The Russian-Ukrainian War and Its Impact on Financial Conditions in the Arab World

(The Crisis and Recommendations)
A Working Paper Presented by the Union of Arab Contractors

At a time when the Russian-Ukrainian crisis has affected the global economic map and posed numerous challenges on various fronts, the Arab countries have been among the most affected. This is due to the nature of the commercial interconnections between the conflicting parties on one hand, and the Arab countries on the other — particularly in the area of importing food commodities such as wheat, corn, fertilizers, oils, and animal feed. Arab countries alone import 25% of the world’s wheat production. Most of these vital imports come from the two warring countries — Russia, the world’s largest wheat exporter, and Ukraine, the fourth-largest. Because Arab countries heavily depend on them to meet the needs of their populations for these goods, this situation increases the risk of food insecurity in the Arab world.

Since there is no immediate alternative available to meet these needs — and in light of the sharp rise in food prices due to supply chain disruptions linked to the COVID-19 pandemic — grain prices have soared dramatically. This has led to increased public spending, negatively impacting the national budgets of Arab states. Additionally, since Russia and Ukraine are important suppliers of metals such as iron, titanium, and palladium, the negative effects have also extended to supply chains related to these metals, including the automobile, smartphone, and aircraft industries.

The war has also had a negative impact on the tourism sector in Arab countries, which affected the overall economic situation. This is due to the anticipated decline in tourism revenues from Russian and Ukrainian tourists, who favor many Arab destinations — especially Egypt, Tunisia, Lebanon, and Morocco.

Moreover, the war has caused a spike in energy prices due to reduced supplies of gas and oil. As is well known, the prices of energy products are directly linked to the prices of other goods due to their influence on production, manufacturing, transport, and storage costs. This has triggered a new wave of inflation, adding to the inflationary wave triggered by the COVID-19 pandemic — significantly impacting financial conditions and markets in Arab countries.

The economic fallout from the Russian-Ukrainian war has also led to a decline in the Arab world’s GDP, along with rising inflation rates driven by increased production costs due to higher energy prices. As a result, the war has increased pressure on central banks in Arab countries, leading to inflation spikes, slower growth and employment rates, and difficulties for the business community.

Additionally, the high inflation rates in wealthy countries, particularly in the United States, prompted the U.S. Federal Reserve to raise interest rates to curb inflation. This led to the withdrawal of foreign capital and foreign investments in securities, bonds, and treasury bills from emerging markets and developing economies — including Arab markets — and redirected them primarily to the U.S. market, triggering major financial crises.

Recommendations

• There is a need to move toward greater economic cooperation, integration, and interdependence among Arab countries to reduce reliance on foreign sources.

• It is important for Arab countries to coordinate on financial, banking, and capital market issues — including traded stocks and securities.

• Unify Arab positions and perspectives in financial markets, and implement flexible exchange rate policies to address the pressures resulting from rising foreign currency prices.

• Activate the Arab Common Market.

• Rationalize import and consumption processes, encourage local products, and gradually move toward replacing imported goods with domestic alternatives.

• Increase spending on agricultural reclamation projects in the Arab world to expand the cultivated area, especially for food grains like wheat and corn, in order to achieve self-sufficiency and ensure food security.

• Provide various financial stimulus packages and all forms of support to improve the performance of the national private sector and the local investment environment, with flexible and streamlined procedures that help strengthen the structure of national Arab economies.

• Form a high-level Arab crisis unit and contact group to maintain constant communication and coordination, monitor the crisis, and conduct necessary consultations to safeguard Arab interests and mitigate the effects and repercussions of this global crisis.

• It is crucial to resolve the problems and obstacles facing foreign investors in Arab countries by all possible means to improve the investment climate in the Arab world.

• Develop incentive measures and a package of financial and tax facilities to attract new foreign investments that can help create more jobs and reduce pressure on local currencies.

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