variety of components. We can now trade so many objects or to be precise commodities that accumulating wealth is now not the tedious task it used to be. Some of the conventional commodities that are traded currently are equity, bonds, and currency. There have also been a few unconventional commodities that have been created such as cryptocurrency, non-fungible tokens, baseball cards, mortgages, meme stocks, and many such commodities.

Conventional commodities have been researched to death. Manipulating commodities like these is what led to the formation of SEC and SEBI-like organizations. But the unconventional commodities, are the ones that need to be talked about. After Covid-19 commodities such as these became the literal key to unfathomable wealth. People became overnight millionaires.

But this is just the picture that is being seen through rose-tinted glasses. Sometimes this wealth is the result of ill-begotten means. There have been incidences where individuals or entities have used manipulative methods to achieve this wealth.

WallStreetBets and GameStop

WallStreetBets is a community of average Joe traders on the social media website Reddit. These people provide advice on stocks to buy and sell and conduct discussions on everything related to trading. On January 2021 a strange occurrence took place allowed that allowed paupers to exact retribution on the rich nobles, i.e., the trading and hedging firms.

GameStop was a video game retailer chain that had struggled for some time. Looking at a company that was a safe bet, bearish trading, and hedging firms were shorting the stock. This meant that these firms borrowed GameStop shares and sold them. Once when the price dropped, they would buy them back and return them to the lender. This was further causing the share prices to fall.

In the month of January, the most bizarre happened. This was caused by the action of the Reddit community called WallStreetBets. The entire community began amassing a large volume of GameStop shares which caused its equity to grow to $24 billion from $2 billion. The implication. Everyone who invested in these shares became overnight millionaires through this meme stock. But there were also downsides.

This was damaging for the entire Wall Street. The losses for hedging firms totaled approximately $6 billion. Melvin Capital founded by Steve A. Cohen’s protégé Gabe Plotkin had to borrow $2.75 billion just to stay afloat. It was unsuccessful in this endeavor since as of May 18, 2022, Melvin Capital was shutting down its business. Therefore, HNIs who invested in these corporate firms lost a crapton of money thanks to the unity of like-minded people.

(Reported Portfolio Holdings of Melvin Capital from July 2015 – July 2022)

This entire saga began with hatred towards the capitalists who earned their wealth through scrupulous means. Or so believed. But that is a matter for another day. This incident showed a certain flaw in the financial system. If enough people were to pool their resources together for a certain cause they could manipulate an entire equity market. Moreover, they could bankrupt a major hedging firm and bring it to the streets.

Cryptocurrency Manipulation

Cryptocurrency is the new watchword of the financial world. Cryptocurrency has become a subject that many possess functional knowledge of. But even this commodity has its flaws. Cryptocurrency has become associated with many unsavory and illicit activities such as black-market trading, money laundering, and terrorist financing. Moreover, it can be manipulated to be beneficial to a certain beneficiary. There are ways in which this can be accomplished.

(Graph depicting Illicit activities funded by Cryptocurrency)


Cryptocurrency spoofing is the process by which traders attempt to artificially influence the price of a digital currency by creating fake orders. Spoofing is accomplished by creating the illusion of pessimism (or optimism) in the market. Traders do this by placing large buy or sell orders without the intention of ever filling them. When investors do this, they trick other investors into either buying or selling, and the price of the cryptocurrency stands the possibility of being adjusted accordingly.

This was evidenced by the stupendous fluctuation experienced by Bitcoin in late 2017. In that period Bitcoin witnessed a high of $18,000 (19th December 2017). Investors who had invested in the currency for the long term benefited greatly. But on 7th February 2018, the price had fallen to $7,270.51. Notwithstanding the price, it had touched on 5th March 2021 i.e., $49,362.58.

This indicates how traders with adequate knowledge manipulate cryptocurrency to suit their short-term whims.

Pump and Dump

The most ubiquitous technique used in the crypto markets currently is pump and dump. A method that impacts its traders the most. It takes place when core market participants try to pump up the value of a coin until it gains attention. Once traders and investors jump into the market, the group dumps the coin for a neat profit. A low market cap shitcoin can be pumped easily and a lot of this manipulation is well coordinated by hundreds and thousands of users who come together on Reddit, telegram, etc. to execute this technique. It is also impossible to predict the exact time of the pump, or the dump, and this tactic does hurt folks late to the pump, late to the dump, or even those who participated in it.

