Lesson 2: How the Conflict in Ukraine Will Likely Broaden the Global Divide Between the ‘Haves’ and the ‘Have-Nots’

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Editor’s Note:

Arick Wierson, a columnist for The Robin Report, has undertaken the formidable task of dissecting and analyzing the broad and far-reaching consequences of Russia’s invasion of Ukraine as it relates to global retail. Understandably, we are presenting Wierson’s commentary in serialized lessons. This is the second of a three-part series.

Lesson 2: How the Conflict in Ukraine Will Likely Broaden the Global Divide Between the ‘Haves’ and the ‘Have-Nots’

There is never an ideal time for war and bloodshed, but the conflict in Ukraine could not have come at a worse time for the global economy with the real recovery from the pandemic-induced contraction still in its initial stages. With inflation surging and central banks across the globe gearing up for formidable interest rates hikes – the U.S. Fed just made its first rate increase since 2018 – everything from commodity prices to equities have been roiled. The impacts on global brands and retailers – even those who don’t operate anywhere near the conflict in Eastern Europe – will be hard felt, albeit somewhat unevenly.

World Out of Balance

For upscale brands and luxury retailers that cater to higher income consumers, the degree to which the conflict impacts business will largely be a function of their individual exposure to and dependence on Russia and Ukraine markets and consumers. However, for mass consumer brands across the world that serve and depend on middle- and low-income customers who are highly sensitive to even small swings in prices, the effects will be far more severe.

In North America, price shocks in commodities will be felt most acutely by lower-income families who will see basic household operating expenses eat up an increasingly larger percentage of monthly income, leaving far less disposable income for non-necessities. Retailers who think they might be largely insulated from a war happening half a world away would be better off recalibrating their expectations.

From the consumer perspective, like many previous global disruptions, the Ukrainian conflict will not impact all nations and economic strata in a uniform fashion. The pain will be felt most acutely by developing economies in general. In more industrialized nations, the war’s immediate and mid-term impact will weigh most heavily on the working and middle classes. Bottom line: the crisis in Ukraine will ultimately serve to widen the already chasmic gulf between the global haves and have-nots, with important implications for both brands and retailers.

Economic Indicators

Financial markets have been predictably skittish as the war has aggravated pandemic-era uncertainties in ways that are already reverberating across the world, harming the most vulnerable people in the most fragile places. Although it’s still far too soon to predict the degree to which the conflict will alter the long-term global economic outlook, this much we know: much like Covid-19, this crisis also arrived absent any pomp and circumstance, thrusting itself upon us – largely unexpected from not only its scale and ferocity, but also by the global response to it. This much is already clear: higher food and energy prices, escalating home prices and rents, continued upstream supply chain disruptions, and shortages of consumer goods will be the immediate inflictors of pain for low- and middle-income countries and those doing business in those markets. Closer to home in North America, price shocks in commodities will be felt most acutely by lower-income families who will see basic household operating expenses eat up an increasingly larger percentage of monthly income, leaving far less disposable income for non-necessities. Retailers who think they might be largely insulated from a war happening half a world away would be better off recalibrating their expectations.

Major Brands Operating in Developing Countries Should Brace for Impact

Aside from a select handful of hydrocarbon-exporting nations, the lion’s share of the world’s developing economies are still debilitated by the pandemic; the healthy recovery that more fully developed economies have experienced over the past year or so since the rollout of widespread vaccine efforts began in earnest has largely bypassed less developed economies. According to projections from the World Bank prior to the war in Ukraine, by 2023 economic output levels in developing economies were on track to come in at four-percent below their projected levels before the pandemic. Total debt in these economies now stands at near all-time highs while inflation creep has brought price indexes to their highest point in more than a decade.

Across the globe – the Russian Federation’s emergency rate hike notwithstanding – many central banks have already begun to raise interest rates in response to fears of inflationary creep. The Bank of Canada, for example, hiked interest rates for the first time since late 2018 and even went a step further, indicating rates may need to go even higher despite increased uncertainty following Russia’s invasion of Ukraine.

For many other central banks, including the U.S. Fed, the Russian invasion of Ukraine has thrown monetary policy makers in the G7 countries something of a curve ball. Before the magnitude of Russia’s invasion of Ukraine was fully understood, almost all central bankers across Europe, Asia and North America were actively discussing ways to dial back post-pandemic stimulus packages, but skyrocketing gas prices – a derivative of Russian supply shocks – are threatening to dampen the prospects of a swift recovery as many had hoped.

