Tensions have been building between Russia and Ukraine for hundreds of years. The roots extend far back in their shared history, and include deep ideological rifts, historical ties, ‘Russification’, as well as the interests of influential leaders, and more. The complex web of originating causes makes the conflict difficult to resolve. The 2014 annexation of Crimea came first. The hybrid war in eastern Ukraine followed, and now, the full-blown war between Russia and Ukraine rages on. As the Russian invasion of Ukraine is still the top headline in the news, a look back at the long, intertwined history of these two contentious neighbors shows how the current conflict was set in motion. The shared heritage of these two countries stretches back to ancient times, to a kingdom called Kyivan Rus. The center of this early Slavic state was the city of Kyiv (now Ukraine’s capital). In 988 AD, Vladimir I, the pagan prince of Novgorod (today in Russia) and the grand prince of Kyiv, became an Orthodox Christian after being baptized in Chersonesus, Crimea, setting in motion centuries of religious and cultural history in Ukraine and Russia.

This ongoing conflict reached the peak in late February 2022, when Russia mounted a full-scale invasion of Ukraine, destabilizing Europe and – not only geopolitically but also in global politics and economics. Before the conflict started, Russia was Europe’s third-largest oil producer, and a major supplier of natural gas to European markets – potential energy assets that continue to suffer amid the global business decline.

Following the war, Western countries led by the United States and the European Union imposed unanticipated sanctions on Russia. The sanctions target Russia’s biggest entrepreneurs, financial institutions, and energy exports. The United States recognized the danger Russia posed to world stability and strength as early as 2014 when Russia invaded Crimea, while the EU has only slowly become aware of the Kremlin’s ability to destroy authority. Since the 2014 invasion, the United States, working with the European Union and other like-minded countries, has been escalating financial measures to reduce the Kremlin’s profits from the energy sector. Financial instruments initially included sanctions and expanded to include more novel measures such as export controls and price ceilings. The sanctions were designed to undermine Russia’s ability to finance the war and specifically targeted the political, military, and economic elites responsible for the invasion.

As a result of the sanctions, natural gas output in Europe drastically decreased or stopped. An energy crisis in the EU immediately exploded. Russia’s natural gas export, used for heat generation, in industry and in the production of electricity, has now tumbled by more than 80 per cent this year. Wholesale electricity and natural gas prices have risen by 15-fold after the early 2021 figures. Houses and industries are suffering. The dire position of industry reliant on electricity and gas is more severe. Until the recent energy crisis, the primary reason for rising European natural gas prices was the sharp cut in the total supply of Russian natural gas. The sudden substantial reduction in the energy supply led to an energy crisis in Europe and the skyrocketing of energy prices. European governments are now forced to develop alternative energy sources. Some European countries such as Germany and France, notably dependent on Russian gas, can barely maintain their energy supplies, especially during the winter season. The energy crisis provoked countries having to develop renewable energy projects promptly, to import liquefied natural gas (LNG) from the United States and elsewhere, such as Qatar, and to reconsider energy security in Europe.

Despite sanctions, Russia has managed to maintain oil exports by redirecting them to Asian markets, particularly China and India. However, these exports were priced low and increased transportation costs, which reduced Russia’s overall profits. Simultaneously, Russian LNG exports to Europe have increased because LNG is not subject to the same level of sanctions as pipeline gas. This creates a paradox: Russia continues to profit from LNG sales while other energy sectors suffer significant losses due to sanctions. Sanctions on Russian energy exports have also severely affected the Russian budget. Due to Russia’s oil and gas state profits having drastically decreased, which led the government to impose higher taxes on energy companies to compensate for the lost revenue.The pressure on Russian finances is expected to rise as Western countries develop long-term solutions to Russian energy resources and reduce their reliance on Russian imports.