Whale Wall

The Whale Wall technique is an old method that is not as prevalent as it used to be. It is a tactic where a trader will place a huge batch of orders with no intention of ever having them executed. The intent is to create the illusion of large demand or supply in the market. This was frequent in the period between 2013 and 2017.

What would probably happen would be a whale accumulating cryptocurrency secretly while markets would hit sell orders, and the sell wall suddenly vanishes as the whale pulls out his order after effectuating the act. This could also happen and vice versa. Whale walls and spoofing can create exponential profits for whales, as the same people take positions on futures markets too. They profit from volatility in a derivative market by manipulating price discovery in spot markets.

It was witnessed on July 19th, when approximately 79,000 Bitcoins were moved by a whale or whales to Coinbase to create a sell wall and induce a downward price. Normally, this quantity of BTC is bought and sold on OTC. However, the sell wall was executed out of no choice when prices did not fall to expected levels.

Wash Trading

Wash Trading is another version of the whale wall technique and is used to create an illusion of an enthusiastic market for a specific commodity. Just like other tactics, it is illegal to do this in developed financial markets but does not appear to face any issues regarding cryptocurrencies yet. Wash trading typically necessitates buying and selling the same commodity simultaneously by one individual or a coordinated set of folks projecting a false volume. Most traders look at the volume and liquidity of an asset before they jump in and quickly discover liquidity false alarms when wash trading prevails.

Stop Hunting

One of the most nefarious tactics deployed by crypto manipulators is stop hunting i.e., hunting for all the stop loss milestones in all the trades. It is used to force traders out of their positions by driving prices low enough to trigger their stops. The impetus for whales is to pick up the commodity at a lower price once multiple traders’ hands are forced out.

Most traders place their stop losses at key technical levels and absent other manipulation tactics. For example, if coin XYZ has stop loss positioned at a certain level ABC then many sell orders are enacted to push the price to these stops, once it attains key technical levels innumerable automated sell orders are executed with manipulators sweeping up the loot with almost immediate market recovery with many others following the manipulator’s buys on the buy orders.

Given crypto markets run 24X7, unaware traders wake up to discover their stop losses were triggered and the prices are back up to previous levels, but all their positions are lost. Given that placing stops is still essential to managing risk if the market is legitimately moving down, it becomes tricky to spot this technique to avoid being ambushed by whale attacks.

Thus, the market for any commodity is rife with manipulation. Any trader with a rudimentary knowledge of the market in question can manipulate it if he/she examines the market and all its components well enough. But what are the impacts of these manipulations? Understandably, these manipulations would cause ripples in the economy in some manner.

Let’s look at it objectively. To make this simpler we assume ceteris paribus exists in the market. A trader in a long position will demand a commodity over the quantity available in the market. This would lead to two things. Firstly, sellers would want to liquidate their positions at any additional cost(commissions, brokerage). Secondly, there would be an excess of the commodity in the market.

Therefore due to the excess supply, the commodity would get cheaper and the prices would fall. Surely the manipulation would end sometime. When it does the commodity ends up being dirt cheap since demand has now abruptly stopped but there exists an unused inventory of the commodity. This effect is called “burying the corpse”, similar to hiding a crime.

Burying the corpse is the main risk that the trader undertakes. If the manipulator sells the commodity he bought at a depressed price he is at a loss. Unless the gains realized from liquidating long positions at a supercompetitive price outstrip the losses incurred from burying the corpse, manipulation is futile.

This kind of unethical practice is what brings companies to bankruptcy. If one is to check the stock market one will find indexes, a basket of stocks with something in common. Imagine if one stock performs in such a chaotic manner then the entire index is affected. Leading to losses being borne by investors who invested in that expecting healthy returns. Nevertheless, these are risks that all investors and traders commence.

Commodity manipulation is a necessary evil that would stay with us forever since it’s a fundamentally sound economic practice. But these practices are not feasible for perpetuity. Economic frictions which form broken cash markets and liquidity considerations that are skewed towards consolidation or monopolies make manipulation a beneficial activity for the manipulator. All factors that support manipulation have been in various ways since the beginning of the commodity market. Thus no matter what asset humanity comes up with to trade, or how many regulations the relevant authorities bring in, commodity manipulation is an integral and undetachable part of commodity trading.


