As of the time of writing, we are just over two months away from marking three years since the invasion of Ukraine by Russian forces. During this period, the UK economy has been forced to adapt in many ways, as both individuals and firms have been badly affected by the crisis.
Change or Damage?
Despite the UK government claiming to not be reliant on Russian oil to fuel the economy, oil and gas customers have been impacted by record-high inflation within the energy sector. As soon as April 2022, customers were forced with the burden, on average, of an additional £700/annum on their energy bills. Later in November that year, rises equated to an additional £1400/annum, relative to the previous year. From an industrial perspective, supply chains have been disrupted, as higher costs of production are now imposed on firms, negatively impacting those companies operating in the more energy-intensive sectors the most. This has led to rising prices of food and other consumer goods, including that of fuel used in transport. Each factor is a narrow component of the modern-day phenomenon here in the UK of the cost of living crisis. As the prices of goods and services rise, exceeding wage inflation, consumer purchasing power is eroded, constraining household budgets and causing individuals to think harder surrounding economic decisions.
Russia’s invasion across the Ukrainian border is also a key factor within the reasoning of then Prime Minister Rishi Sunak’s decision to steadily grow the defence budget to 2.5% of GDP by 2030. Announced in April 2024, this policy would see the armed forces receiving an additional £75bn over the next six years, ensuring the UK remains the second-largest defence spender in NATO, behind the USA. This move would allow the UK to continue developing cutting-edge technology to fend off potential aggressors as well as the consistent backing of Ukraine in their conflict with Russia. In more recent times, current British chancellor Rachel Reeves has allocated a £3bn yearly budget purely to support Ukraine through the war, along with an increase of £2.9bn for the defence budget next year. This particular increase in government expenditure, although necessary by many means, reduces the fiscal headroom for those in parliament to play around with. Considering the current economic climate in the UK, this increase in spending drew particular criticism from many, who despite acknowledging the importance of a strong national defence, believe the funds could have been better utilised elsewhere.
In the few years following the outbreak of COVID-19, interest rates were dramatically raised to combat spiralling inflation levels. Despite the pandemic initially boosting inflation, the Russia-Ukraine war can only have been seen elevating this value further, as a result of disrupted supply chains and higher costs of production. Hence, considering the previous relationship explored between inflation and interest rates, the conflict can be seen to have been a factor in forcing the Bank of England to heighten the interest rate, as they soared to increase at their fastest rate for over ten years.
The Global Picture
Understandably, the Russia-Ukraine conflict could, and only did have, a negative effect on the UK economy. The real debate that I believe should be had is whether this war or the Israel-Palestine conflict has had the most damaging impact on the UK economy. At present, I feel the conflict in Eastern Europe has affected the British population the most out of the two upon the consideration that the UK government doesn’t directly provide arms to Israel, hence not requiring any government expenditure. Furthermore, Russia and Ukraine are much larger commodity exporters to the world compared to those fighting in the Middle East, hence affecting global supply chains to a greater extent, often impacting the price of UK imports.
