Guest writer Andrei Buruiana analyzes the main economic themes brought up by the war in Ukraine and some potentially positive effects on Romania.
The world is now five weeks into the Ukraine war, Europe’s worse humanitarian crisis since World War Two. The past weeks have been very busy on the world stage, politically, diplomatically and economically. We have all been witnessing a succession of summits and political leaders on display: there was a NATO summit, a summit of the G7 countries, and a joint meeting of the European Council and the US.
On this occasion, we have also been watching a real “tour de force” from US President Joe Biden, who took centre stage in this series of meetings, by attending all of them. From a foreign policy perspective, it seems that he was right when, after winning the presidential election, he declared that "America is back!".
Beyond the positioning, or rather the reassertion of the geopolitical positioning of the Euro-Atlantic alliance, the reaffirmation of strategic, military and economic unity, there are some notable themes, certainly in the context of sanctioning Russia for its invasion of Ukraine. These would add up to the already visible effects I wrote about in previous articles, at the onset of the war.
The sanctions theme
A new sanction against Russia, more impactful than others, at least in the author's view, is the fact that, starting next year, 1/3 of the EU's gas imports (about 50 billion cubic meters) will no longer come from Russia, but from the US in the form of liquefied natural gas (LNG). This announcement should really start to have an effect on Russia, especially because 1/3 of its annual exported gas represents, based on 2021 figures, just under $20 billion, i.e. almost 5% of Russia's exports.
At the same time, the task of replacing 1/3 of EU gas imports is also an extremely ambitious target for both US producers and exporters and European importers, according to a recent New York Times analysis.
In the US, there are many oil and gas resources that are still in the licensing phase (as the US is already a net exporter), whilst there are not enough LNG terminals required by the increased export volume.
In the EU, there are also not enough LNG import terminals, especially in countries like Germany.
On the other hand, these gaps turn into opportunities: new business, investment and jobs. Direct as well as second-round effects. The biggest players in the LNG market are Cheniere Energy, Royal Dutch Shell and Total Energies.
Speaking of opportunities, Romania could step up and become a relevant player in the EU oil&gas market, given its outstanding offshore reserves, yet to be fully used.
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There are positive signs coming from Romania, with the Black Sea Oil&Gas consortium due to start drilling this summer, whilst Romgaz, Romania’s biggest gas producer, continues its own projects, alongside OMV Petrom.
It remains to be seen where the remaining 2/3 of gas imports will come from. The fact that the EU will buy natural gas on a joint basis also sounds interesting. This should put pressure on gas prices in the medium to long term.
The (hidden) coal theme
A not so obvious topic, but one that I think is on the political agenda, is that of fossil fuel, namely coal. It is worth remembering that the war in Ukraine has caught the EU in a process of planned reduction of coal energy production.
Recently, however, some EU countries have decided to detach from the overall approach, especially those with a strong existing coal infrastructure: Germany and Poland. For example, the EU's coal-based energy component increased by 18% in 2021 compared to 2020.
Romania has also increased its coal energy share this winter.
So, an old dilemma rises back to the surface: the EU's carbon footprint reduction target.
The theme of the Ukraine war-induced food crisis
The theme is, by all means, a real one, but perhaps slightly artificially exacerbated. Take wheat for example.
Maybe the fact that Russia and Ukraine combined make about 25% of global wheat exports sounds pretty alarming, and perhaps this might even mean there will be a food crisis. Before anything else, just as a convention, let us not confuse 1/4 of exports with 1/4 of total consumption.
Also, I don't think Russia's wheat production and exports will be affected this year, as it's not Russia that's being invaded, so it can grow its crops, plus, as another argument, Russia's exports go mostly to "friendly" (like China) or neutral (African) countries anyway, countries that won't impose sanctions. So Russian wheat will most likely circulate in the global market.
As for Ukraine's wheat export, assuming it will be zero this year, and since its wheat export is around 18 million tons (2020 level), I don't think the effect should be more than 2-3% within the global wheat production, estimated at 780 million tons in 2022.
Even if we were to assume that Russia would not export anything this year (37m tonnes in 2020), together with Ukraine’s crops, it would still be in the single-digit quota (around 7% of global production).
Sure, Ukraine produces and exports other food commodities as well, and markets will certainly be affected, but by no means as severely as hinted.
One element that I think would be more disruptive to the food markets is the supply chain, namely the delays and the costs of shipping, caused by expensive oil.
Here, once more, as in the case of natural gas, Romania could play a key role. Perhaps it’s Romanian agriculture’s moment to shine, from two perspectives: Romania could and should boost its crops this year, in order to fill in for Ukraine’s reduced production, whilst playing the middleman for whatever Ukraine decides to sell from its reserves.
