The Russian invasion of Ukraine has caused the greatest humanitarian crisis in Europe since the Second World War. Already, thousands of lives have been lost, and millions of livelihoods have been disrupted through displacement, lost homes, and lost incomes (Exhibit 1). We, like so many others, are shocked by the unfolding humanitarian tragedy and the consequences of this brutal war.
As in any conflict, uncertainty is high. It is unclear how the military situation, the political process, and the countermeasures around the world will play out—in either the shorter or longer term. However, it is already certain that, as a consequence of the economic impact of the crisis on energy and food markets, disruptions will affect many in Europe and beyond.
In this article, we offer an initial framing of the challenges, with full recognition of the uncertainties. We begin with a perspective on the short- and midterm disruptions and then frame scenarios for the potential impact on livelihoods in the eurozone, in the belief that some guidelines to bound uncertainty are better than none at all. As conditions change, we will adjust. We conclude with some reflections on implications for business leaders as they navigate yet another crisis.
Untangling short- and midterm disruptions
As business leaders deal with the short-term effects of the conflict, fundamental disruptions are under way that will shape the future beyond the immediate crisis. While we recognize that more challenges may emerge over time, several areas are already apparent:
The invasion of Ukraine is causing a massive humanitarian crisis. In addition to the pain and suffering experienced by those inside Ukraine, there are already more than three million people seeking refuge in neighboring nations, with similar numbers displaced within Ukraine. As in other major conflicts and refugee crises—including those in Syria and Yemen—it will be a gargantuan task for the world community to aid, shelter, and host these unfortunate people.
Once again, the vulnerable will suffer the most. Vulnerable populations are most likely to become refugees and will find it hardest to bear the rising costs of food and fuel. Aid efforts are under way globally to ensure that people’s basic needs for food, shelter, and psychological safety are met, in and beyond the conflict zone. Initial discussions on how to defray higher energy costs for all are taking place in many countries, and first funds have been made available.
Energy policy is rotating toward secure access and source diversification. The role of Russian oil and natural gas globally brings into focus the importance of access to energy. While acceleration of renewable energy can solve part of the puzzle, gas will remain an important source, and nuclear and coal may become larger components of the fuel mix to secure supply, particularly to replace potential shortages of gas. The implications for achieving publicly committed net-zero emissions are not yet clear.
Food security is on the agenda. The concentration of wheat, fertilizer, and related production in Russia and Ukraine will strain food supplies globally. Securing the continual supply of food to the countries most exposed to exports from these regions is becoming a major near-term issue.
The competition for critical materials, equipment, and commodities intensifies. The world’s real and perceived needs for secure access to natural resources, materials, and advanced equipment (for example, neon, nickel, palladium, semiconductors) is likely to grow and further intensify the race among nations and companies.
A new age of supply chain control efforts and localization attempts has arrived. The era of not looking too closely at supply chains, trusting suppliers, and optimizing for cost is probably over. Those behaviors, already made suspect by new tariff regimes and the COVID-19 pandemic, are now likely to be consigned to history. Governments and corporations are looking to increase supply chain resiliency and are considering innovative ways to fund these changes.
Global technology standards are more likely to separate. To promote security interests and foreign-policy objectives, governments have increased the use of geo-economic tools such as sanctions, direct-state support to strategic industries, and export controls over sensitive equipment, software, and technology. The coordinated use of these tools by like-minded countries in response to Russia’s invasion of Ukraine is likely to accelerate the trend toward separation of standards and independent technology development.
Financial-system ripple effects will occur. The disruption of sanctioned financial flows has the potential to ripple through the banking system and financial markets, with significant repercussions for affected bondholders, lenders, aircraft lessors, derivatives counterparties, and investors. There remains a risk of contagion with second- and third-order effects across the globe.
Defense investments are being stepped up. The show of unity and economic sanctions by North Atlantic Treaty Organization (NATO) countries, the European Union, and other European countries could drive a greater focus on defense resilience. France and Germany have both announced significant increases in defense spending. In early March 2022, the US Congress approved a $42 billion increase in America’s defense budget.