Craig Pirrong, “The Economics of Commodity Market Manipulation: A Survey”, Bauer College of Business, University of Houston, February 11, 2017

John McDermott, “The Fortunes Won—and Lost—in the Mind-Boggling Rise of r/WallStreetBets”,, May 13, 2021

Nathan Reiff, “Cryptocurrency Spoofing”,,or%20optimism)%20in%20the%20market, July 16, 2021

Nitin Kumar, “Spotting the 5 Common Crypto Price Manipulation Patterns”,, July 21, 2021

International linkages: India’s comparative advantage and trade patterns

All of us have heard a multitude of things about the world becoming a global village today where the boundaries of nations are getting blurred with each passing day. International trade between India and other countries is widespread and at its peak since the economic reforms of 1991 liberalized India’s economy including foreign investment, tax reforms, banking reforms, and liberalization of international trade. Before 1991, India’s trade with other economies was very limited and regulated due to the government’s inward-looking policies. In 991 however, owing to the reforms that were given a green light under Prime Minister Narasimha Rao’s government- India started engaging in extensive trade with the rest of the world. These measures helped the Indian economy gain traction.  Since then, India’s economy has advanced substantially and given way to a more globalized world.

Our understanding of events refines with time. Even though the reforms were originally implemented to help the country get through the 1991 Balance of Payments crisis, the alterations they brought about went beyond the requirements set by the International Monetary Fund for the bailout.

What are the implications of these reforms in the world that we live in today? How has India’s trade policy panned out since then? How does a nation decide if it is more beneficial to produce a good domestically or import it from outside? How are these important trade policy decisions made?

International economics as a discipline tries to provide answers to all the above questions by studying the international variations in productive resources and consumer preferences across national boundaries that affect economic activity. It aims to explain the trends and effects of exchanges and transactions, including commerce and investment, between inhabitants of various nations.

Comparative Advantage is the concept through which nations decide which products & services to export and which ones to import. To be able to understand comparative advantage, it is necessary to understand what absolute advantage is. The ability to generate more or better goods and services than competitors is referred to as having an absolute advantage. The ability to create goods and services at a lower opportunity cost, not necessarily at a higher volume or quality, is referred to as having a comparative advantage.

As per the Indian Council for Research on International Economic Relations’ research paper, India has a competitive advantage in 1512 goods. In terms of its total exports, India has a comparative advantage in 32% of its exports, which is the same as in 2000. India’s comparative advantage is concentrated on industries like agriculture, organic chemicals, cotton, iron, and steel, as well as accessories for clothing items rather than knit or crocheted items. The product category with the greatest comparative advantage is determined to be flat-rolled high-speed steel >/=600mm wide.

What this means is that the opportunity cost i.e., the cost of the next best alternative foregone for India to produce the above items is the least when compared to other countries.

For the sake of better understanding, If India can produce 80 units of cotton and 100 units of jute whereas another country can produce 100 units of cotton and 200 units of jute with a given set of resources, It is evident that even though the other nation has an absolute advantage in both cotton and jute; India has a comparative advantage in producing cotton since the opportunity cost for producing cotton in India is lower than the other nation.

How does comparative advantage help in determining the trade policy of a nation? This is where the Heckscher-Ohlin model of international economics comes into play which states that nations should export the goods and services they can create most effectively and in large quantities. The model emphasizes the export of goods requiring factors of production that a country has in abundance. It also emphasizes the import of goods that a nation cannot produce as efficiently. It takes the position that countries should ideally export materials and resources of which they have an excess, while proportionately importing those resources they need.

It then goes on to categorize resources into the binary of labor-intensive and capital-intensive and further explains that countries with relatively abundant labor and relatively scarce capital will typically export labor-intensive goods while importing capital-intensive goods. In contrast, countries with relatively abundant labor and relatively scarce capital will typically export capital-intensive goods while importing labor-intensive goods.

Some nations have a relatively high level of capital, which means that the average worker has access to a wide range of tools and machines to help with the job. These nations typically have high pay rates, which makes it more expensive to produce labor-intensive commodities like textiles, sporting goods, and basic consumer electronics than it would be in nations where there is a surplus of labor and low wage rates. Conversely, in nations with cheap and abundant capital, items like automobiles and chemicals that require a lot of capital, but little labor tend to be relatively inexpensive. Therefore, nations with a lot of capital should be able to create capital-intensive commodities cheaply and export them to cover the cost of importing goods that require a lot of labor.

