Ukraine and the Middle East economy

Ahmed Mahdi , Tuesday 1 Mar 2022

The military conflict in Ukraine, a major energy and food-producing region, will have significant implications for the economies of the Middle East, writes Ahmed Mahdi

Fathi Abul-Ezz

On the morning of 24 February, Russian forces launched a massive surprise attack on Ukraine. The spat came over the two pro-Russian separatist republics of Donetsk and Luhansk in the Donbas region in the east of Ukraine.

This article is not concerned with analysing the reasons behind the war, forecasting its likely outcomes, or with trying to understand what Russian President Vladimir Putin really wants. (Does he want a full-scale invasion of Ukraine? Or just a short, sharp attack to show that he is still the regional hegemon despite US attempts to expand its influence into the region?) This article is more concerned with the economic effects of the war so far, specifically on the Middle East.

Nevertheless, I want to make a brief point about the geopolitical reasons behind the great power competition between the US and Russia in ex-Soviet Eastern Europe.

As those closely following the situation know, governments in Washington and the European capitals have condemned Putin’s aggression, while former US president Donald Trump has called Putin a “genius” for attacking Ukraine, saying that his bid to invade Ukraine for “two dollars’ worth of sanctions” was a “smart move”.

I am not a Trump supporter, a Biden supporter, or a Putin supporter. I have serious misgivings about each of these three men. However, I do agree with the school that argues that it was the West that provoked Russia into taking such aggressive actions in Ukraine and the ex-Soviet regions.

This view has been promoted by some academics and analysts, including John Mearsheimer, a professor of international relations at the University of Chicago in the US and the author of a famous and controversial book The Israel Lobby and US Foreign Policy (2006).

Mearsheimer (also not a Trump supporter) believes that Putin was provoked by the US and European insistence to expand NATO and EU membership into ex-Soviet states like Ukraine and Georgia that have historically been within Russia’s traditional sphere of influence.

Therefore, Putin felt threatened by the prospect of having NATO and EU on his doorstep in his traditional sphere of influence and was provoked into taking aggressive economic and military steps over the past two decades in what he sees as the self-defence of Russia’s traditional sphere of influence.


ECONOMIC REPERCUSSIONS IN THE MIDDLE EAST: Interstate wars that involve great powers have always had global economic repercussions, especially in the modern era when trade and communications technology have made the world more connected.

The effects would be especially acute if they involved a major power such as Russia, a major global producer of oil, natural gas, and cereals, and Ukraine, also a major global producer of cereals and having a strategic location on the Black Sea that allows it to act as a transit point between Asia and Europe.  

The war in Ukraine has caused economic losses for many people outside Russia and Ukraine themselves. Because of the war, the UK’s FTSE 100 Index declined by three per cent, and the German Dax Index declined by 5.5 per cent. In the US, the Dow Jones Index declined by two per cent, while the S&P 100 and NASDAQ declined by one per cent each.

This decline in global stock market indices is due to the general fear that the war will disrupt global economic transactions, especially with the economic sanctions being imposed on Russia. This is bad news for investors who have put their money into these stocks.

Regarding the Middle East, there are two reasons why the Russian offensive on Ukraine will have economic repercussions on the region. The first is the global food security factor, as Russia and Ukraine are among the world’s largest producers and exporters of wheat, while some Middle Eastern countries, including Egypt, are among the world’s largest importers.

The second reason is the global energy sector. Russia is the world’s largest producer and exporter of natural gas and is among the world’s largest producers and exporters of petroleum. Ukraine, on the other hand, is a strategic transit route for natural gas from Russia to Europe and the rest of the world through a network of pipelines that carry Russian natural gas from Russia to the rest of Europe.

The Middle East, too, contains the world’s largest producers and exporters of petroleum and natural gas, and there have been episodes of competition between Russia and the major OPEC producers in the petroleum market.

Even though there is not really such a thing as a “global” market for natural gas (like that for petroleum), Russian natural gas exports do have an effect on the European gas-consuming states that are working on diversifying their natural gas exports away from Russia and towards other natural gas exporters in the Middle East.


EFFECTS ON FOOD SECURITY: Many people in the Arab world were disturbed by a recent report in the British Daily Telegraph newspaper that said that the war in Ukraine would have an effect on global wheat supplies and prices and “push families across the Middle East and North Africa into severe hunger”.

Food prices have already reached a 10-year high amid the rising demand caused by the global post-Covid recovery. The war in Ukraine will raise food prices even further.  

