A View From Me on ’23 – Ukraine impact will continue to be felt across the year

Anna Walker, Director, at Control Risks examines the year ahead and the outlook for the ongoing war in Ukraine and its wider impact.

The conflict in Ukraine, and its repercussions, will continue to influence the global risk landscape in 2023. Fighting between Ukrainian and Russian forces will persist well into 2023, particularly in Ukraine’s southern and eastern regions. Russia is likely to come under sustained pressure in the south, in particular, and to have largely withdrawn its forces to the Donetsk and Luhansk regions by mid-year – essentially retreating to the territory that it held prior to 24 February 2022. But no ceasefire is likely, and the frontlines will remain heavily contested.

Moreover, Russia will accompany this pullback of troops with continued rocket and drone attacks on Ukraine’s critical national infrastructure, particularly energy facilities, with the aim of weakening morale and thereby reducing public support for President Volodymyr Zelenskiy. It is unlikely to be successful in either of these goals. Support among the Ukrainian population for Zelenskiy and his position towards the conflict remains high, and even the onset of winter – with all that entails by way of freezing conditions and reduced access to electricity, water and heating – is unlikely to reduce his popularity.

This outlook assumes that Ukraine will continue to receive military equipment and financial backing from its Western allies, which is highly likely, at least for the first half of 2023. To date, the West remains generally united in its support for Ukraine – a stance that Ukraine’s successful counteroffensive on the battlefield has helped to sustain. But as the conflict enters its second year and economic constraints in Ukraine’s allies mount, politicians are likely to start to face questions from their constituents over their priorities, namely whether constrained budget resources should instead be dedicated to addressing the cost-of-living pressures that many countries are experiencing. What seems certain is that the sanctions regime on Russia will persist throughout 2023; even were a ceasefire to be called or a peace settlement reached, a rolling-back of the sanctions in a meaningful way that permits business to be resumed in Russia is highly unlikely for the foreseeable future.

Beyond Ukraine itself, the impact of the conflict – and specifically the loss of Russian oil and gas imports – on Europe’s energy security will remain a leading area of concern for businesses in the region in 2023. In the run-up to the 2022/23 winter, European governments, industries and households took action to reduce the risk of energy supply shortages causing power outages through a combination of supply and demand responses. EU governments ensured that gas storage across the bloc was close to capacity; both businesses and households reduced consumption, responding partly to high prices and partly as a pre-emptive measure. A warmer-than-usual November helped to conserve gas storage levels, in particular.

But a cold snap in mid-December in northern Europe has reinforced expectations that the 2023/24 winter is likely to be much more challenging. This is because gas storage levels are likely to be lower going into the winter, given the sharp year-on-year drop in Russian gas exports to Europe. Europe will also find it more difficult to secure supplies of liquefied natural gas (LNG), from both a volume and price perspective, partly on account of increased demand for LNG in China and other consumers. Europe is also reluctant to sign up to the long-term contracts that LNG suppliers are now requesting, partly because these contradict the region’s energy transition goals. With renewables and other energy sources capable of meeting only part of the shortfall in the next few years, the risk of power outages – both planned and unscheduled – will increase.

Food security concerns will also persist in 2023. The extension of the Black Sea Grain Initiative until early 2023 is a welcome development, but Ukraine’s harvest is likely to be much lower than in previous years, given the impact of the conflict on its agriculture sector. Moreover, high fuel and fertiliser costs, compounded by extreme weather events, will combine to sustain high food prices in 2023, heightening the risk of social unrest – particularly where these coincide with the lingering impact on economies of the COVID-19 pandemic, escalating external debt and depreciating domestic currencies.