By Ranajoy Bhattacharyya, Indian Institute of Foreign Trade, Kolkata Campus

1. Introduction

Two important wars—one in Ukraine and the other in the Middle East—have destabilized the world economy in recent times. These conflicts denied the world the quiet recuperation period needed to calm the unsettled economic conditions left behind by the monumental disruptions of the coronavirus pandemic. Russia, Ukraine, and the Middle East are among the most important suppliers of food and energy in the world. While Russia and Ukraine together supply significant amounts of wheat, corn, barley, and sunflower oil essential to global food security, Russia and the Middle East together account for roughly 40 percent of global crude and other liquid fuel supplies. Any conflict involving these regions is therefore expected to have catastrophic consequences.
On the food security front, the latest development is that Ukraine has succeeded in pushing back Russian blockades in the Black Sea, restoring some of its former grain exports. The United Nations has warned that any sustained interruption to Black Sea grain exports could trigger acute food shortages across North Africa and the Middle East, regions that depend on Ukrainian wheat for a significant portion of their bread supply.
No such relief is in sight regarding the Hormuz Strait, which remains a flashpoint. Iran is restricting passage to ships bound for all but a handful of friendly nations (India, Russia, China, Pakistan, and Malaysia), while the United States is blocking all vessels heading to or from Iranian ports. Iranian gunboats have even fired upon ships from ostensibly friendly countries. Negotiations between the United States and Iran are ongoing, but no timeline for resolution has been set.

2. Consequences of the Wars on the Global Economy>

The Hormuz Strait is the world’s most critical oil chokepoint—roughly 20 percent of all globally traded petroleum passes through it daily. Any sustained closure would be without modern precedent in terms of its impact on global energy markets.
The main victims of these disruptions are the major Asian import-dependent economies, including India, China, Japan, and South Korea. Brent crude prices fluctuated between approximately $85 and $117 per barrel between mid-April and mid-May. At the time of writing, prices hover around $100 per barrel—roughly $30 above pre-war levels—a substantial increase over a brief period.
Higher oil prices is a tax on oil-importing countries. Countries dependent on imported fuel—such as India, Japan, South Korea, and many European economies—face rising import bills and worsening trade deficits. Transportation costs increase globally because shipping, aviation, and logistics depend heavily on petroleum products. This raises production costs across industries, leading to widespread inflationary pressures. The World Bank has projected that prolonged disruptions could significantly raise energy prices worldwide. Rising fuel prices feed into food prices, manufacturing costs, electricity generation, and consumer goods. Economists often refer to this as “cost-push inflation,” where firms raise prices because their input costs rise.
The combination of high inflation and low growth could generate stagflation—stagnation combined with inflation—a condition last experienced globally during the oil shocks of the 1970s. Stagflation is especially dangerous because traditional macroeconomic tools become less effective. Adjusting the repo rate and reverse repo rate, the standard levers of monetary policy, loses much of its potency when the source of inflation is a supply disruption rather than excess demand. Governments trying to stimulate growth risk worsening inflation, while anti-inflation policies can deepen recession.
Financial markets have reacted with heightened volatility. Investors dislike uncertainty, and war in the Middle East historically causes sharp movements in stock markets, commodity prices, and exchange rates. Oil-exporting countries—particularly Gulf states such as Saudi Arabia, the UAE, and Kuwait—may initially benefit from elevated prices, but most economies face falling stock valuations and weakening investor confidence. Safe-haven assets such as gold and US Treasury bonds have risen in value. Emerging markets including India are experiencing capital outflows as international investors shift toward perceived safer destinations, putting downward pressure on currencies and equity indices.
The dollar has strengthened against most emerging market currencies, compounding the pain for countries that borrow in dollars and earn in local currency. Sovereign debt servicing costs have risen for several low-income countries, increasing the risk of debt distress. Sri Lanka’s 2022 sovereign default—triggered in part by fuel import costs—offers a cautionary preview of what more fragile economies could face if the energy shock deepens or persists. Some countries such as India have tried to mitigate their loss of foreign exchange reserves through policy interventions such as excise duty on gold and restrictions on international travel. If the crisis lingers more stringent policies to save foreign exchange may have to be taken. India has a bitter experience on the concerns of foreign exchange reserve in the pre liberalisation era. Foreign exchange restriction acts became notorious . The restriction of foreign exchange ultimately led to India taking a loan from the IMF with a huge burden of conditionalities that required India to align with the Washington Consensus.
The major difference between that era and this foreign exchange crisis is that the Indian Rupee followed a fixed exchange rate system during that era. Today the exchange rate is flexible in the current account. Excessive prices of crude leading to severe trade and current account deficit will be automatically adjusted at least to an extent by the depreciation of the rupee vis-à-vis the dollar. However though this may take care of the reserves issue to an extent a more depreciated rupee implies higher prices of imported goods in terms of the domestic currency and as a consequence higher retail price of petrol in the domestic currency. This will trigger additional fears of inflation.
Not only India but the developing countries suffer disproportionately from the crisis. Many low-income economies are heavily dependent on imported energy and food. Rising oil prices increase transportation and fertilizer costs, thereby raising food prices. The World Food Programme has warned that conflict-induced energy disruptions can worsen global hunger and food insecurity. Poor households spend a larger share of their income on food and fuel, meaning inflation hits them hardest. Governments in developing countries may be forced to increase subsidies or welfare spending, worsening already strained fiscal positions.