In sum, the Russia-Ukraine war dramatically changed the social landscape of eastern Europe and damaged the world’s commodities markets for food and energy. Russia’s energy market and position have been seriously hit by the West’s sanctions. However, they remain hard to fully utilize, especially Russian LNG products. In the course of Europe’s green transition and energy diversification, the lasting consequences of the fight for energy security are changing the global business landscape.

The Russo-Ukraine conflict, which had a major impact on inflation and big companies, caused several international trade and supply chain disruptions. The war has increased the country’s inflationary strain, in addition to rising power and food prices. In developed and developing nations, inflation is driven by rising oil and gas prices. According to a research article, oil price shocks have been the main driver of international CPI inflation over the past fifty years, which has contributed to a 38 % variation in inflation. Global demand shocks contribute about 28%, while global supply and interest rate shocks contribute less and almost equally. Over time, the importance of oil price and demand shocks increases while the impact of supply shocks decreases.Moreover, oil price shocks have been typically of major importance for global PPI inflation, while supply shocks have usually been of major importance for global core CPI inflation. Since the beginning of the Russo-Ukraine war, US inflation went up from 8.3 per cent in May 2022 to 9.1 per cent in June, its highest level in about four decades, while inflation for the Eurozone moved up to 10 per cent after hitting 8.1 per cent in May. The rise in energy prices have triggered relay inflationary effects upstream and downstream, especially in transportation due to higher fuel prices and in manufactures due to rising energy costs. Alongside, food prices soared as well, due to dislocations caused by the war in Ukraine, the largest grain exporter in the world which spread to the global food supply chains. Due to the increased international inflation pressure brought on by the crisis, economies have already been weakened. The Federal Reserve and European Central Bank among the world’s leading key banks attempted to significantly raise interest rates. To significantly raise interest rates are necessary to curb inflation, but will also risk sending many economies into recession. Countries that rely on oil and gas imports are particularly vulnerable because they are facing the double pressure of rising energy bills and rising debt costs.

The two major countries in the world agricultural markets are Ukraine and Russia. They provide almost 30 % of the world’s wheat and a high percentage of other grains around the world. Food security has been a debated topic for recent years. Ukraine, one of the main grain producing countries, has been a serious contributor to this issue. During the conflict, its exporting rate has dramatically declined. Due to grain exports falling, food security is a topic of concern for millions of people all over the world. The rice production in Ukraine decreased by 29% between 2022 and 2023. Before the battle, about 90 % of Ukraine’s agricultural exports were transported by sea ​​transport. After the war broke out, Russian forces temporarily blocked Ukraine’s Black Sea ports which caused exports to almost come to a standstill. Sanctions from the West are also preventing Russia from exporting grains and other crops that would help it deliver grain and fertilizers to global markets. The Food Security Information Network’s Global Report on Food Crises estimates that 258 million people fell into the highest levels of severe food insecurity in 2022 – the highest number in the existence of this report, this is part due to the conflict in and around Russia and Ukraine, as well as related issues in food, fertilizer and energy markets. Although previous agreements like the UN-brokered Black Sea Food Initiative have loosened restrictions on exporting products, these efforts have often been short-lived and disrupted. Uncertainty about future food supplies continues to pose a significant challenge to the global food supply chain, especially in poorer regions that cannot quickly recover from lost imports from Ukraine and Russia.

