The Economic Impact of Geopolitical Risk: Insights from the War in Ukraine

Introduction: Context and Scope

The conflict in Ukraine shows how much geopolitical risks can impact the global economy, not just the area where the war is happening. These risks include problems with international trade, investments, and production. Raul Sampognaro, an economist from the Observatoire français des conjonctures économiques (OFCE), studied how the war affected the economies of six important countries: France, Germany, Italy, Spain, the United Kingdom, and the United States. To deal with these geopolitical tensions in the future, countries will need to work together and plan carefully, especially when it comes to switching to sustainable energy sources. How the global economy adjusts to these changes will decide how both developed and emerging countries manage these issues. The geopolitical risk (GPR) indicator is useful here because it measures tensions by looking at their economic effects through press article analysis. It’s a unique way to study these kinds of risks.

Methodology: Geopolitical Risk Indicators and Adaptations

The Geopolitical Risk Indicator

The GPR indicator calculates geopolitical risk by scanning press articles for words and phrases related to geopolitical tensions. The number of articles with these keywords determines the level of risk. Country-specific indices help measure how geopolitical shocks affect each nation differently. In the past, the GPR indicator has captured big geopolitical events like the Gulf War, 9/11, the Iraq War, and, most recently, the Ukraine war.

Adapting the Indicator for the Ukraine War

Sampognaro used this method to study economic trends in the six countries. For example, in early 2022, France’s GPR index rose by almost four standard deviations, while Germany’s jumped by six due to its dependence on Russian energy. These risk levels were then compared to key economic data, such as GDP, investments, prices, interest rates, and stock market activity, like movements in France’s CAC 40 index.

Results: Quantifying Economic Impacts

Country-Specific Impacts

The war’s economic impact varied across the six countries:

• Germany’s GDP fell the most, by 1.1 percentage points, mainly because it relied heavily on Russian energy.
• The GDP of France fell by 0.4 points, whereas Italy and the United Kingdom along with the United States saw their GDP drop by 0.3 points each.
• As for Spain, its GDP fell short by a meager 0.2 points.
  

These are consistent with global patterns where trade volumes decreased by 0.7 points (excluding price and commodity effects), and industrial production decreased by 0.6 points— similar to what those advanced economies experienced.

The Energy Crisis and GDP

The energy crisis made things worse. Rising costs for oil, gas, and electricity slowed France’s GDP growth by 1.4 points in 2022. However, measures like subsidies and price caps helped soften the blow, recovering 0.8 points of that loss. This left a net GDP reduction of 0.6 points. Even so, France’s terms of trade—the balance between export and import prices—dropped sharply. It was the largest hit to national income and purchasing power since the oil crisis of the 1970s.

Structural Lessons and Long-Term Implications

Adapting to Energy Shocks

The countries showed resilience and found ways to adapt to energy shocks despite the money spent on subsidies intended to alleviate the crisis that could have been spent on environmental initiatives. One of the unfortunate effects was that it delayed some of the important investments in the green economy infrastructure, thereby creating another challenge for the future.

Ongoing Geopolitical Risks

While the immediate uncertainty of the Ukraine war might decrease over time as the conflict becomes more familiar, the economic effects will likely last. Indeed, there is some possibility for international trade to be partially reclaimed from disruptions, but some of these disruptions will remain permanent. Furthermore, new rising tensions between the U.S. and China can be another addition to the geopolitical risk that would conceivably affect global supply chains and of multinational companies.

Conclusion: Navigating a New Geopolitical and Economic Landscape

The war in Ukraine is a demonstration of the extent to which geopolitical risks affect the global economy beyond the immediate location of the warfare. Such risks affect trade, investment, and production on international scales. So, in-depth frameworks have to be established for measurement and management of such shocks, as Sampognaro's analysis reveals. In the future, mitigating geopolitical tensions and shifting energy sources to sustainable ones will require collective actions as well as long-term planning. The way the changing global economic systems adapt will determine how both developed and emerging economies will move forward in overcoming these challenges.