While Russia, Ukraine and Belarus account for a little over 2% of global GDP, the economic ripples of the conflict in eastern Europe could have a significant impact on the rest of the world, Invesco has warned. 
Paul Jackson, global head of asset allocation research at Invesco, highlighted four main ways that the global economy and financial markets could be affected by Russia’s invasion of Ukraine: reduced exports, disruptions to energy supplies, higher inflation and shifts in fiscal and monetary policies.
The first impact is through the usual trade effects to stem from any conflict, namely reduced exports to involved countries. Together, exports to Russia, Ukraine and Belarus come to around 0.5% of the GDP of the rest of the world.
Neighbouring countries, which include the Baltic states, are those that are most likely to be impacted by this effect. The below chart shows the nations that exported the most to Russia, Ukraine and Belarus in 2020.
Share of national exports that went to Russia, Ukraine and Belarus in 2020 (%)
The second economic impact highlighted by Invesco’s Jackson revolves around the fact that Russia is a major supplier of energy to the rest of the world, especially Europe. For example, Russia accounted for 65% of Germany’s pipeline gas imports in 2020.
“Closure of those oil & gas feeds could have extreme short-term consequences for Europe, until supplies could be switched from elsewhere,” he pointed out.
Third, Invesco estimated that a $10 per barrel rise in the oil price would increase the world's oil bill by around 0.4% of GDP (with a similar effect expected from a 10% increase in the price of gas).
This would have a negative impact on the global economy, if consumers cut spending on other goods and services to account for rising energy prices.
Finally, these higher energy prices would contribute to the existing inflationary backdrop and putting further pressure on real disposable incomes and consumer spending volumes.
However, Jackson argued that there might be an upside to this: “This could turn into a positive if the Fed and other central banks are persuaded to delay rate hikes (though Fed Funds futures still point to six rate hikes this year).”
That said, he predicted that “the most concrete policy support” to the global economy is likely to come from a widening of fiscal deficits in response to the crisis.
NATO and Western governments are funding large amounts of military, medical and humanitarian aid for Ukraine, but the conflict might lead to a permanent increase in military spending by European countries. Germany is a case in point: it has pledged to boost military spending to above 2% of GDP, compared with a pre-pandemic baseline of 1.1% to 1.2%.
“Taking all of the above into account, and assuming no rapid resolution to this conflict, we fear that global GDP could be reduced by 0.5% to 1%. That's enough to aggravate the ongoing slowdown but not enough to produce recession. Nevertheless, some parts of Europe could experience recession, especially if there is a halt to energy flows from Russia,” Jackson finished.
“We also think that inflation will stay higher for longer, which will make life more difficult for central bankers. Nevertheless, we think markets are now overly aggressive in their views about the extent of rate hikes this year.”