The Russia-Ukraine conflict has disrupted global supply chains and has slowed down international trade. The conflict has heavily affected supply chains for automotive manufacturing, technology and construction. The biggest impact has been the disruption to raw materials supply – both Russia and Ukraine are significant producers of critical commodities such as aluminum, palladium and steel – essential materials in the manufacturing and industrial process. While the military mobilization had already devastated supply chains for automotive manufacturing after COVID-19, this sector has been the hardest hit. The Russian Federation is the biggest producer of palladium, which is critical to car catalytic converters, and disruption of palladium supply chains from the conflict is driving up costs and slowing times for manufacturing. Increasing demand for both steel and aluminum (key materials for cars and constructions) is also pushing up prices and slowing times for production. In the technology industry, the ongoing impact of the Russia-Ukraine conflict has extended an existing semiconductor shortage. Neon – a byproduct from the production of semiconductors – gets produced primarily in Ukraine. The ongoing war has significantly decreased neon supply, which has worsened existing semiconductor bottlenecks in production, which in turn disrupted every aspect of life – from TVs to computers to medical equipment that uses semiconductors. The Ukraine-Russia conflict has also resulted in rising transport costs, as shipping costs, particularly sea and air-freight, have skyrocketed. Rerouting of trade away from war zones, insurance costs in case of conflict or civil unrest, as well as rising fuel prices, have driven up shipping costs. All this has added cost to moving goods around the world, adding more disruption to supply chains, as production times are extended and delays occur because of trade difficulties, which result in upward price pressures and increased costs for consumers, as well as longer lead times for businesses that depend on global supply chains. Global trade has been thrown into deep disarray by the Russia-Ukraine conflict. Higher energy prices, pressures from inflation, and the disruption to key agricultural and industrial supplies have all stemmed from the conflict, leaving the global economy teetering from the higher costs and great uncertainty that lies ahead. The impacts on automotive, technology, construction and global food security have laid bare how interconnected modern global supply chains are, and the ripple effect when geopolitical conflict takes place. As the war with Russia grinds on, global supply chains remain vulnerable to disruption and diversified energy and material supplies are essential to reduce future systemic crises.

That war and its global consequences have put Europe’s fossil-fuel dependence on Russia sharply into focus and lent a new urgency to EU efforts to speed the pace of fossil-fuel reduction. Investment in renewable energy across the continent grew explosively in 2022 as governments raced to substitute renewables for Russian fossil fuels. In Germany, alone, more than €50 billion in renewable energy projects were given the green light for investment in 2022. Offshore wind farms in the North Sea and solar farms in southern Europe were prioritized to speed up the energy supply with renewable energy while Europe was desperate for more energy due to Russian fossil fuels being switched off, all in anticipation of sharply rising energy needs as the weather cools and the growing season ends. These projects were designed to ease the implementation of the EU Green Deal which is the EU commitment to the EU being fossil-fuel neutral by 2050 and to encourage a more independent and resilient energy system. To speed up this transition, governments sweep away regulatory barriers Wrapped into the fast moving energy-transition narrative have been projects designed to streamline the permit approach to wind and solar energy projects (which are notoriously laborious processes, often lasting a decade). This rapid adjustment of regulatory approvals shows the determination of European governments to build a more robust and independent energy system.

Hydrogen will lead in Europe’s new generation of renewable energy. It is a clean and readily dispatchable energy vector with a plethora of applications, including heavy industry, transport, and residential heating. Storing excess renewable energy produced at times of high solar and wind resources, large-scale renewable hydrogen production would boost the storage of the EU’s electricity sector in the long term and provide large-scale energy to the continent’s distinct interconnected market for many decades. The characteristics of hydrogen storage are particularly beneficial for the grid because they promise to store the energy from periods of renewable overproduction for longer periods of time, enabling flexible solutions, and matching production with demand when there are periods of underproduction or overproduction. Renewable hydrogen helps boost energy efficiency across the EU. Demand for hydrogen is rising throughout Europe as countries compete to become leaders of the emerging hydrogen economy. Germany, the Netherlands and France have been at the vanguard of hydrogen’s rising profile. Their respective clean-energy agendas are rapidly reshaping the global hydrogen economy, and the world should look to them to capture the lion’s share of the world’s renewable hydrogen economy in the years to come. One of the key appeals of hydrogen is its potential to replace natural gas as a high-energy demand vector in industry. For instance, hydrogen can compete with natural gas in the steel sector, which is the largest energy consumer in the world. If the sector wants to be more environmentally friendly and abide by ongoing regulatory tightening, hydrogen represents a potential replacement of fossil. Similarly in transport, there are ongoing research efforts investigating this use of hydrogen as a low-carbon liquid fuel. Hydrogen-based fuels are of particular appeal in the context of long-haul trucking and buses because they require high-energy density fuels. And many others are trialing hydrogen-based heating systems where natural gas can be replaced with the fuel at home for the first time. It is not hard to see how the EU has become the emerging energy hub for hydrogen. Numerous pilot projects spread out across the continent have already come online in recent years, including the development of hydrogen pipelines and storage to build the backbone of an evolving large-scale hydrogen infrastructure. Key examples include the EU’s new ‘Hydrogen Strategy’, which seeks to deploy 40 GW of renewable hydrogen electrolysers by 2030.

