The Ukraine war, with its severe disruptions to agriculture and energy markets, is lifting inflation and threatening to worsen global inequality for the world’s most vulnerable people. An international G20-led effort to help guarantee that developing nations have access to essential commodities would help keep the shock of the invasion from spreading in the form of widening inequality.
The world has been stunned by Russia’s invasion of Ukraine, which has visited terrible suffering on cities and villages across the country. More than just brutal for millions of people, however, the war is sending shockwaves through global agriculture and energy markets.
Since Ukraine and Russia are key exporters of wheat and other crops, the conflict has spurred volatility. Combined, these nations account for 12% of calories traded globally, UN agencies have said. Great swathes of the Ukraine, the “Breadbasket of Europe”, have gone unplanted, as tanks, not tractors, crisscross fields. Black Sea ports are shuttered. Energy prices have jumped, boosting transportation and fertilizer costs. Potash supplies for crops like soybeans are tight, as producer Belarus also faces sanctions.
The UN’s food price index has soared to a record
The upshot? The United Nations’ Food and Agriculture Organization (FAO) Food Price Index jumped to record levels in March as cereal, vegetable oil and meat hit historical peaks. Swiss Re, as a re/insurer of supply chain risks and provider of re/insurance cover for agricultural operations around the world, has been analyzing these impacts and is working closely with clients to understand and resolve emerging challenges.
In May, the Swiss Re Institute will release one of its flagship sigma publications, with this edition focusing on the detrimental effects of inequality on societal resilience. Our report will examine the role of insurance in helping tackle this issue, which erodes social cohesion, economic growth and the stability of financial markets. Public and private sectors, including insurers, must intensify partnerships to help re-shape the social contract.
As disastrous as the Ukraine war has already been, it will be even more tragic if its effects are amplified globally in the form of a widening equality gap. That’s why it is so critical for world leaders to work together now to preserve efficient global trade — and to ensure that people in vulnerable countries are not blocked from access to essential goods like food due to sharply rising prices.
Forward-thinking leadership
There are some immediate steps that can be taken by forward-thinking leaders to head off worsening inequality.
As the International Monetary Fund and the World Bank meet April 18-23 to discuss investing in resilience and managing uncertainty, nations led by the Group of Twenty (G20) should be prepared to act with appropriate lending programs to dedicate funds and activities to ensure that food affordability is maintained. Part of the strategy also means providing technical assistance in helping to establish social protection schemes in countries that are most affected and least well-equipped.
With the war’s global repercussions hitting the world economy in a fragile time of skyrocketing inflation, we need a broad international effort to ensure vulnerable nations have sufficient cash to secure commodities on global markets. Such a program to bolster food and energy security, backed by wealthy countries, would be a tool to keep inequality from widening.
Dissatisfaction could fuel instability
There are many reasons why inflationary spikes and their contribution to rising inequality concern us. People in emerging economies who spend a disproportionate share of their incomes to feed their families suffer the most. A new Swiss Re Economic Insight documents how commodities prices were rising even before the war, with the poorest countries hit hardest. That shock, on necessities like oil, gas and grains, heightens stagflation risks. Russia’s invasion has made these risks more acute.
Consider this: Half of the grain bought by the United Nation’s World Food Programme that feeds the world’s neediest people comes from Ukraine. Its director, David Beasley, told the United Nations Security Council recently that the programme is now limiting rations while raising concerns that food insecurity could spur “massive migration”. “We feed 125 million people before Ukraine ever happened,” Beasley said. “You can only assume the devastation this is going to have on our operations alone”.
Escalating food prices and hunger can spur dissatisfaction and despair among millions of people, undermining stability of governments. We saw this in 2008 when food-related riots contributed to the toppling of Haiti’s government. When food prices spiked again in 2011, experts contend they were a match that helped light the flames of the “Arab Spring” in the Middle East and North Africa.
Falling macroeconomic resilience, growing protection gaps
There are additional steps governments can take to help preserve stability. As they honor global sanctions aimed at ending the war, leaders can pursue policies that help keep supply chains for food and fertilizer open. They can refrain from actions that add to upward price pressure. Hoarding and panic buying should be avoided. Countries may also consider shifting to alternative crops, to close gaps next harvest season.
We already know that global macroeconomic resilience lost ground during the COVID-19 pandemic: Swiss Re’s Resilience Index 2021 illustrates how the global insurance protection gap for health, mortality and natural catastrophe risk has risen to record levels. Our index shows how the shock-absorbing capacities of virtually every country’s economy are reduced, as massive stimulus packages limited fiscal and monetary headroom to respond in the event of a new crisis.
And that new crisis, unfortunately, is now upon us. The war and its effects are rippling through the interconnected global economy. This is why a G20-backed initiative aimed at reducing downside risks to economic equality like access to food is so critical, in the form of special lines of emergency credit to address hunger that harbors the potential to further chip away at economic resilience. Let’s make certain money is flowing so that food supplies can move where they are needed the most, so the global inequality gap does not widen. And let’s not wait to do it.