According to the Heckscher-Ohlin theory, the amount of capital per worker rather than the total amount of capital is what matters. A small country like Luxembourg has much less capital in total than India, but Luxembourg has more capital per worker. Therefore, according to the Heckscher-Ohlin theory, Luxembourg will export capital-intensive goods to India and purchase labor-intensive goods in exchange.

Is this what happens in real life? Let us now dive deep into the trade practices of India to see if they are in alignment with the Heckscher-Ohlin theory and the concept of comparative advantage.

India exported goods worth $422 billion in the fiscal year 2021–2022 and services worth $250 billion during that same year. For the fiscal year 2021–2022, India’s top trading partners, as measured by the sum of their imports and exports, in billions of US dollars, were:

Source: Government of India

RankCountryExportsImportsTotal TradeTrade Balance
1United States76.1143.31119.4232.80
2 China21.2594.16115.41-72.91
3 United Arab Emirates28.1044.8072.90-16.7
4Saudi Arabia834.0042-28
6 Germany8.2113.6921.9-5.48
7 Hong Kong13.720.3434.04-6.64
8 Indonesia4.1215.0619.18-10.94
9South Korea4.8515.6520.5-10.8
11 Singapore7.729.3116.93-1.59
12 Nigeria2.229.9516.36-11.00
14 Qatar0.909.0215.66-13.55
17 Kuwait1.254.9714.58-12.18
18United Kingdom8.835.1914.344.30
19 Iran2.786.2813.13-4.78
20 Australia3.268.9013.03-7.47
22 South Africa3.595.9511.72-3.40
Remaining Countries126.78104.92231.7021.86
India’s Total422.08612.611034.69-192.0

India exports roughly 7500 different products to 192 different nations. The top 10 markets for Indian exports in 2019–2020 are listed in the table below.

RankCountryValue (US$ billion)Share of overall exports
1 United States57.716.94%
2United Arab Emirates28.89.20%
4 Hong Kong10.93.53%
6United Kingdom8.72.80%
10  Nepal7.162.28%

India imports about 6000 different goods from 140 different nations.  The top 10 import sources for India in 2019–2020 are listed in the following table.

RankCountryValue (US$ billion)Share of overall imports
2United States30.57.57%
3United Arab Emirates25.86.39%
4 Saudi Arabia23.05.70%
5 Russia214.91%
7 Hong Kong14.63.63%
8South Korea13.23.28%
10 Singapore12.23.02%

As can be seen from the data given above, India’s biggest export partners are developed countries which are capital intensive and thus require imports of products that are labor intensive. India’s population is its biggest asset, is, of course, a labor-intensive country and is exporting all the labor-intensive products to these countries with some exceptions like China and Bangladesh, which we will shortly circle back to while understanding the Leontief Paradox and the shortcomings of the Heckscher Ohlin model.

Similarly, if we look at the countries that India is importing from, there is a clear common thread of most of them being developed and capital-intensive countries that India does not have a comparative advantage in with the outlier here being China again.

India’s maximum number of exports to and imports from are with the United States which is arguably one of the most capital-intensive countries in the world. This is also in line with the Heckscher-Ohlin theory of trade.

It is reasonable to say at this point that the model does manifest itself in real life and was formulated after observing the real life for which Bertil Ohlin was even awarded the Nobel Prize in Economics in 1977.

However, despite its general plausibility, it is very important to note that the model is frequently at odds with the actual patterns of international trade. As the tables above depict, many patterns can be observed where the theory is falling apart. For example, India’s biggest importer is China despite it being a labor-intensive country. The list of India’s top ten exporters includes developing countries like China and Bangladesh which themselves are labor-intensive countries per se.

A Russian-born U S economist; Leontief was the first one to observe that the theory does not hold in a lot of situations. He argued that the United States was relatively well-endowed with capital. Therefore, the reasoning goes, the United States should export commodities that need a lot of capital and import goods that require a lot of labor. He discovered that the contrary was true: American exports typically require more labor than the kinds of goods that the country imports. The Leontief Paradox refers to these findings by him since they were the exact reverse of what the theory predicted.

