Editors’ note: This column is part of the Vox debate on the economic consequences of war.
The war in Ukraine, with its regional and global reach, has far-reaching economic consequences for the country’s economy and human capital, especially through trade and financial ties (Angris et al. 2022, Federle et al. 2022). Several researchers have begun measuring the cost of trade sanctions with Russia for other countries (Langot et al. 2022, Chepeliev et al. 2022). In our recent analysis (Winkler et al. 2022), we study how the Russian invasion of Ukraine affects the Global Value Chain (GVC) risk associated with trade barriers and highlights the weakness of countries dependent on Russia as exporter of commodity inputs.
What is the role of Russia in the global value chain?
Russia’s role as a major supplier of the product makes it the basis for a wide range of global production. Russia is particularly important as an exporter of primary and intermediate goods and services used in the export of other countries in the early stages of production. This is indicated by Russia’s position in the global GVC, which is characterized by high progressive GVC participation (or ‘upstream’). The products that drive this upstream link to GVC are energy (coke and petroleum), metals and chemicals, as well as transportation and some business services (Figure 1, left panel). In contrast, Russia is much less important in GVC as a ‘buyer’, relying less on imported inputs to produce its exports (advanced GVC participation).
Russia’s export disruptions will feed into the GVC through major global manufacturing hubs for trade, and will particularly affect regional economies that rely heavily on these supplies. Although virtually all GVCs are affected by rising energy prices, GVCs that rely exclusively on metal and fertilizer inputs from Russia for their export production include transportation equipment, machinery, electronics and agribusiness, as well as ancillary services including transportation and business services (Figure 2). . China’s GVC manufacturing centers (and to a lesser extent Japan and South Korea), Germany (and other Western European countries) and the United States are among Russia’s largest trading partners, both as importers of Russian goods and as exporters of GVC products. . However, the countries that are most dependent on exports from Russia, and thus particularly vulnerable to such trade disruptions, are the neighboring and regional economies (Figure 1, right panel).
Figure 1 Russia’s ten most dependent markets on GVC participation and imports from Russia ahead and behind
Source: Own calculation. Data: OECD-WTO TiVA 2021 Release (left panel) and UN ComTrade (right panel).
Note:: Forward GVC participation = tangible domestic value addition in third country exports (% of exports). Backward GVC participation = Imported input into export (% of export). Mirror data for used exports. Bright blue bar = Eurasian Economic Union country.
What are the GVC risk factors and channels?
As a major commodity exporter, the disruption of trade with Russia has a global impact through rising prices, especially of fuel products, which affects transportation costs and virtually all GVCs. Globally, supply constraints and rising prices are being felt, especially for wheat, corn and vegetable oils (due to which several countries have restricted exports of their own products), fertilizers, metals and energy products (Ruta et al. 2022). Logistic disruptions, inflation and long delays affect trade and transit flows between Russia and Europe, but also between East Asia and Europe (Arvis et al. 2022).
Power relations are also important with some GVCs, which consist of many competing suppliers globally (such as apparel); Pig iron exports, for example, are dominated by three countries (Russia, Brazil and Ukraine), accounting for more than three-quarters of global exports. Therefore, importing pig iron from Russia will be more difficult than replacing products for which the world market is less concentrated.
In short, although a country’s GVC risk depends primarily on direct trade links with Russia, GVCs rely on products with fewer alternatives that will be more severely affected. The replaceability of inputs from Russia also depends on whether the products are separate or homogeneous. Some of Russia’s main export products (such as rare metals) are difficult to replace in the short term, suggesting a serious impact on GVC.
Which country and price chain are most dependent?
Russia is a major exporter of a number of products, including metals (with reliance on the most direct trade connections for European and Central Asian countries, or ECA, region) and fertilizer (with high dependence on both regional and global markets). And extends to those export support services. Regionally close countries rely heavily on Russia as a trading partner. Examples of high regional dependence include imports of cereals and fertilizers from Russia, metals (nickel and iron and steel), wood products and mechanical products and vehicles (especially in Eurasian Economic Union countries).
Figure 2 Russia as a seller, impact for key sectors and products and GVC and trade partners
Source: Own compilation.
Note:: Based on an analysis by Winkler et al. (2022).
A critical exporter of (rare) metals, several countries, especially the ECA, import more than 90% of certain iron and steel, aluminum, copper, nickel and palladium products from Russia. Iron and steel accounted for more than half of Russia’s metal exports during 2018-20. For example, Denmark and Belgium depend on Russia for more than 80% of their semi-finished iron and non-finished steel imports. Exports of unrecognized aluminum have reached the Commonwealth of Independent States with over 90% share. Both products are used in various manufacturing activities including electricity, construction, consumer electronics and transportation / vehicles.
Russia’s fertilizer exports are important in both global and regional markets. Kazakhstan is the third largest buyer of Russian chemical exports and the ECA is one of the eight top ten dependent markets for Russian chemical imports. About half of Russia’s chemical exports come from fertilizers. Belarus, Mongolia and Moldova import more than two-thirds of their fertilizer from Russia, while Honduras and the Central African Republic account for more than half.
What is the role for policy?
Russia’s aggression in Ukraine has disrupted trade, highlighting the weakness of firms and countries that rely on centralized suppliers for their imports. Russia’s upstream position as an exporter of energy, metals, chemicals, as well as transportation and business services, most severely affects its regional neighbors as well as world trade partners with limited options. The results of the new survey show that it will not be difficult or economically viable for German companies to replace their inputs from Russia, Ukraine or Belarus in the short term.1 In the long run, firms and government policies should focus on strengthening supply chain resilience to idiosyncratic shocks, for example, by diversifying firms’ global supplier base or making them less dependent on manufacturing processes using conventional energy sources.
Author’s Note: The opinions expressed in this column are those of the authors and do not represent the views of the World Bank Group.
Angris, N, S Djankov, P Goldberg and H Patrinos (2022), “The loss of human capital in Ukraine”, VoxEU.org, 27 April.
Arvis, JF, C. Rastogi and D. Saslavsky (2022), “Impact on Global Logistics and Connectivity”, M. Ruta (AD), The effects of the Ukraine war on global trade and investmentWorld Bank.
Chepeliev, M, Thomas Hertel and D van der Mensbrughe (2022), “Reducing Russia’s Fossil Fuel Exports: Short-Term Pain for Long-Term Profits”, VoxEU.org, 9 March.
Federle, J, A Meier, G Müller and V Sehn (2022), “Economic Expansion from the Ukraine War: The Proximity Penalty”, VoxEU.org, 18 April.
Langot, F, F Malherbet, R Norbiato and F Tripier (2022), “Strength in Unity: The Economic Cost of Trade Sanctions on Russia”, VoxEU.org, 22 April.
Ruta, M, N Rocha and A Espitia (2022), “Impact on Food Trade,” in M Ruta (ed), The effects of the Ukraine war on global trade and investmentWorld Bank.
Winkler, D. L. Wester and D. Knight (2022), “The Impact of Russia’s Global Value Chain Participation,” M. Ruta (ed.), The effects of the Ukraine war on global trade and investmentWorld Bank.
1 See https://www.ifo.de/en/node/69417