So, with regard to food prices rising, they are rising more artificially and not so much because of the war in Ukraine. Eventually, supply would unequivocally meet demand and markets would stabilize.
The theme related to Poland
There have been many questions about President Biden's choice to visit Poland, on his European tour. There have also been some questions on whether President Biden should have come to Romania as well.
Beyond Poland’s proximity to Ukraine, the higher number of refugees it received and stationed, there are several other elements that could serve as arguments for such a visit:
If we would make an analogy with the electoral contest in the US, but with two different sides this time, democracies vs. countries with illiberal tendencies, Poland could be seen as a "swing state". Let’s not forget that only a few years ago Poland was flirting with illiberalism and anti-EU doctrines, whereas it now seems to have turned westward again. The "swing" back to western democracy seems to be a foreign policy success, especially for the US. On the other hand, Romania has been able to contain its illiberal politicians all this time, therefore it is not a reason for concern.
Poland is greater than Romania in just about every economic aspect. It negotiates with the big powers on a totally different level than Romania.
Quite possibly, and I am only speculating here, a topic for discussion could also be the coal issue, as Poland has a large coal power capacity and, contrary to the EU trend, continues to generate a lot of energy from burning coal.
Ukraine's reconstruction theme. Ukraine 2.0.
Although not a very obvious theme, as the war is not over yet, the topic is certainly on the political agenda. There is informal talk of some kind of a Marshall Plan for Ukraine, as the destruction caused by the war already amounts to around €500 billion, according to local Ukrainian sources.
The saying "every crisis is an opportunity" applies here as well, as rebuilding a big part of a country means many large infrastructure projects. The stakes here are and will be enormous. We are likely to see a lot of projects involving large companies in the fields of civil construction, infrastructure, as well as consultancy and services.
Given Romania’s proximity to Ukraine, local private companies acting in infrastructure, civil engineering and construction materials should keep their eyes open, going forward. And, again, Romanian political leadership must be involved in the reconstruction plan’s design and implementation.
Another possible positive outcome for Romania would be the fact that the pathway toward Ukraine crosses its Northeastern region (Moldova region), which also lacks proper infrastructure, whilst having a very low GDP/capita. So, on its way to help with Ukraine’s reconstruction, Romania could eventually finalize a highway linking its capital to Iasi (Romania’s most developed city in its N-E region), whilst getting regional companies involved, and thus benefiting regional development as well.
Needless to say, rebuilding Ukraine will and should be a European collaborative process, funded with both grants and financing.
The theme of refugees
The humanitarian aspect of the massive exodus from Ukraine has been a top priority, and for good reason. Everyone is currently focused on aid and accommodation, and that's perfectly normal. But what comes next?
It is estimated that the Ukrainian exodus could be as high as 5 million internationally displaced citizens. Their economic contribution, should they decide to settle in their countries of adoption, is not to be overlooked. Of course, developed countries are the preferred destination, but that doesn't mean countries like Romania should not try to convince them to stay.
Yes, you read that right. Romania should do everything in its power to adopt as many Ukrainians as possible. These people, properly integrated into the fabric of our society, would bring both economic and socio-cultural contributions. And, among them, there would be people who can bring with them intelligence and innovation.
On the Romanian labor market, there are already visible signs of Ukrainians joining Romanian companies, ranging from highly specialized ones like IT to more service-like ones in beauty care, leisure or retail. Perhaps, this brain drain pouring in from Ukraine could fuel Romania’s aspiration of becoming an IT hub in Eastern Europe and setting the stage for the next Romanian unicorn (with Ukrainian DNA) to arise.
Zooming in a bit, coincidentally, one of Romania’s IT cluster cities is Iasi, a city that is pretty close to the Ukraine-Romania border.
In conclusion, in terms of investment, I remain faithful to the effects I mentioned and anticipated in my previous articles on the economic aspects of the war in Ukraine.
Financial markets would further remain anchored in the war, hence volatile, but, very importantly, still under the larger shadow cast by global inflation and the measures taken by central banks to tackle it.
And, amid these times filled with uncertainty and volatility, the advice to "not keep all your eggs in one basket" is evermore relevant, especially as the eggs have become increasingly valuable.
by Andrei Buruiana, contributor
Andrei Buruianăis a seasoned professional in financial services, with 15 years of experience, having covered:
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Investment & Pension Fund Management;
Retail Banking: Wealth Management & Private Banking, Product Management and Business Planning;
Project Finance: EU Funds;
Training & Consulting (currently), covering: Personal Finance, Sales and Ledership.
Andrei is also a content creator and contributor on several Romanian business & economics platforms. He has a Bachelor’s degree in International Business & Economics, from the Bucharest University of Economic Studies.