Russia and Ukraine are among the world’s largest exporters of wheat, as they both export 56 million tons per year, constituting 30 per cent of global wheat exports. Russia is the world’s largest exporter of wheat, as it exports 38 million tons per year, while Ukraine is the world’s fifth-largest wheat exporter at 18 million tons per year.

Disruption of these supplies would be dangerous for the Middle East and Africa, which obtain half of their cereals from Russia. Timothy Lang, an emeritus professor of food policy at City University in London, said that “we can no longer assume that food is somehow apart from the political impacts of conflict.”

The global media has paid special attention to Egypt’s food security, given that Egypt is the world’s largest importer of wheat. Russia is Egypt’s largest source. In 2021, Egypt was the largest importer of wheat from Russia, as it imported 4.2 million tons of wheat from Russia at a cost of $1.2 billion.

Ukraine is Egypt’s second-largest source of wheat. In 2021, Egypt imported 651,000 tons of wheat from Ukraine at a cost of $650 million. Russia and Ukraine comprise 80 per cent of Egypt’s sources of wheat. In response to the present crisis, Cairo has announced that it is planning to import wheat from 14 substitute countries, and the cabinet says that Egypt has five million tons in reserve that will last for nine months.

During a recent visit to the military academy in Cairo, President Abdel-Fattah Al-Sisi said that the government had added 250,000 feddans of agricultural land this year for the purpose of wheat cultivation and that next year this number should increase to one million feddans. The following year it would reach up to one and a half or two million feddans, he said, in order to reduce Egypt’s dependence on the import of commodities.

The potentially negative effects of the conflict also extend to the tourism sector, as tourist flights to Egypt have declined too. Sharm El-Sheikh is Egypt’s largest destinations for Russian and Ukrainian tourists. Ukrainian tourists coming to Sharm El-Sheikh declined by 30 per cent between January and February this year, while Russian tourism declined by more than 50 per cent.


EFFECTS ON ENERGY MARKETS: Global oil and energy prices normally increase when there is a military conflict involving an energy rich state like Russia or an important transit state like Ukraine.

Oil breached the $100 per barrel threshold for the first time since August 2014 in February, reaching as high as $105 per barrel. The Saudi oil company Saudi Aramco’s shares have seen a record increase since the company’s initial public offering (IPO) and have recorded the second-highest market capitalisation worldwide at $2.23 trillion, with Apple being the highest at $2.6 trillion.

In the meantime, the shares of ExxonMobil and Chevron increased by 3.5 and three per cent, respectively. Such increases in oil prices may be good news for the major oil exporters such as Saudi Arabia, the UAE, Kuwait and other OPEC members, but they are bad news for petroleum importers as they increase the costs of doing business and of other commodities and the general costs of living.

Gold prices, too, have jumped by three per cent to their highest level in a year, because Russia is the third-largest producer of gold in the world after Australia and China, and the war could disrupt Russia’s production of gold. Furthermore, the US dollar has risen to its highest level in two years, and the Russian rouble has sunk to a record low, as investors have resorted to the US dollar as a safe haven amid the global instability caused by the Ukraine war and the subsequent economic sanctions imposed on Russia by the US and Europe.

Higher oil prices were not the only effect of the war on energy markets. In response to the Russian offensive, western economic steps were also taken against Nord Stream 2, the 1,200 km pipeline planned to carry natural gas from Russia to Germany. Furthermore, Germany has suspended its approval and ratification of Nord Stream 2, which was finished in September 2021 in terms of construction, but has not entered into operation yet due to political and managerial procedures.

“In the light of the most recent developments we must reassess the situation in particular regarding Nord Stream 2,” said German Chancellor Olaf Scholz recently. In early February, US president Joe Biden said in a joint press conference with Scholz that if Russia invaded Ukraine, “then there will no longer be Nord Stream 2. We will bring an end to it.”

 Russia pushed for the construction of Nord Stream 2 in order for its gas to avoid passing through pro-US transit states such as Ukraine. Germany also participated in Nord Stream 2 since it imports 35 per cent of its natural gas from Russia. Other states in the western camp like the US, the UK, Poland and Ukraine have always been opposed to the pipeline, fearing that it would give Moscow a stronger geopolitical grip over Europe’s energy supplies.

Subsequently, Washington, London, and the EU imposed sanctions on the company that built the Nord Stream 2 pipeline, Nord Stream 2 AG, a registered Swiss firm that belongs to Gazprom, Russia’s state-owned gas company. Gazprom owns the entire Nord Stream 2 pipeline, but paid only half the costs, while the rest was shared by Shell, Austria’s OMV, France’s Engie, and Germany’s Uniper and Wintershall DEA.