3. Ideological Consequences of the war

Death of a Belief in Strategic Alliances The Russia-Ukraine war delivered a severe lesson in the limits of strategic alliances. When Russia invaded Ukraine in 2022, Ukraine hoped that NATO would rally firmly behind it—providing arms, ammunition, intelligence, logistics, and ultimately boots on the ground. The response was late and insufficient relative to what was needed to repel the Russian military at full strength. As a result, Ukraine lost more than a third of its territory. This outcome dealt a serious blow to the concept of perceived benefits of security and strategic alignment.
Since the Second World War, Europe had relied on the United States for its security umbrella, while developing countries like India had aligned strategically with Russia for protection. With the Ukrainian example before them, such dependencies looked dangerously fragile. All of Europe and many developing countries have since been compelled to sharply increase military spending. For countries with limited fiscal space, this has meant painful trade-offs: allocating more resources to defence has come at the direct expense of investment in healthcare, education, and social welfare. India, which lacks deep indigenous capabilities across the full spectrum of advanced military technology, faces the additional inefficiency of procuring expensive systems from abroad—a further deviation from comparative advantage and productive resource allocation.
Re-prioritization of Resources
The social cost of this reorientation is not merely economic. When governments divert funds from schools, hospitals, and poverty alleviation programs to purchase weapons and maintain larger standing armies, the burden falls disproportionately on the poorest sections of society. Progress on reducing income inequality, improving child nutrition, and expanding access to education is slowed or reversed. The wars of the 2020s have thus imposed a double penalty on the world: higher costs of living through energy and food inflation, and reduced public investment in the very services that lift populations out of poverty.
Trade diversion
One of the more troubling consequences of this shift from butter to guns is that weapons themselves become an important commodity of international trade. Through most of human history, trade served to supply people with the essential goods—food, medicine, tools—that they could not efficiently produce themselves. It was one of the great engines of human welfare, creating a world in which cooperation yielded higher returns than enmity. When the trade of these goods is displaced by the trade of arms and ammunition, as is increasingly the case today, commerce is transformed from an instrument of human flourishing into an instrument of human destruction. This role reversal, though universal in its harm, becomes inevitable once wars begin to dominate the logic of international relations. And there is a further loss: the resources devoted to manufacturing weapons—the engineers, the raw materials, the capital—are resources withdrawn from producing goods that enhance human welfare and redirected toward producing goods whose purpose is to reduce it. That is not merely inefficiency. It is a net subtraction from the wealth of the world.

From globalisation to de-globalisation
While the short- and medium-term damage is severe, the most consequential long-term impact may be ideological. From the 1990s onward, the world moved steadily toward liberalizing international trade and finance. This process allowed market forces to allocate resources efficiently across borders and contributed to historically high rates of economic growth, poverty reduction, and technological diffusion. A powerful political consensus emerged in favor of market mechanisms over government intervention. Expanding production networks, global value chains, rapid logistics, and long supply chains all reinforced the case for the unimpeded operation of free and open markets.
The coronavirus pandemic, China’s challenge to US economic dominance, and the wars of recent times have together severely eroded this consensus. Policymakers have been forced to rethink economic strategies and reorient them toward domestic priorities. Self-reliance—captured in India by the term Atmanirbhar Bharat—has returned as a guiding principle for risk-conscious national development. Governments are once again seeking to restrict the flow of goods and capital across borders. Countries are attempting to produce domestically what they once imported freely, even where they lack comparative advantage, leading to wasteful and inefficient resource allocation. Deglobalization has become the new buzzword.
Globalization was built on the concept of production processes distributed across multiple countries and the so-called “death of distance”—the idea that frictionless movement of goods and services could allow companies to organize production globally. Each component would be manufactured where it could be produced most cheaply, then assembled elsewhere for final sale. This logic delivered enormous efficiency gains for three decades. The wars of the 2020s have exposed the vulnerability embedded in these long chains: a single conflict, a single chokepoint, a single sanctions regime can sever them without warning.
The wars between Russia and Ukraine, and between Iran, the United States, and Israel, have exposed the fragility underlying the promise of globalization. The premise of globalization is that it enables the efficient allocation of resources across nations: each country specializes in what it produces best and trades for the rest. This is how markets are meant to work. But when nations are in open conflict with one another, the logic of comparative advantage collapses. Supply chains become weapons, trade corridors become battlegrounds, and the mutual dependence that once seemed like a strength is revealed as a profound vulnerability. The economic case for globalization remains sound in theory; it is the political and security conditions required to sustain it that are now in question.

4. Conclusion

Wars are not merely military events. They are economic and ideological inflection points. In the short run, they have raised energy and food prices, stoked inflation, disrupted trade, and squeezed the fiscal capacity of governments. In the medium run, they threaten stagflation, financial instability, and a sustained slowdown in global growth. In the long run, they are accelerating a structural shift away from the open, rules-based international economic order that underpinned the prosperity of the post-Cold War era.
The real damage from these wars is not the $30 premium on a barrel of Brent crude, severe as that is. It is the unravelling of a world order built on the premise that interdependence is preferable to autarky, that trade is more productive than conflict, and that human welfare advances when nations cooperate rather than arm themselves against each other. That premise is now in serious danger—and the consequences of abandoning it will be felt most acutely by the billions of people who had the most to gain from it and the least capacity to absorb the loss.