Responding to Covid 19 has left many countries’ foreign exchange reserves dangerously low, with countries whose economies relied on tourism particularly badly affected.  The economic rebound as the Western world’s highly-vaccinated populations emerged from lockdowns and began spending, caused supply chain tightness, sparking the beginnings of an inflationary spike.  The Russia-Ukraine crisis has exacerbates that growing cost-of-living crisis and its inflationary impact is already being felt across the world in a variety of sectors.  Whilst developed countries may be able to manage these inflationary pressures, developing countries in Africa, Asia and the Middle East are less able to insulate themselves.

COVID-19 variants and supply chain disruption have led to an unequal global economic recovery, while rising inflation and record debt constrain countries’ ability to address recurring challenges. Lesser-developed countries are less able to recover from the pandemic’s economic fallout, hit by the dual impact of a lack of access to vaccines and lower capacity to finance stimulus measures. The WFP estimates that about 60% of low-income countries are currently in, or at high risk of, debt distress, compared with only 30% in 2015.

This note looks at three important sectors where the crisis is likely to have the greatest impact.


Russia is the world’s largest natural gas exporter; the second-largest exporter of crude oil; and the third-largest producer of crude oil.  Prior to the invasion of Ukraine, Europe and China imported around 60% and 20% respectively of Russia’s oil and 40% of European gas consumption was supplied by Russia.

The Russian invasion of Ukraine pushed crude oil prices to a 14-year high and had a similar impact on European gas prices. High shipping costs, reputational impact and buyers’ lack of willingness to order oil from Russian ports mean that Russia’s oil supply to global markets has been severely disrupted.

The EU has suddenly woken up to the dangers of over-reliance on hydrocarbon provision by unreliable partners.  Its response is to accelerate its transition to renewables.  However, that transition cannot be achieved overnight, and so in the short to medium term, the EU will continue to rely on hydrocarbons for its energy needs.

Fears that stripping all Russian hydrocarbons out of the European industrial machine would tip the European (and then global economy) into recession partly explain EU reluctance (so far) to place sanctions on Russian gas exports.  However, the EU has undertaken to drastically reduce its reliance on Russian gas by two-thirds this year (from 158 bcm to 55 bcm) and to fully end its dependence on Russian gas by 2027.  This means the EU must find other global suppliers to fill the gap: the US has offered to supply an additional 15 bcm to the EU and Qatar has offered an additional further 15 bcm (and Germany plans three new LNG ports to receive that gas) – but that still leaves the EU market under-supplied by 73 bcm this year. In the longer term, the EU calculates it can cover that gap with 19 bcm of gas with renewables and a further 50 bcm by hydrogen by 2030.

The Commission has ordered EU Member States to ensure that their gas storage reserves are 90% full by October this year, meaning the EU will be turning to international markets to purchase not only the gas it needs to run its industry and supply domestic demand, but also the gas it needs to fill its storage capacity. As the EU competes on constrained global markets for that gas (including with developed countries like Japan, which is highly gas import-dependent), the cost of gas will increase further (in January 2021, the price in Euros per megawatt hour of gas was 25: at the end of February 2022, it was €225).  This could push some less-developed countries into increased reliance on coal for power.

Since the EU will introduce a new joint gas purchasing process (as it did for Covid vaccines), its purchasing power means that it is inevitable that countries less able to meet the higher prices demanded will be squeezed out of the market, with implications for their economic growth and development.  On the other hand, for some countries, such as India and potentially China, the European pull-back from Russian hydrocarbons represents an opportunity to access gas and oil at a steep discount giving their industry a short-run competitive advantage.

In the medium term, individual European countries are making huge commitments to strip hydrocarbons out of their energy systems. In January this year, Germany purchased 55% of its gas; 50% of its coal; and 35% of its oil from Russia.  By the end of March, those figures had already fallen to 40% gas, 24% coal and 25% oil.   Germany (whose energy minister recently described renewables as ‘freedom energies’) has further undertaken to reduce its gas requirements to below 10% of domestic consumption by 2024 and to increase from 42% to 80% its energy provision from renewables by 2030.  That is an ambitious target, made all the more so by the fact that, as industry, transport and heating electrify, demand for power will also accelerate.  The increase in renewable provision from 42-80% requires a near-trebling in installed capacity – from 225 TWh in 2021 to over 600 TWh by 2030. Nuclear is making a renaissance (the UK Government announced this week its intention to build up to eight new nuclear stations) and the rise of Hydrogen as the miracle fuel continues.