A research paper from the faculty of California State Polytechnic University in Pomona in their findings about the Heckscher Ohlin model state that there is little evidence of a defined statistical relationship between India’s exports/imports ratio and its capital/labor ratio in today’s world. This does not mean that the theory has no relevance in explaining international trade between countries today. The limitations of a lack of more refined and cross-sectional data could have severely hampered the results and findings.

The Heckscher-Ohlin model has been put to test many times in the past and will yet again be put to test many times in the future.

 According to the literature, putting the theorem to the test with actual data has either yielded positive or negative results in terms of its predictive power. To explain international commerce, many economists have improved upon the original model and created additional theorems. Some of them have been successful, while others have not. However, the H-O model has always served as the fundamental framework. It has been the underlying building block to decoding patterns of trade in the world. This demonstrates that the H-O theorem is still pertinent to today’s economic debate and will continue to be employed in future studies of global commerce.

Regardless of the reasons, India’s prowess as a trading partner to many countries in the world has been consistently growing which showcases its potential to become a leader in the international trade arena in the coming years. Even though the BOP deficit continues to haunt us as a nation, especially in the wake of the pandemic that has just gone by and the fears of a recession looming soon, it is important to understand that for a developing country like India, taking little positive strides every day is the key. To be able to do this, we must keep trying to understand our strengths and weaknesses with the help of the theories explained above and make decisions basis that to emerge as an international economic power.

-Simran Soni

Junior Editor TJEF

Impact of the Russia-Ukraine War on Global Economy


On 24th February, 2022, Russia launched a full scale invasion of Ukraine. Russia had earlier invaded Ukraine back in 2014 post which Crimea got annexed. Although that invasion lasted for a month back then, this time around the war has dragged on, while making an already ailing world economy all the more distraught. It has severely hampered the prospect of a post-pandemic economic rebound for developing economies in the regions of Europe and Central Asia. By severely disrupting trade and spiking food and fuel prices, the war is still continuing to harm the world economy. This has led to rising inflation and a tightening of financial conditions around the world. The IMF warned that countries that depended on oil imports would see bigger fiscal and trade deficits as well as higher inflation. In 2023, worldwide economic growth would only be 1.7% if natural gas prices increase by more than 40% during the remaining part of the year. Due to damaged supply chains, heightened financial stresses, and a fall in consumer and company confidence, activity in the euro area has significantly deteriorated in the second half of 2022. However, the invasion’s most negative repercussions are the sharp increases in energy prices and the significant decreases in Russian energy supply. Energy markets were already dwindling before the start of the crisis, following unpredictable consumer demand and GDP growth in 2021. Though crude oil and natural gas were still around 50% above their level at the start of the year, they have been much more volatile of late.

As we delve into the detailed facets of how this war has been impacting the world as we knew it, let us first discuss its impact on Gas, Oil, Commodities and Other Industries followed by the toll it has taken on economies of certain continents like Russia, Europe, Asia.

Impact on Gas & Oil:

According to the International Energy Agency, oil prices were already rising prior to the war alongside a rebound in demand that accompanied the global economic recovery, but they skyrocketed after Russia’s invasion of Ukraine, sending inflation to decade-high levels. Hardest hurt will be the nations with a medium to high reliance on natural gas imports for heating (30% of energy demand), industry, or electricity, as well as nations with tight ties to EU energy markets.  If gas prices stay where they are, energy costs will probably increase soon, tightening the stress on consumer incomes. After the planned 54% hike next month, the cap on residential gas prices in the UK could jump by more than 40% once more in October, with part of the October increment offset by the Treasury-backed £200 discount on bills. This extraordinary crisis has repercussions for both consumers and governments, limiting household welfare, company productivity, and budgetary viability. Hence countries predominantly dependant on EU energy markets must get ready for gas shortages and establish emergency measures to lessen the worst effects on people and businesses. These preparations should include energy conservation, improving energy efficiency, and implementing quota/rationing schemes.