Despite its strategic push into renewable energy, Europe faces major impediments in its bid to become a carbon-neutral continent by 2050. A document outlines the challenges of the European renewable energy transition. Even as ambition levels are growing, a major number of obstacles still persist: among them, the fact that policy continues to give numerous benefits to oil and gas at the expense of more sustainable technologies; that bureaucracy is still hampering improvements in the sector and that, for example, the administrative procedures needed to get a renewable energy plant up and running are still too extensive and time-consuming; that material and workforce availability is at times a constraint; or that our grid is not ready for the future. Others are related to the strategic supply chain of technologies such as solar panels and batteries; or to inefficient policies such as the energy taxation system, which is still not promoting the use of green technologies, or to the slow-implementation of better support for technologies like heat pumps or poorer participation of the citizens in the planning of renewable energy.

In fact, the biggest problem that renewables will bring is grid stability. You can generate as much energy from wind as you can from the Sun, but their energy is not stable, meaning you can’t produce a 20 Gigawatt (GW) or 100 GW output throughout the day or year, which ultimately means that you cannot have a stable and secure electricity stream from renewables unless you have a suitable energy storage solution.  However, we still need to develop completely new energy storage technology if we want to fill in the gap. Europe is already working on finding a solution that enables our continent to take advantage of advanced energy storage options such as grid-scale batteries and pumped hydro, which could facilitate us storing deficient energy from renewable energies and utilizing the storage capacity when we’d need it in times of a deficit. Such systems also need to be deployed at versatile, but rapid pace, if later we want to see that we have stored renewable energy when the sun has been shining or the wind is blowing and it can be utilized at the time when there is a demand and the wind and the Sun have gone silent. A common blindspot of the green transition is the crucial minerals that are being used in key technologies for the renewable energy transition, such as solar panels, wind turbines and batteries, which are fossil fuel-free energy sustainability solutions. These minerals are lithium, cobalt, manganese, nickel and rare earth elements: production comes from mining. A large percentage of the world’s lithium and cobalt supply is mined in South America, and more than a half of the world’s rare earth elements come from China. This geographic concentration leads to vulnerability in the supply chains. For instance, much of the world’s lithium and cobalt supply comes from unstable nations, like the Democratic Republic of the Congo, and Bolivian political uncertainty can lead to the closure of mines. Geopolitical risks can also push up the prices, which might ultimately change in a way that investors and companies producing vital technologies cannot bear, and in so might cause damage to the green transition. A third barrier for the European green transition is regulatory burdens. The European green transition is also being held back by regulatory barriers. Although many renewable energy projects are moving forward, we need to speed up the authorisation process.

The Russo-Ukrainian war accelerated the green energy transition by triggering unprecedented investment that took Europe’s wind, solar and hydrogen projects on a new scale. This is not enough. To be carbon-neutral and European self-reliant in energy, the green transformation must overcome the obstacles of grid balancing, supply chains and many other rules. As Europe puts up more obstacles to its green energy future, more innovation, more international cooperation and even more investment will make the European Green Deal a reality.