This impulse is welcome:  The most recent instalment of the IPCC’s sixth report IPCC report notes that in order for the world to meet a 1.5° future, emissions must peak by 2025 and halve by 2030. Failure to meet those targets would mean that 8.8% of current farmland will be unproductive and one billion people will be at risk from coastal flooding by 2050.


The Russian invasion of Ukraine has already had a noticeable impact on food prices. Between them, Russia and Ukraine export around a quarter of all traded wheat[i]; more than three-quarters of traded sunflower oil[ii] and one sixth of the world’s supply of maize[iii].   An estimated 13.5 million tons of wheat and 16 million tons of maize are stuck in silos in the two countries – 23 and 43% respectively of their expected exports in 2021/22 – and unable to find a route to market, as shipping from Black Sea ports has all-but ceased.  Even if ships could make their way, insurance premiums on shipping in war-zones are prohibitively high, with insurers already hiking their premiums on ships even entering the Black Sea.

The impact of the war is not only on the distribution of this year’s supplies, but on next – Ukraine should be beginning its planting season now, but has not yet begun sowing due to the conflict.

Russia is one of the world’s largest exporters of the three major types of fertilizers – nitrogen, phosphorus and potassium. Replacing those ingredients will, together with higher gas prices, result in higher input costs, which will, in turn, impact next season’s harvest, leading to elevated food prices in the longer run.

The World Food Program (which buys 50% of its wheat supply from Ukraine) calculates that the cost of food has increased by 40% since 2020 and increased by 3.9% between January and February of this year (an annualized rate of 47%). In more than 40 countries where the WFP operates, imported cereals such as wheat and maize account for 30% or more of dietary energy.

One third of Egypt’s population already lives on less than $2 a day. For this section of the population, bread is the essential basis of their daily nutrition. Bread is made from imported wheat (80% of Egypt’s annual wheat demand is imported – the government has blocked the export of wheat) and heavily subsidised. Global wheat prices have increased from $798/bushel on 21 February to $1043 on 5 April – an increase of 30%.  To give this figure some context, a 10% increase in the price of wheat represents 0.2% of Egypt’s GDP, as Egypt needs more money to buy the wheat and more money to cover the difference between the market and subsidized prices. This combination of factors means that Egypt has been forced to request its third IMF assistance package in six years.

The impact of rapidly rising prices is likely to fall hardest on developing and nutrition-fragile countries (as is the case with gas price rises).  This is particularly true in the Middle East and Africa where countries reliant on wheat from Ukraine and Russia and have few alternative supply options.  Somalia gets 100% of its wheat from Ukraine and Russia; Lebanon buys 60% of its wheat from Ukraine (and has only one month’s wheat reserves); Yemen gets 50% of its wheat from Russia and Ukraine.

In a 7 April statement, UNICEF warned of the growing risk of severe malnourishment for children in fragile countries in the Middle East and Africa. The WTO and WFP have already signaled their concern at potential famine in Africa (35 African countries are predominantly dependent on food imported from the Black Sea region) as shortages on the international market compound the impact of droughts in Europe and Africa,.  The WFP itself normally buys its shipments of split-pea and barley from the port of Odessa (which is no longer accessible) for sale mainly in West Africa, where the cargo should ordinarily be distributed from May onwards – a date that is looking increasingly unrealistic.

Migration and Governance Issues

These economic and social pressures will result in a political response as the lack of access to and increasing prices of food and energy are likely to lead to increased migration from Africa into Europe, with the consequent increase in right-wing populist sentiment. Since those right-wing parties are also associated with nationalist agendas there are knock-on implications for global supply chains and for potential resistance to international cooperation, just at the time when that cooperation is most needed.

In addition to migration, the global pressures on energy and food prices risk leading to increased inequality and civil unrest, making governance more difficult and contributing to regional instability. The consequences of that instability range from further disruption to global supply chains, to the deployment of peace-keeping forces and the need for significant volumes of aid – all of which themselves have global consequences.