Impact on Commodities:

The spike in commodity prices, which will feed already-existing inflationary pressures, will be the biggest economic impact on the rest of the world. Net importers of energy and food items will be disproportionately impacted, as is always the case when commodity prices surge, with the possibility of significant supply disruptions in the event of a further escalation of the conflict. Companies in the UK, the US, and China reported a slight reduction of supply chain restrictions prior to the invasion, despite the fact that they were still increasing in the Eurozone. Some of these advances can be undone by the most recent happenings. Global trade will be hampered by the decline in demand from Europe. The top 5 producers of steel, nickel, palladium, and aluminium are all in Russia. It exports more wheat than any other country in the world (almost 20% of all exports). Additionally, Ukraine ranks among the top ten producers of sugar, beet, barley, soya, and rapeseed and is a significant producer of corn (sixth largest), wheat (seventh largest), and sunflowers (first) as well. Thereby food costs have increased exponentially as well.

Impact on other Industries:

High-value supply chains for crucial components took the brunt of the disruptions in the trade corridor between Europe and Asia. Due to a variety of shortages and high commodity & raw material prices, such as those for metals, semiconductors, cobalt, lithium, and magnesium, the crisis is undoubtedly having a significant influence on the already stressed automotive and electronics sectors. The larger supply chain and industrial production could suffer from delays in their acquisition. According to the World Bank, the conflict has prevented automakers from supplying essential components like Ukrainian-made wiring systems. Some assembly lines have stopped as a result. While some of the Ukrainian auto firms that provide major Western European automakers declared the closure of their factories; other plants throughout the world have already begun to prepare outages
due to chip shortages. Construction, petrochemical, and transportation industries are among those that have been impacted by bottlenecks. The cost of petrochemical feedstock is anticipated to increase, and the entire agri-food sector would be affected by the rising natural gas prices and the fertiliser markets that could have an impact on food production as well as the global food supply chain.

Additionally, higher fuel prices would also hurt businesses that transport goods by sea and air, with airlines being especially vulnerable. First, it is predicted that gasoline will make up approximately a third of their overall expenses. Second, Russian airlines are not allowed to enter the US, Canada, or Europe, and Russia has responded by forbidding European and Canadian aircraft from entering its airspace. Airlines will need to take longer routes, which will result in greater expenses. Eventually, airlines’ ability to absorb cost increases will be limited as a result of their ongoing revenue declines.

Rail freight will also be disrupted because European firms are not allowed to conduct business with Russian Railways, which will probably disrupt freight traffic that transits via Russia on its journey from Asia to Europe.

Source : United Nations

Economic Impact of the war:

According to the OECD, the invasion of Ukraine by Russia will cost the world economy $2.8 trillion in lost output by the end of the next year—and considerably more if a harsh winter causes energy restrictions in Europe. The projected growth rates for the world economy were 2.2% next year and 3.0% this year.
It had anticipated growth of 4.5% in 2022 and 3.2% in 2023 before the war. The discrepancy between those two figures indicates that the war and its aftereffects will have cost the globe the same amount of money as the French economy produced in those two years in terms of economic output.

Due to the relatively weak trade and financial ties between North America and Russia and Ukraine, the conflict’s effects will primarily be felt through price increases and a slowdown in European economy.

Impact on Europe

The Organization for Economic Cooperation and Development(OECD) warned that in the event that energy costs rise once more, Europe’s economy could see an even more severe collapse as it is most exposed to the effects of this conflict because of its reliance on Russian oil and natural gas (Russia being the world’s third largest oil producer and second largest producer of natural gas). Such a price increase may occur if Europe has energy shortages throughout the upcoming winter due to unusually cold weather. If natural gas prices happen to increase by 50% or more during the remaining months of the year, in 2023, European economic growth may be 1.3% points lower. This will tighten the stress on consumer incomes. After the planned 54% hike next month, the cap on residential gas prices in the UK could jump by more than 40% once more in October, with part of the October increment offset by the Treasury-backed £200 discount on bills.
However it is impossible to replace the entire Russian natural gas supply to Europe in the short to medium term, and hence the current price levels are  considerably impacting inflation. Although gas prices in Europe have already increased after Russia stopped sending gas through the Nord Stream1 pipeline to Germany, there can be another dire situation as well. According to Goldman Sachs, a complete cut-off would cause a recession in the euro region, with significant contractions in Germany and Italy.  IMF predicted that global growth would slow to 2.6% in 2022 and 2% in 2023 under a plausible alternative scenario that includes a complete cut-off of Russian gas supplies to Europe by year’s end and a further 30% drop in Russian oil exports, with absolute stunted growth in Europe next year.