Cyber is a stage for conflict. Countries and companies have for years been concerned about the increasing frequency and sophistication of state-supported cyberattacks. Most concerning is the shift from ransomware and extortion to direct destruction. It was a major topic at the meeting between US president Joe Biden and Russia president Vladimir Putin in Geneva in June 2021. It is highly likely that these attacks will further intensify, testing the resilience of cybersecurity systems.
Corporate actors are taking a stand. This war has galvanized a strong global response against the invasion. Many corporations and other nonstate entities have restricted their activities beyond the formal requirements of sanctions to distance themselves from Russia and its actions.
Volatility, volatility, volatility. The war in Ukraine joins the already crowded timeline of 21st-century disruptions, with disparate origins and complex consequences. We see many business leaders trying to move their organizations from ad hoc reactions to each disruption to a foundation of greater resilience, staying alert to what is over the horizon and building capabilities to continually manage uncertainty.
This list covers only the most prominent vectors of disruption at this early stage of the Ukraine crisis. While there is a lot of uncertainty around how each of these will play out, many of them will likely matter a great deal to lives and livelihoods worldwide, albeit to very different extents, depending on geography and sector.
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War’s impact on livelihoods: Framing potential scenarios
We have learned from conflicts around the world that livelihoods adjacent to and sometimes far from the conflict zone can also be put at risk. In part, the risk arises because of inadequate attention paid to people whose economic well-being is already precarious; in part because of the inevitable knock-on effects in a highly connected world.
In framing scenarios for how the war will potentially affect livelihoods outside the conflict zone, we draw upon a wide range of expertise.1 We see two critical dimensions.
First is the scale and duration of disruption. The drivers of scale and duration of disruption are complex and include both military and political factors (such as sanctions). How high the prices for natural gas, oil, agricultural commodities, and minerals and metals go will in large part determine the effects on most people’s livelihoods—price rises have to be paid out of pocket. We currently illustrate three potential levels of disruption:
- Contained disruption. The disruption is significant but contained in duration and scale—for example, through a quickly negotiated cease-fire. Sanctions do not escalate further and may even be scaled back. Some refugees can return home. Energy and commodity markets stabilize, and prices begin to normalize.
- Extended disruption. The disruption continues and grows for some time—for example, through hostilities that continue throughout 2022. The refugee crisis worsens. Multilateral sanctions escalate moderately. The global energy and commodity markets adapt and stabilize, but prices remain elevated for some time.
- Severe, escalating disruption. The disruption becomes more pronounced in scale and duration—for example, through protracted hostilities. The refugee crisis grows more desperate. Energy, food, and commodity markets spiral higher over an extended period. Supply chains are disrupted, particularly in the Europe–Russia energy trade.
While military escalations beyond Ukraine are conceivable, we currently do not include them in our range of possibilities.
The second dimension is the impact of government policy, consumer, and business responses. Government actions will matter profoundly in modulating the impact that this war has on livelihoods. In our view, four elements are in play: (1) the COVID-19 economic policies that are in place as the world exits the Omicron wave; (2) new policies that may be initiated to blunt the impact of spiking energy prices; (3) policies and private-sector actions toward achieving net-zero emissions and sustainable growth; and (4) changes in consumer behavior. As these elements will come together unpredictably, we illustrate three potential policy responses:
- Restrained response. Central banks accelerate monetary tightening to limit inflation, hitting the confidence of consumers who continue to save instead of spend. Other headwinds persist and limit growth, including labor market tensions (for example, skill mismatches, rising unemployment, stagnant wages) and the enduring challenges of the COVID-19 shock, which hamper the ability of the economy to produce.
- Moderate response. Current fiscal and monetary stimulus programs continue to wind down, with a focus on steadily reining in inflation. Some new programs offer moderate, long-term support that help mitigate higher energy and food prices—for example, through fossil fuel investments or slowing down decarbonization plans. Consumers remain cautious but continue to spend moderately.