Outside of the world’s most advanced economies, the Ukraine crisis could make it harder for many low- and middle-income nations to regain their footing in any meaningful way. In Central and Eastern Europe, for example, in addition to higher commodity prices, policy makers are bracing for macroeconomic fallout across several other vectors such as trade shocks, financial tumult, unbridled capital remittances, and a massive exodus of refugees fleeing the fighting in Ukraine. Countries closest to the conflict, by virtue of their historically strong trade, financial, migratory, and tourism links to both Russia and Ukraine, are likely to suffer the greatest immediate impact, but the effects could ripple far beyond Europe into Middle Eastern economic hubs like the Emirates and Qatar to far-off countries like Brazil and Australia, prompting fears of a return to global stagflation.

Discretionary Purchasing

We’re looking at a global low-carb diet: Soaring food prices will force the global working class to delay or cut back on apparel, hard goods, and services. Some developing economies are heavily reliant on Russia and Ukraine for their food supplies. Together, Russia and Ukraine supply more than 75 percent of the wheat imported by a handful of economies in Europe and Central Asia, the Middle East, and Africa. And some cases are even more extreme – for example, virtually 100% of the wheat imports for Eritrea come from Russia and Ukraine. Overall, there are 25 or so low- and middle-income economies that depend on the two nations for more than half of their overall grain imports. The growing conflict in Ukraine, coupled with U.S. and European-led efforts to isolate Russia from the world economy, will leave these grain importers between a rock and hard-place – their economies are particularly vulnerable to a disruption in the production or transportation of grains and seeds from Russia and Ukraine. The result of shortages of basics like bread – oftentimes cited as the spark of the Arab Spring in Tunisia – could again threaten politically weak, autocratic-run countries across the world, leading to a new wave of global political instability as disruption to supplies as well as higher prices could cause increased hunger and food insecurity

Amid middle income nations, rising food prices will cause the middle class to shift a significant amount of their income away from hard goods, clothing and services to food and other basic necessities. Even in the U.S., which has virtually no food dependence on Russia or Ukraine, surging global demand has already raised commodity prices for staples like corn and soybeans which will cut into lower-income Americans’ disposable income as they spend more for food other basics. Diversified retailers such as Target and Amazon (via Whole Foods) that have doubled down on investments in the grocery sector will be best positioned to weather the storm gathering on the horizon. Companies like Macy’s, Kohl’s, Best Buy, and other purveyors of soft and hard goods should be taking steps to brace for a much greater impact.

Remittance Restrictions

Tightened restrictions of foreign remittances will exacerbate problems in Russia-dependent economies with broad effects to Western brands. The clamp down on Russian capital remittances due to banking sanctions imposed by the West is another factor that will upend the apple cart for many economies around the world. Former Soviet countries in Central Asia, for example, are heavily dependent on remittances from Russia – in some instances, these remittances account for as much as 10 percent of the country’s GDP. Kyrgyzstan and Tajikistan will be most severely affected by the expected fall in remittances sent from Russia, according to data from the World Bank published shortly after widespread sanctions on Russia were announced.

Kyrgyzstan confronts the largest projected drop this year out of all post-Soviet countries, with remittances expected to fall by 33 percent. Prior to Russia’s invasion of Ukraine, forecasters had expected cash transfers from Russia to increase by three percent in 2022. This dried up source of revenue will have a direct impact on many Western companies such as Hyatt Regency, KFC, Papa John’s, Baskin-Robbins, Nike, Levi’s, New Balance, Avon and other global brands that have a presence in the country.

This same trend outlined in bas-relief in the Kyrgz market will also play out – although in a slightly less acute fashion – across the majority of former Soviet satellite nations in Central Asia and Eastern Europe as well as other markets with direct ties to Russia, similarly affecting local and global retail brands operating in those markets.

The lesson here is that brands should be weary of analyzing the Russia-Ukraine conflict as limited simply to these two countries and their immediate neighbors. The cumulative effect of cutting off Russia from the global financial system coupled with taking Ukrainian exports offline will have far reaching impacts across the globe. The overall dynamics of the war in Ukraine are still far from certain, and some retailers will find that they have more direct exposure to the conflict than others, but every company, no matter where it operates, will feel the impact of the crisis as it reverberates through the supply chain and into consumers’ pocketbooks.

Next Up: Lesson 3, Will the losses incurred in Russia force retailers and brands to proceed more cautiously as they contemplate future overseas investments?

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