As energy price shocks continue to affect the region, consumer prices, which only increased 2.6% in 2021, will increase by 8.3% for the entirety of 2022 and by 6.8% in 2023.

Lithuania, whose exports to Russia account for 6% of its GDP, may be the nation most vulnerable to trade frictions as a result of the crisis. Due to trade restrictions with Russia, according to analysis by the Kiel Institute, Lithuania’s GDP might decrease by around 2.5% over time, while the economies of Latvia and Estonia could shrink by about 2% over time.

The OECD anticipates that the eurozone economy will only grow by 0.3% in 2023. The larger European economies of Germany, Italy, and France are much less exposed (Germany’s economy is projected to contract by 0.7%), with exports to Russia making up only 1 to 2 percent of total exports. The Kiel Institute’s analysis estimated that the long-term impact of trade restrictions on these economies would be a GDP reduction of 0.4% to 0.16%, with Poland potentially experiencing a slightly higher reduction of 0.78%.

Impact on Russia:

Coming to the impact to Russian economy, the Russian Rubel recovered from decline in March as the central bank doubled interest rates to protect the currency in the aftermath of inflation. Earnings from export was 65% higher than last year although imports went down by 20%. However, the economy survived mainly by virtue of fossil fuel sales. They exported around USD 140 billion in the first 100 days of war, with China buying more than USD 18 billion, followed by Germany who bought around USD 17 billion. These skyrocketing fuel prices resulted in a huge windfall for Russia. Despite exporting 15% less fuel than last year, they earned around USD 1.3 billion dollars as compared to USD 958 million last year. However, they need to now look at investing on infrastructure or acquire oil tankers since more than 70% of their fuel delivery used to be made on EU, UK and Norwegian tankers.

Apart from this, economic activities along other avenues haven’t exactly dialed down completely. Kremlin expects bilateral trade to reach USD 200 billion a year with Beijing by 2024. India and China have been buying oil at discount from Russia(around 29% discount form global prices). From January to June India imported 6.82 lakh barrels a day as compared to merely 22000 a year ago. India’s fertilizer import has also gone up (from 6 to 20%); In June alone India had imported 70% of all that had been imported in FY21. India has also increased import of coal, sunflower seeds, non-industrial diamonds. Russia, on the other hand, has circulated a fresh list of products it wants to import from India – medical equipment, pharmaceutical, chemicals, industrial equipment, garments, furniture, jewellery for more balanced bilateral trade and sustainable implementation of rupee denominated payment mechanism.
When it comes to the US, although overall imports from Russia went down, certain items have been more in demand – fertilizer import went up by 32%, rubber by 13%, marine products by 87% and wood & related items by 78%. The EU brought down oil imports from Russia but their overall imports increased by 79%. Saudi increased oil imports from Russia for use in power generation- they doubled their imports of crude oil to 6.47 lakh tonnes in the last 3 months, while exporting crude oil from their own fields to global market at elevated prices. Kingdom Holding, run by Saudi royalty, purchased stakes worth USD 600 million in major Russian energy firms Gazprom, Lukoil, Rosneft when their shares plummeted. There’s even speculation that items banned to be transported to Russia by EU and USA, are being routed through Middle East, Istanbul, Dubai, China.

Impact on Ukraine:

Since economic activity is marred by the destruction of producing capacity, damage to agricultural land, and a decreased labour supply as more than 14 million people are reported to have been displaced, the Ukrainian economy is expected to collapse by 35% this year. Recent World Bank projections indicate that USD 349 billion in recovery and reconstruction is required across the infrastructure, production, and social sectors, which is more than 1.5 times the size of Ukraine’s pre-war economy in 2021.

Impact on Asia :

The rising oil costs will have a greater impact on emerging Asian markets than any other part of the world because the majority of Asian economies are centred on consumption, with food and energy accounting for over half of consumption expenditures. The impact will be felt almost immediately in the form of higher import costs in the Asia-Pacific area, as numerous economies in the region are net energy importers.

The war’s immediate effect on the major Southeast Asian economies is the increase in commodity prices, particularly those of oil, nickel, wheat, and corn. As net importers of these goods, Singapore, Vietnam, and Thailand should be particularly concerned about this trend.