- Robust response. Monetary stimulus continues to wind down and successfully brings inflation under control. Governments also launch fiscal programs to blunt the impact of rising energy and food prices. Lower inflation and additional support are enough to buoy confidence and cause consumers to spend some of their pent-up savings. Significant energy investments increase resilience to energy shocks and hasten the energy transition.
As illustrated in Exhibit 2, the intersection of these two dimensions—the scale and duration of disruption and the ensuing responses—produces a range of potential scenarios, with differing effects on global lives and livelihoods.
The current context
Across all scenarios, a few facts are immutable. The harshest effects are being felt in Ukraine. This is where lives have been lost and thrown into turmoil. Destruction of property and infrastructure is already extensive and worsening by the day. The impact of sanctions on Russia is significant: the ruble has lost about half of its value since the onset of hostilities, consumer prices are increasing rapidly, the Russian central bank has been forced to lift short-term interest rates to 20 percent, and the Russian stock market is closed.
Beyond the conflict zone, the invasion of Ukraine takes place at a fraught moment for the global economy and livelihoods, particularly the vulnerable. COVID-19 is receding in many parts of the world but is not yet gone, and it is still a crisis in many countries, with some of them struggling with the exit from public-health interventions. Furthermore, the possibility of a new and severe virus variant cannot be discounted. Also, inflation continues to gather steam in most parts of the world. In some, it has reached multidecade highs and is driving up the costs of living for households.
Energy is a particular concern (and is a key parameter across scenarios2). European natural-gas prices have jumped 60 percent since Russia started massing troops. Brent crude oil is consistently trading near $120 per barrel. Further, prices for key agricultural, mineral, and metal commodities rose 10 to 15 percent in the first week of the conflict; nickel prices doubled recently. Ukraine and Russia together produce about 30 percent of global wheat; spot market prices are up about 40 percent. They are also the largest producers of class 1 nickel (used in electric-vehicle batteries), with a 23 percent global share, and the second-largest producers of palladium (used in catalytic converters), holding a 38 percent global share.
The spike in commodity prices has shaken the confidence of consumers and businesses globally. Regardless of which scenario ultimately plays out, households may remain cautious and will keep on the sidelines the excess savings that they have accumulated during the pandemic, at least in the near term, even as the economy fully reopens. Businesses may look to slow all but necessary expenditures and hiring. And the US Federal Reserve and the European Central Bank have, as of March 11, 2022, stated that they see the risks of accelerating inflation to be greater than those of potentially weak demand and are moving to halt the inflation cycle by initiating a steady pace of interest-rate increases.
Initial economic scenarios for the eurozone
We have modeled three scenarios—1B, 2A, and 3B—which may help leaders and decision makers bound uncertainty as it appears today. Scenario 1B captures contained disruption with moderate policy response. Scenario 2A looks at extended disruption and robust policy response. Finally, scenario 3B considers outcomes from a severe, escalating disruption, but still with moderate policy response. (Scenario 3C is also a distinct possibility, if central banks act more aggressively to fight inflation and the conflict endures for some time.)
In what follows, we focus on the eurozone, which is the world’s largest macroeconomy and highly exposed to the conflict. At the conclusion of this section, we offer some considerations for other geographies. Here, we do not analyze Eastern Europe per se but are keenly aware that these nations will see direct and significant impact from the economic disruption, as well as the burgeoning refugee crisis. We use GDP to measure impact on livelihoods, as incomes are a substantial component of GDP. As is standard in scenario analyses, any point estimates in our calculations are not forecasts but merely the center point of a range of potential outcomes.
