War and Markets: The Economic Shockwaves of the Russia–Ukraine Conflict on Global Food and Energy Systems

Introduction

The Russia–Ukraine war, now in its third year, has become one of the most significant geopolitical shocks to the global economy since the Cold War. Beyond the immediate humanitarian cost, the conflict has severely disrupted two of the most fundamental markets underpinning modern economic stability: food and energy.

Russia and Ukraine are both major exporters of key agricultural commodities, including wheat, maize, and sunflower oil. Russia is also one of the world’s largest producers and exporters of natural gas and crude oil. The war has not only diminished supply from these critical sources but also increased global uncertainty, triggering sharp changes in prices, trade flows, and policy responses.

In this blog, we analyze how the Russia–Ukraine conflict has reshaped global food and energy markets, using key economic principles such as supply and demand, price elasticity, trade substitution, and fiscal externalities. We also examine the long-term structural effects on both developed and developing economies.

I. Disruption of Agricultural Supply and the Law of Supply and Demand

Before the war, Russia and Ukraine jointly accounted for nearly 30% of global wheat exports, 20% of corn, and 75% of sunflower oil. The invasion in early 2022 led to immediate disruptions in export logistics, input availability (notably fertilizers and diesel), and harvest activity.

According to the law of supply and demand, a negative supply shock - such as port blockades or crop destruction - reduces the market supply of a good, leading to a rightward shift in the demand-supply equilibrium price. As a result, the price of wheat spiked by over 60% in the first six months of the war, peaking at $12 per bushel in May 2022.

However, since the demand for staple grains is highly inelastic - people must eat regardless of price - price increases were steep and immediate. This price inelasticity led to consumer surplus erosion, especially in net food-importing countries in Africa, South Asia, and the Middle East, triggering food insecurity and social unrest.

II. Fertilizer Supply Shock and Input Cost Transmission

Russia and Belarus are dominant players in the global fertilizer market, accounting for over 40% of potash exports. Following Western sanctions and logistical barriers, global fertilizer prices surged, increasing the cost of production across the agricultural sector.

This represents cost-push inflation, where an increase in input costs raises the marginal cost of production, shifting the aggregate supply curve leftward. This resulted in higher food prices globally, even in countries that do not directly import Ukrainian or Russian grain.

Many farmers, particularly in low-income countries, reduced fertilizer use in response to high prices, causing a decline in agricultural productivity and further reducing crop yields in the 2023 and 2024 seasons. The feedback loop between input prices and output declines reinforced global inflationary pressures.

III. Energy Market Volatility and Elasticity Dynamics

Russia was the largest natural gas exporter and the third-largest crude oil producer globally. The war led to an exogenous shock in energy markets as the EU cut back on Russian imports and Moscow responded by weaponizing energy flows.

Natural gas, which exhibits low short-run price elasticity of demand, saw prices in Europe rise by over 300% in 2022. In the short run, consumers and firms cannot easily substitute energy sources, so the burden of price increases fell heavily on buyers, leading to real income contraction across Europe.

This shock also demonstrates derived demand effects: higher energy prices increased manufacturing costs, especially for energy-intensive sectors like steel, aluminum, and chemicals. These sectors either passed the costs to consumers or scaled down production, leading to output reductions and job losses - a classic case of stagflation.

Oil prices, more globally traded and with more elastic demand in the medium run, initially surged but stabilized due to substitution effects (e.g., increased production from the U.S. and OPEC+). However, supply chain frictions, freight cost inflation, and strategic petroleum reserve drawdowns kept the market in a precarious balance.

IV. Trade Diversion and Market Substitution

The theory of comparative advantage suggests that when two countries are unable to trade (as with Ukraine's grain exports blocked), global production becomes suboptimal. In the short run, other exporters like India, Australia, and the U.S. attempted to fill the gap.

However, trade diversion came with increased transaction costs, such as longer shipping distances, higher insurance premiums, and foreign exchange volatility. These frictions reduced global allocative efficiency and resulted in deadweight losses.

Moreover, the Black Sea Grain Initiative (briefly implemented in 2023) provided temporary relief but collapsed due to continued hostilities. As a result, nations dependent on low-cost Ukrainian grain - such as Egypt, Lebanon, and Ethiopia - suffered disproportionately, reinforcing North–South economic divergence.

V. Policy Responses and Fiscal Externalities

To shield domestic consumers from food and energy price shocks, many governments implemented price controls, fuel subsidies, or export bans (e.g., India’s wheat ban in 2023). While these policies can reduce short-term volatility, they introduce fiscal externalities and distort market signals.

Fuel subsidies, for instance, increase fiscal deficits, reduce government capacity for long-term investment, and create moral hazard, encouraging overconsumption. Export bans worsen global supply shortages and violate WTO trade principles, often prompting retaliation or diplomatic friction.

Monetary authorities also faced dilemmas. While the supply-side nature of the inflation suggested that tightening monetary policy would have limited effect on food and fuel prices, central banks raised rates aggressively in 2023–24 to anchor inflation expectations, raising the risk of a policy-induced recession.

Conclusion: From Inflation to Geoeconomic Fragmentation

While the immediate economic effects of the Russia–Ukraine war - price spikes, supply shocks, and inflation - are beginning to ease in 2025, a deeper structural problem is emerging: geoeconomic fragmentation.

In an attempt to build resilience, many countries are now pursuing food and energy self-sufficiency, often through onshoring or friendshoring supply chains. While this may reduce dependence on geopolitically risky partners, it often comes at the cost of comparative efficiency and global productivity. In the long run, this trend could shift the global economy from an integrated model of low-cost, high-efficiency trade to a fragmented model characterized by higher redundancy, higher costs, and lower growth potential.

The larger problem, then, is that the war may have permanently shifted the global economic paradigm. If countries increasingly weaponize trade and critical resources, we risk moving from a system governed by economic laws to one governed by political calculus. This transition could destabilize the post-WWII economic order, increase volatility, and make cooperative global solutions - on issues like climate change, debt relief, and food security - much harder to achieve.