Due to the rise in commodity prices, both producer and consumer price inflation have been steadily rising in Thailand. Oil has been in low supply in Vietnam, and reports of hoarding gasoline are now emerging, which is driving up prices even further. The effects of increased oil prices are visible in the transportation, housing, electricity, gas, and other sectors in Vietnam, Malaysia, and Indonesia. However, other economies in Southeast Asia, such as those in Indonesia, Malaysia, and the Philippines, are not immediately impacted. These economies will be able to reduce the impact of rising oil prices on inflation thanks to their low energy usage. Singapore and Thailand, on the other hand, have local price increases because to their economies’ comparatively high energy and gasoline consumption.

Similarly, another country whose inflation will inevitably rise as a result of the ongoing rise in oil costs, is Japan. The high cost of energy is passed on to the final users, which reduces user needs. Even South Korea will have serious repercussions from this. The export sector in South Korea is predicted to suffer greatly as a result of high oil prices. Its export business is supported by the manufacturing sector, which is heavily reliant on energy imports. Consumer goods costs are rising as a result of the increasing prices, which will impede the nation’s economic expansion.

The war has had an effect on the Indian economy as well, especially in terms of liquidity. Consumer spending has reduced as a result of the pandemic and the constrained supply of liquid currency. Due to limited access to cash, consumers are hesitant to spend money, while major firms are unwilling to put money in the market due to the possibility of low returns. Panic selling and investor concern caused the stock market to lose Rs. 7.5 lakh crores; as a result, the Sensex fell by 2700 points. A progressive increase in the price of essential oils along with increased import costs for crude oil seem to have hurt the Indian exchequer too, with household nutrition being the most negatively impacted.

Additionally gold imports are projected to rise as a result of rising demand. The cost of imports will increase as a result of this and the high cost of petroleum products. Due to deglobalization and the slowing global economy, exports are likely to suffer as well. The falling capital flows will make the already-unfavourable balance of payments even worse. The rate of expansion of the economy, which was severely impacted by the epidemic, will be slowed down by factors like uncertainty of demand, investment, inflation, and BOP. As a result, the rupee may continue to be devalued against the dollar, which would make inflation even worse. The already significant fiscal imbalance will widen much more, which would result in a reduction in capital account spending and the social sector’s expenditures.

In an effort to resolve these issues, the governments of Asian and Southeast Asian countries, particularly those that are net oil importers, should look out for alternative oil suppliers, such as Saudi Arabia and Venezuela, to secure their energy needs in order to deal with the ongoing situation resulting from disruptions in the oil supply due to the Russia-Ukraine crisis. The International Energy Agency and the Organization of Petroleum Exporting Countries (OPEC) can be pressured to raise the supply of oil and lower the growing oil prices by using regional organisations in Asia like Asean and the South Asian Association for Regional Cooperation (SAARC).

Long-term, oil-dependent nations should endeavour to diversify their energy sources and look for additional renewable energy options. Energy efficiency may potentially play a significant role in controlling the rise in oil costs. However, the only option to lessen reliance on oil is to progressively switch to renewable energy sources in order to spur economic growth.


The world economy is predicted to develop just little this year and much more slowly in 2023 due to high interest rates, punishing inflation, and Russia’s conflict against Ukraine.

Demand will experience downward pressure due to higher inflation as well as trade interruptions’ negative effects. Price increases and trade friction spillover effects will be felt in economies outside of Europe. If this were to continue, income would be redistributed from countries that use oil to those that produce it, which often have a lower tendency to spend. This could result in a decline in profitability, which could have a detrimental impact on investments in nations that import oil. Some nations may experience a short-term boost in exports as trade with Russia shifts away from the West and toward other regions.

However, Asia’s emerging markets will account for a substantial portion of the global economy’s growth next year. They are predicted to contribute towards three-quarters of global growth next year, while the U.S. and European economies contract.

All-in-all, in the long run, this war may profoundly change the global economic and geopolitical order, if supply lines are reconfigured, payment networks are fragmented, trade in energy is altered, and countries revaluate their reserve currency holdings. We can only hope for it come to a peaceful end as soon as possible, so that regular trade activities can resume and the global economy can begin to bounce back from this nadir.

-Aritra Acharyya
Junior Editor, TJEF