Scenario 1B: Contained disruption with moderate policy response
In this scenario, the end of hostilities occurs within a few more weeks. Sanctions do not escalate further and may even be scaled back; energy exports from Russia to Europe keep flowing. Before the end of 2022, natural-gas prices in Europe return to their precrisis peak of about $30 per million British thermal units (MMBtu); Brent crude returns to $70 to $80 per barrel. GDP growth (and thus jobs and incomes) across the eurozone reverts to its precrisis trend, albeit with a first-quarter slowdown, reflecting the shock of the invasion.
Inflation expectations remain elevated relative to prepandemic norms but are stable, and the European Central Bank continues to reduce monetary stimulus. Consumer confidence reverts to its prepandemic level, and businesses continue their COVID-19-exit investment plans through most of the eurozone by the second quarter of 2022.
Eurozone GDP growth in 2022 returns to a preinvasion trajectory of 3.8 percent. Growth falls to 2.7 percent in 2023 and 1.5 percent in 2024 as economies return to their long-term trends. Germany, the largest economy in the eurozone, follows a similar trajectory: growth of 3.5 percent in 2022, 3.0 percent in 2023, and 1.3 percent in 2024. Exhibit 3 sets out estimated GDP growth for each of the three scenarios.
The Russia/Ukraine discussions announced on March 16, 2022, if agreed, would likely result in this scenario.
Scenario 2A: Extended disruption with robust policy response
In this scenario, the end of hostilities is in sight in the second half of 2022. Sanctions do not extend into the energy sector; energy exports from Russia to Europe keep flowing. However, natural-gas prices in Europe return only to their precrisis peak of about $30 per MMBtu, and Brent crude trades between $90 and $100 per barrel throughout 2022. Consumer confidence bounces back by the end of the year, and households use their pent-up savings to drive a surge in demand, particularly for services, and businesses respond with additional investments and hiring. Further, sentiment on energy policy shifts rapidly given new concerns about energy insecurity. Businesses and governments make near-term investments in additional fossil fuel capacity to ensure resilience—and also accelerate investment in sustainable energy.
Shocks to energy, food, and other commodities boost eurozone inflation to more than 4 percent in 2022, versus 2.5 to 3.0 percent in 2021. Exhibit 4 reviews energy prices and inflation in each of the three scenarios. But prices fall back as a resolution to the war comes into view. By early 2023, the effects of energy shocks recede, and central-bank actions successfully slow inflation, with consecutive monthly increases in prices trending downward. Inflation expectations remain elevated relative to prepandemic norms but are stable, providing a strong signal that inflation has been contained.
With elevated price levels in the near term, as well as the shock from the invasion, GDP growth in the eurozone and Germany is essentially flat in 2022. Growth in the eurozone rises to 2.1 percent in 2023 and 4.8 percent in 2024. The German economy grows slightly faster: 2.7 percent in 2023 and 5.5 percent in 2024, buoyed in part by increased spending on defense.
Scenario 3B: Severe, escalating disruption with moderate policy response
In this scenario, protracted conflict intensifies the refugee crisis in Central Europe. Western countries and Russia further extend sanctions, leading to the shutdown of oil and gas exports from Russia to Europe. European gas prices more than double to $70 per MMBtu in early 2022, from their already-high level of about $30, and Brent crude jumps to $150 per barrel.
Eurozone headline inflation spikes to more than 7 percent on the year. The continent can replace some of its natural-gas shortfall in part by buying on the spot market and in part by slowing the shift away from coal. Producing and consuming nations can build new liquefied natural gas (LNG) export/import infrastructure over time, but in the near term, higher prices, lower real incomes, and reduced consumer spending will result in some demand destruction.
Combined with the collapse in confidence we are already seeing, the eurozone tips into recession in 2022 and 2023. Growth slips to –0.5 percent in both years; growth in Germany is weaker, at –1.4 percent, because of its greater reliance on natural gas. By mid-2023, the weak economy suppresses demand; energy prices fall from their peak, easing inflation considerably. Entering 2024, GDP growth resumes as consumer spending and business investment start to rebound, even as a low-intensity conflict in Ukraine continues. By the end of 2024, employment finally regains the ground it has lost since 2019, and growth moves back to prepandemic long-term trends.