The loss of its energy markets in Europe has crippled the Russian economy. Gazprom, Russia’s largest natural gas company, has taken a huge financial hit for cutting off gas supplies to Europe in 2022 in hopes of creating political (and economic) problems for the EU. Instead, Europe found energy sources to replace Russia’s and Gazprom’s revenue took a hit, falling by 41 per cent by mid-2023. Sales profits were down 71 per cent, while gas production fell 25 per cent. Gazprom suffered a $7 billion net loss in 2023, its first loss in more than 20 years, because it was unable to redirect gas to other markets such as Asia. Russia’s oil sector did better than its gas sector, because Russia could ship oil to Asian markets, although at much lower prices and much higher transportation costs. Oil production declined slightly, and the industry’s output was around 80 percent of the pre-war level. But the EU oil embargo and problems shipping to Asia, such as longer routes and higher cost of insurance, significantly reduced profitability. Although discounts on Urals oil fell after the war, they rose again when sanctions were imposed, while transportation costs reduced the efficiency of Russian exports to Asian destinations. With revenues reduced, the prospects for longer-term Russian economic growth could be dampened as well. With the backbone of the Russian economy being energy exports to Europe, especially natural gas, Europe’s diversification of its energy supplies has meant that Russia, for the first time in decades, has had to redirect energy supplies to new markets. These markets are not as profitable and the logistical costs of shipping to Asia are much higher – the longer routes add to transportation costs while the higher insurance costs further erode Russian profits. Sanctions also make it much more difficult for Russia to maintain investment in infrastructure.

Unexpectedly, The war produced an important surge of European solidarity on defense and energy independence. Just as Finland and Sweden are trying to join, NATO’s eastward expansion constituted a major shift in Europe’s defense posture. The conflict has also encouraged the EU to speed up its push for energy independence and a green economy. Higher military spending by European countries signals a deeper commitment to collective defense, making the continent more united and resilient to future threats. This growing cohesion has strengthened the military alliance and pushed Europe to cooperate more in its energy policy. The EU has focused on investments in renewable energy and diversifying its energy imports, reducing its reliance on Russian gas. These efforts have fostered more EU member-state cooperation, making Europe a more autonomous and proactive actor in the world.

The war has rebuilt global energy markets. The United States instead of Russia became a major supplier of liquefied natural gas (LNG) to Europe. The Middle East is also emerging as a key energy hub, because of Gulf states boosting oil and gas exports. All of these changes are likely to endure for many years, with global energy flows shifting and traditional trade routes dramatically altered. The war has started one of the biggest changes in the world’s energy landscape since the Second World War. Europe’s energy dependence on Russian energy has ended, and the continent is seeking to increase LNG supplies from the US and the Middle East. All of this will continue postwar, probably with even more dramatic implications for global oil and gas prices. New trade routes and energy alliances are being created as the world’s energy patterns become more multipolar and competitive. The global demand for fossil fuels will likely decline as Europe invests in renewable energy infrastructure.

As a consequence, the Russia-Ukraine war not only changed global geopolitics, but also global energy economics. Russia’s economic influence is now in decline, however, Europe is stronger, and global energy markets have also changed. The effects of the war on international relations and global trade  will continue to stay and shape energy flows, defense policy and economic policy for decades to come.

In brief, the Russia-Ukraine war is challenging the foundations of the contemporary global economy. Thus far, the early shockwaves of the war have hit Europe the hardest as the global economy experiences a brutal energy crisis. Stoppages to energy supplies, inflation, a rollercoaster of fluctuations in the global trade, and the fragmentation of supply chains that have made industrial, financial, consumer and social life unstable all remind us that the world is intertwined and that regional crises can give way to global economic confusion. The coming years are likely to bring more twists and turns, and developments in unexpected directions, as the war now looks unlikely to end soon. Because of the conflict, Europe’s response has been to accelerate the development of renewable energy and to push for energy diversification. Hopefully, this will be a turning point in the continent’s economic turning point: there are many complexities to unravel beyond the current difficulties in establishing energy security. But Europe’s green transformation could reshape the global energy order.

By Hongyi Gao