EFFECTS OF SANCTIONS: Further western sanctions against Russia include bans on sensitive technologies such as semi-conductors and the freezing of the bank accounts of certain high-ranking individuals in the Putin government.

It is doubtful if these sanctions will have an effect. Russia has been under US sanctions for years due to its actions in Georgia in 2008 and Ukraine in 2013, and they failed to deter Putin from his plans for the region. This is especially the case since Russia’s resources of energy and metals make it a “full-spectrum commodity superpower” (to use the Telegraph’s words), and the West is fearful of imposing serious sanctions on Russia’s energy exports to Europe, given Europe’s dependence on Russian energy (Europe depends on Russia for 40 per cent of its natural gas supplies).

This is the case even as Russia (as the supplier) needs Europe (the consumer) more than Europe needs Russia. This is because 70 per cent of Russia’s energy exports go to Europe and the Russian budget is highly dependent on revenues from exporting oil and natural gas. Perhaps this is why Russian Energy Minister Nicolai Shulginov said a few days before the invasion at the forum of gas producers in Qatar that Russia was “fully committed” to its energy contracts with Europe.

Europe, on the other hand, is working on diversifying its energy sources away from Russian gas and increasing its natural gas imports from Qatar and Algeria to replace Russian natural gas. This is where the energy-producing Middle Eastern countries could see the crisis in Ukraine as a boon.

The main potential gain for Egypt, for example, might be its exports of natural gas. Egypt’s natural gas exports increased in 2021 by about 385 per cent compared to 2020 due to the development of liquidation plants in Damietta and Edco. European natural gas prices increased by 400 per cent in 2021, and this could potentially help Cairo if Egyptian gas supplies to Europe were to increase.

Furthermore, the potential decline in oil and natural gas supplies and Europe’s desire to diversify away from Russia could give Iran, one of the world’s largest oil and natural gas producers, more leverage in its relations with the West.

Tehran is currently negotiating a return to the Joint Comprehensive Plan of Action (JCPOA), or the “Iran nuclear deal”, to halt Iran’s nuclear programme, which was signed by former US president Barack Obama in 2015 and was then withdrawn from by Trump in 2018. The Democrats under Biden are currently seeking a return to the deal.

Another producer of natural gas that could make a profit out of the Ukrainian situation is Qatar. Qatari Energy Minister Saad Al-Kaabi has said that neither Qatar nor any other country has the capacity to completely replace Russian gas supplies to Europe. Furthermore, Qatari natural gas exports are currently locked into long-term contracts, mostly with Asian buyers.

On the other hand, however, Al-Kaabi also said that up to 15 per cent of this natural gas could be diverted to Europe if needed. Qatari gas to Europe was among the issues discussed by emir of Qatar Sheikh Tamim bin Hamad with Biden during the former’s visit to Washington in late January, when Biden granted Qatar major non-NATO ally status.

Nevertheless, Qatari gas alone will not cover Europe’s energy needs. Europe consumes 550 billion cubic metres of natural gas per year, while Qatar’s annual production is only 70 billion. This is not nearly enough, even if we add Australian and Iranian gas to the equation.  

Despite these potentially good opportunities for the economies of the Middle Eastern energy producers, one has to remember that energy prices are highly volatile and that these high prices are due to a sudden military conflict, the end of which will lead to a decline in energy prices. Therefore, the boom is temporary, and one should not be overoptimistic.

The harsh truth is that all the Arab states, rich and poor, are almost always on the receiving end of the economic results of international events shaped by the great powers. This is because the Arab world does not have a strong agricultural sector or a strong industrial sector on which to build real economic power.

The major Arab governments should have long-term plans to develop their agricultural and industrial sectors, because these are the real pillars of a strong economy. Generally speaking, it is the Arabs’ fault that they do not grow their own food. Do the Arab states have a plan for cooperation and development in agriculture and food security? The answer is, unfortunately, no.

The Arab countries should have a long-term plan to develop their agricultural and industrial sectors in order to ensure their food and economic security, even as they have to depend on food imports from abroad for now.

The  writer  is  a  political  science  lecturer  at  the  British  University  in  Egypt,  a  member  of  the Egyptian Council for Foreign Affairs and the  Royal  Institute  of  International  Affairs,  Chatham House, UK.

*A version of this article appears in print in the 3 March, 2022 edition of Al-Ahram Weekly.

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