MENA nations set for economic hit as a result of Ukraine crisis

9 March، 2022

Russia’s invasion of Ukraine will have far-reaching effects around the world, including in the Middle East and North Africa. While the war presents security and diplomatic risks for the region, its most significant impacts are likely to be economic.

The war is driving up food and energy prices, adding to inflationary challenges for individuals and exacerbating fiscal challenges for governments. A reduction in tourism and other business impacts of intense sanctions on Russia will also present risks.

Russia and Ukraine, combined, are the largest suppliers of wheat to the Middle East. The fighting in Ukraine and sanctions on Russia threaten to derail planting and harvesting, shut down ports, damage grain storage facilities and complicate shipping and financing. These risks are already increasing wheat prices globally and could seriously undermine supply to the region.

Disruptions in wheat supply from Russia and Ukraine are particularly damaging to Egypt, the world’s largest importer of wheat. More than 80 percent of Egypt’s wheat imports come from Ukraine and Russia.

Egypt is also dependent on these two countries for its supply of sunflower oil, another dietary staple.

Bread is a very important part of Egyptians’ diet, accounting for a third of their calories, according to the UN. It also has deep cultural importance.

Importing wheat is a huge weight on Egypt’s fiscal deficit, as the government currently provides bread subsidies to two-thirds of the population. The government has been planning to scale back subsidies in the coming budget. However, the new surge in prices creates a dilemma, as it would intensify the pain to Egyptians of a subsidy cut and also increase the burden on the budget.

Most of North Africa is vulnerable to price shocks in wheat. Tunisia and Libya are heavily reliant on wheat imports from Russia and Ukraine. Algeria is a major global importer of wheat. Furthermore, North Africa is experiencing severe droughts that threaten the region’s own wheat production. The Lebanese already face runaway inflation on many goods and Lebanon imports about 60 percent of its wheat from Ukraine.

Turkey, which also has very high inflation, buys the vast majority of its imported wheat from Russia, followed by Ukraine. Yemen is heavily reliant on imported wheat and Russia and Ukraine are two of its top suppliers. Some of these countries have grain reserves for a few months, but not all. For example, the Beirut explosion of 2020 damaged important grain silos, leaving Lebanon with only about a month of reserves today.

The Gulf countries are less vulnerable to food price shocks, given their smaller populations and larger fiscal resources. However, the UAE, Oman and Qatar all import significant amounts of wheat from Russia and Ukraine, though the increase in oil and gas prices will boost these countries’ ability to afford higher wheat prices.

The war has also pushed already high oil prices even higher, spiking at close to $140 per barrel on Monday. For the MENA region, higher oil prices often are a double-edged sword. For oil and gas exporters, higher prices will lead to higher revenues. For energy importers, increased prices will add to inflation and large fiscal deficits. Even exporters who benefit from higher prices will have to use some of the increased revenue to pay more for various types of imports.

The war and sanctions are also already reducing the number of Russian and Ukrainian tourists to the region, just when tourism was recovering from the pandemic. Turkey, Egypt and Dubai are typically popular destinations for Russian tourists. Russians and Ukrainians also contribute to tourism in several other countries.

There will be other economic and business consequences. The global economy has continued to struggle with pandemic-induced supply chain disruptions and reduced exports from Ukraine and particularly Russia will further complicate the production of many goods worldwide. MENA businesses must also consider the impact of sanctions on their financial and business operations, partnerships and investments.

Disruptions in wheat supply from Russia and Ukraine are particularly damaging to Egypt, the world’s largest importer of wheat.

Kerry Boyd Anderson

The war’s economic implications also raise the risk of instability in several countries. The increase in wheat and energy prices — on top of preexisting inflation throughout the region and subsidy cuts in some countries — will further squeeze many people who are already struggling to afford basic needs.

There is a long history of sudden spikes in bread or energy prices sparking protest and civil unrest in the region. If the Egyptian government proceeds with plans to reduce bread subsidies at the same time as prices in this dietary staple spike, protests are very likely; the main uncertainty is the scale of protest.

Turkey’s currency crisis leaves it with little ability to manage increasing food prices. Lebanon’s already-collapsing economy and standard of living has no capacity to handle increasing energy and bread prices. War-torn countries such as Libya and Yemen lack the bandwidth to cope with a spike in wheat prices or shortage in supplies.

Several of the countries that are most dependent on wheat imports from Russia and Ukraine are also least able to adapt to a supply or price shock.

The war in Ukraine comes at a particularly difficult time for many MENA countries. Furthermore, bread prices are likely to rise around the time that Ramadan starts. These developments are intensifying a combustible situation in several countries.