Institute of Directors: The

The Ukraine crisis

What does it mean for UK business?

Emma Rowland Junior Policy Advisor Institute of Directors

Kitty Ussher Chief Economist Institute of Directors

Aside from the grim human repercussions, at first glance, the invasion of Ukraine would not appear to have a huge impact on the UK business environment: the UK economy is about twenty times the size of Ukraine’s and with UK-Ukraine trade worth £1.8 billion it is number 62 on our list of trading partners. We buy goods worth £1 billion from Ukraine, predominantly iron, steel and cereals and our foreign direct investment (FDI), although totalling £3 billion only accounts for 0.2% of the UK’s total outwardstock.

When adding the impact of sanctions on Russia, the economic disruption is potentially greater. Russia is the UK’s 19th largest trading partner, making up 1.3% of our total trade, with direct imports consisting mainly of metals and precious stones.

Even larger however is the indirect effect through the sharply rising prices of goods Russia supplies into the global market, even if UK businesses themselves do not buy those goods directly from Russia. Energy is the most obvious example, but we have also seen great volatility in prices of nickel as well as fertiliser components such as potash.

Russia is the 11th largest economy in the world in terms of GDP, and the 5th largest in Europe. In 2020, it was the largest global exporter of mineral fuels, oils, and distillation products, to the tune of a massive $142 billion. Its primary exporting markets in these products are China, Netherlands, Germany, and Republic of Korea. Russia’s next largest exports are other commodities, precious stones and metals, iron and steel, and cereals.

Contagion effects on British businesses are also felt through the financial markets. Asset managers holding stocks in Russian securities have written their value down sharply, if not to zero, and under pressure to sell if a market exists for them to do so. This may affect the value of insurance premiums, if not private pensions, in future. And a falling stock market affects the climate for IPOs and merger activity, which in turn is a medium-term driver of economic growth.

In the longer term, however, the lasting impact on UK-based businesses will come from how households decide to behave. For those who were already unable to save, these are tough times and rising prices make it even harder to make ends meet.

For those who have some disposable income, the key question is whether concerns around rising bills more than offset the desire to return to a ‘normal’ spending pattern now the pandemic is receding. The initial data showed both happening at once: retail spending rising while consumer confidence fell. The lasting impact on the UK economy will depend on which of these forces wins out in the months ahead.