Stress nexus

These issues – food and energy shortage, supply chain disruption and migration, set against the continuing economic and social impact of Covid – form a ‘stress nexus’, which is potentially exacerbated by the growing impacts of climate change to magnify the risks to societies around the world.  This combination of disruptive factors has led some commentators to raise the spectre of a more globalalised systemic disorder.

Inflationary pressures (inflation is at 54.4% in Turkey, 50% in Argentina, 10% in Brazil, 9.7% in Spain) have already led a number of countries to raise their interest rates (South Africa’s rates already stand at 4.5%).  The US Federal Reserve is considering interest rate rises to counter inflation.  It is worth looking at the history of such action: six out of eight of the US interest rate rises since the early 1980s have led to global recession.


Many companies and countries had already drawn the Coronavirus pandemic-related conclusion that they needed to reduce the vulnerability of their business to global supply chains.  Their response was to look increasingly at onshoring production and where that was not possible, to reduce the geographical exposure of their supply chains by nearshoring their production.

The Russia-Ukraine crisis is likely to accelerate that tendency, with implications for North African economies as near-shore destinations for European investment. That tendency potentially conflicts with the Energy Transition’s need for efficient global supply chains (for example, the DRC produces over 70% of the world’s cobalt; China produces 65% of the world’s refined cobalt; Chile and Australia are the world’s top lithium producers; and China controls the majority of the lithium-ion battery supply chain).

In the near-term, European competition on global markets for non-Russian gas is likely to continue to drive up prices, with the knock-on impact on food and migration.  New LNG terminals will need to be built as will many more LNG tankers. There may even be a limited return to coal.

In the medium to long-term there may be a divergence in response between Europe and the US.  The EU has made it clear that it will use the crisis as a catalyst for an accelerated push towards renewables (and the UK’s new Energy Security Strategy[iv] follows a similar pathway).  The increasing delta between the cost of gas and the cost of renewables making investment in the latter more attractive[v] – even though supply chain disruption risks pushing up the cost of renewables.  In the US, higher gas prices make increased oil and gas prospecting attractive not only as a means of insulating the US economy from the need to import hydrocarbons from overseas, but as a profit-returning venture in its own right.

What is clear is that Russia’s unprovoked invasion of Ukraine has changed the paradigm in ways that we are only just beginning to discern.  The impacts will be long-term and potentially transformational.






[v] Allianz SE recently published their estimate that, to reach its 2030 targets, the EU will need to spend $187 billion per year for the next six years, but noted that, even at that price, it was still cheaper to invest in renewables than risk price fluctuations on the international hydrocarbon market

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Photo of Thomas Reilly Thomas Reilly

Ambassador Thomas Reilly, Covington’s Head of UK Public Policy and a key member of the firm’s Global Problem Solving Group and Brexit Task Force, draws on over 20 years of diplomatic and commercial roles to advise clients on their strategic business objectives.


Ambassador Thomas Reilly, Covington’s Head of UK Public Policy and a key member of the firm’s Global Problem Solving Group and Brexit Task Force, draws on over 20 years of diplomatic and commercial roles to advise clients on their strategic business objectives.

Ambassador Reilly was most recently British Ambassador to Morocco between 2017 and 2020, and prior to this, the Senior Advisor on International Government Relations & Regulatory Affairs and Head of Government Relations at Royal Dutch Shell between 2012 and 2017. His former roles with the Foreign and Commonwealth Office included British Ambassador Morocco & Mauritania (2017-2018), Deputy Head of Mission at the British Embassy in Egypt (2010-2012), Deputy Head of the Climate Change & Energy Department (2007-2009), and Deputy Head of the Counter Terrorism Department (2005-2007). He has lived or worked in a number of countries including Jordan, Kuwait, Yemen, Libya, Iraq, Saudi Arabia, Bahrain, and Argentina.

At Covington, Ambassador Reilly works closely with our global team of lawyers and investigators as well as over 100 former diplomats and senior government officials, with significant depth of experience in dealing with the types of complex problems that involve both legal and governmental institutions.

Ambassador Reilly started his career as a solicitor specialising in EU and commercial law but no longer practices as a solicitor.