Cost of economic war hurting life in Britain

Ayear ago, Russia invaded Ukraine, sparking a war that’s already killed or injured hundreds of thousands of victims, with no end in sight.

Military conflict is most obviously a human tragedy. But the related economic war between Russia and the West has meanwhile affected living standards across the world – not least in Britain.

One reason is that Russia has historically provided 40pc of the natural gas used across Western Europe while pumping 10pc of global oil consumption.

These supplies have clearly been disrupted by a combination of physical upheaval and Western sanctions – imposing a cost on energy-importing nations, including the UK.

In January 2022, prior to the war, unleaded petrol in Britain averaged £1.46 per litre. By mid-summer – with oil up at $128 a barrel, some 30pc above pre-war levels – forecourt prices averaged £1.94 per litre, going above £2 in some parts of the country.

Petrol prices have since eased, with unleaded averaging £1.48 per litre so far in February. So the cost of filling up is roughly back where it was on the eve of this Russia-Ukraine conflict.

Yet the underlying cost of crude, at about $83 a barrel, is now some 20pc lower – suggesting petrol prices should have fallen quite a bit more.

And, as any lorry driver will tell you, diesel remains about 10pc more expensive than it was before Vladimir Putin’s invasion, despite oil prices now significantly down.

There’s been even more economic fallout when it comes to gas and electricity bills – which remain far higher than before the war. During 2021, the average UK household spent £1,309 on their combined utilities, rising to an annual cost of £2,621 now – more than double pre-war levels. That is despite the drop in wholesale energy costs, with gas currently about €50 per megawatt hour on European wholesale markets, well below the mid-August peak of €380/MWh, as nations struggled to stockpile energy ahead of winter, and below pre-war levels too.

Yet utility bills look set to stay sky-high. The energy regulator Ofgem is due to announce a new higher £3,000 household price cap, up from £2,500, at the end of this month – limiting not total bills, but per unit cost given average usage.

Industry analysis suggests average bills will drop back to about £2,100 this summer, remaining close to that level for the rest of the year, making the household cap redundant.

While that’s some relief, energy costs look set to remain elevated for tens of millions of households – and also countless firms – for some time to come.

Since this war began, the Western world has grasped that while Russia constitutes a relatively small part of the global economy, it has an outsized influence on the world’s supply not just of energy but also food – accounting for 25pc of global fertiliser exports. And Russia and Ukraine between them grow about a quarter of all wheat sold worldwide.

Export embargoes, plus intermittent military blockades on Black Sea shipping freight, have prevented bulk transportation from southern Ukraine, with this war seriously impacting world food prices.

The Food and Agriculture Organisation’s global price index was 14.4pc up last year compared with 2021.

Given the heavy reliance of parts of the Middle East and the Horn of Africa on Russian and Ukraine exports of wheat and other staples, that’s sparked food riots and deepened starvation in some of the poorest parts of the world.

UK shoppers have felt the impact of food price inflation too, with bread prices up 20pc on a year ago and eggs and milk respectively 29pc and 39pc higher – given the impact on the cost of farmers’ feedstocks.

A week into the war in Ukraine, World Bank president David Malpass said it was “a catastrophe” for the global economy, “coming at a bad time because inflation is already rising”.

The post-lockdown surge in demand, combined with lingering supply chain issues restricting flows of goods and services, certainly meant that UK inflation was already at 5.5pc in January 2022 – a 30-year high.

The combination of more expensive fuel, utilities and food has since pushed inflation to 11.1pc in October, falling slightly to 10.1pc now. The Bank of England has had little choice but to raise interest rates repeatedly, from 0.5pc last February up to 4pc – and there could be more rate rises to come.

That’s pushed up mortgage costs, of course, leading to a slowdown in the housing market – with prices falling in some areas. Soaring inflation has also driven a broader cost of living crisis, sparking higher wage claims, a severe deterioration in industrial relations and the most widespread strike action Britain has seen since the late 1970s.

While the end of lockdown was always going to result in inflation, and interest rates anyway needed to rise, there is no doubt this Russia-Ukraine conflict has resulted in much sharper hikes in both prices and borrowing costs than would otherwise have happened.

Ukraine is by far the greatest victim of this war, not only in humanitarian terms, but economically too. About a quarter of the country’s 44 millionstrong pre-war population has been displaced, with local economists estimating a huge GDP drop of between a third and a half of pre-war output.

About two-fifths of the country’s electricity-generating capacity has been destroyed, along with other vital infrastructure.

Once this war is over, a major rebuilding plan will be vital.

For its part, the Russian economy has weathered the war better than expected, despite far-reaching US and European Union sanctions, shrinking about 2pc during 2022, with rising military output helping to bolster production.

The ruble was the only major currency that rose against the dollar in 2022, as energy supplies Russia has traditionally sold to Western Europe were largely diverted to India, China and other sanctions-busting markets. But new price caps introduced by the G7 on seaborne Russian oil products are now squeezing exports more.

The UK Government spent about £2.3bn on military assistance to Ukraine last year and is pledged to spend the same amount in 2023 – which is relatively manageable.

The broader costs in terms of food, fuel and utility bills – plus higher borrowing costs – are incalculable, but clearly much more significant.

Despite that, a year into this ghastly conflict, for now at least, public backing in Britain remains strong for continued Ukrainian resistance.

‘While Russia constitutes a small part of the global economy, it has an outsized influence on the supply of energy and food’