Effects on other large economies
Of course, the nature of disruption and the ability of governments to respond will differ across countries, and we can anticipate a wide range of scenarios. In any scenario, growth in large economies such as China and the United States will be less directly affected than in the eurozone. Two questions arise. Will the war in Ukraine disrupt consumer and business confidence? What will be the impact of higher commodity prices?
In the United States, the key issue will be how the Federal Reserve Board reacts to the impact of the spike in oil prices and to the jump in agricultural, mining, and mineral commodity prices (US natural-gas prices are largely independent of Europe). Under more normal circumstances, the Fed would likely not react to supply-driven spikes in inflation, preferring to ensure that growth does not falter. But inflation in the United States is already uncomfortably high. On March 16, 2022, the Fed raised its short-term rate by 25 basis points, the first hike since December 2018. In its statement, the Fed also said that it “anticipates that ongoing increases in the target range will be appropriate.” Market observers are in widespread agreement that even larger 50-basis-point increases are likely. It appears that the invasion of Ukraine will only slow the pace of interest-rate hikes, not change the course of policy in the United States. In scenario 2A, US growth would be flat. In scenario 3B, shaken confidence and continued high prices for oil would reduce spending by consumers and businesses, and a recession would ensue.
The main impact in China will likely come from price increases in globally traded commodities; indirect effects such as reduced demand from trade partners will also matter. Consumer sentiment in China itself is less likely to be affected.
Implications for business leaders
The speed of this crisis has confounded many corporate leaders. The fog of war makes it hard to understand exactly what is happening in the moment, let alone chart a path forward. However, many companies need to decide how to act both now and in anticipation of longer-term disruptions, especially those we outlined at the outset.
Not every company is affected the same way. Businesses that operate in Ukraine or Russia will be most immediately affected. Right now, most of these companies are deeply engaged in safeguarding the lives of their employees.
For others, their geographic location, scope of operations, and industry sector will determine to what extent the war will affect their business. This crisis is structurally different than the pandemic. For companies outside the war zone, threats to employees’ lives are less immediate. Instead, their near-term challenges are more likely to concern the effect of sanctions and challenges of compliance, the stance toward Russia they decide to take, and, especially for manufacturing companies, inflationary effects on cost and issues related to continuity of supply.
After several months of rising inflation in much of the world, another rapid rise in commodity prices is especially concerning. It will drive headline inflation to even greater highs and lengthen the period of elevated inflation. Our conversations with executives worldwide suggest that a concerted, enterprise-wide effort is the only appropriate response. Leading companies are tackling inflation simultaneously in procurement, pricing, supply chains, the workforce, and the finance function.
Executives can be guided by the degree to which their organizations are exposed to the forces originating from this crisis. All leaders should develop a view of the scenarios that matter to them, designing models that reflect their industry and their own circumstances. Leaders concerned about more substantial impact can reactivate as appropriate proven tools from the previous few major crises, including nerve centers and plan-ahead teams. One critical difference between this crisis and COVID-19: today the world is suffering from supply shocks (which might be followed by demand shocks), while in March 2020 it was the other way around. Plan-ahead teams should start by modeling today’s supply shocks. These cross-functional teams can also help to avoid decision-making biases and other pitfalls of crisis management under high uncertainty, while also supporting longer-term resilience.
The scenarios above suggest that only a contained disruption can be absorbed by Europe and the global economy—from a macroeconomic point of view—but that window will not stay open for long. We hope that the scenarios will help you and your organization navigate a confusing and challenging period. At the same time, we recognize their shortcomings; they fail to account for the extraordinarily long and fat tail of risks that most wars implicitly carry.
This war has already caused devastation and suffering. March 2022 is reminiscent of times in Europe we all thought had long passed. In the interests of people in Ukraine and everywhere, we dearly hope that this conflict will end as soon as possible.
