Social Impact of the War in Ukraine

Author

François Geerolf, Xavier Timbeau, Guillaume Allègre

Published

November 17, 2022

Abstract

Using data on HICP per COICOP and quintile, we calculate for EU member states the impact on income of households of price evolution since the invasion of Ukraine by Russia. Most of the loss in income is due to energy price increases. In some countries, food prices are also an important factor. Code and data used in the note are available at http://github.com/ofce/siwu. Updated with HICP release 17/11/2022, prices indexes for all products up to october 2022. Next update on 16/12/2022

1 Social Impact of War in Ukraine

The invasion of Ukraine by Russia on February 24, 2022 opens a new world that calls for great cohesion in Europe. The response operates over multiple dimensions, and we propose to analyse the economic and social consequences of the war in Ukraine. To that end, we shall focus on the evolution of Europeans’ purchasing power in the short run.

1.1 Main channels

The main channel that we identify, concerning the social impact of the war in Ukraine, is the rise in the prices of consumer goods or services linked to actual or anticipated interruptions in the delivery of certain products imported from Russia or Ukraine. These products are mainly crude oil, gas, certain cereals or oil seeds, nitrogen fertilizers and other products used in industry. There are generally substitutes (of origin or nature) for these products, but the rigidity of supply chains and/or production capacities have led to a rise in prices since (and before) the war started. The partial exclusion of Russia from the Western financial system and the prospect of an embargo extending to gas supplies amplifies the price movements. Evidently, an embargo would amplify it further, with large impacts on prices, and probably also volumes (via quotas).

These price hikes are cascaded down to end consumers in the European Union. The price of gasoline at the pump reacts quickly to changes in the price of oil. For other goods, the contracts (between the final consumer and his distributor, between the distributor and the supplier) are complex and can introduce inertia or an absence of transmission. Other prices can increase in cascade such as electricity through indexation or price formation as for the single market for gas or electricity. However, subsidies or price regulations can prevent the price hikes cascades.

Due to lack of data or clear estimation of mechanisms, we don’t take in account 3 important channels.

  • The first one is the response of government to compensate price increases when not directly acting on prices. Exceptional checks, increases in allowances or income are note accounted for. Data provision on this matter by Eurostat in a standardized format would be very useful.

  • We don’t take in account expected increase in future prices due to known indexation mechanisms. For instance, in some countries, rents are re-evaluated on an index which is calculated using prices of certain goods or services.

  • We don’t take in account increases in wages or other components of income that could increase in the future due to price increase. Some of those indexation are explicit in private contracts or mandatory through general law, depending on the country and the source of income. Some increases are going to occur due to non explicit market mechanism and negotiations between economic agents. Here also, there is a clear lack of standardized information about country and source of income heterogeneity. Years of low inflation may be a explanation for this poor documentation of essential short term mechanism, but the surge of prices increases points the urgent need for a comprehensive collection of this information, in order to forecast future evolution of purchasing power and redistributive effects caused by increases of prices, being a general increase in price or located on a few products.

1.2 Methodology

Our methodology is as follows:

  1. We first identify the prices that have experienced a significant increase between several dates, mainly between February and April, 2022, which can then be attributed to the invasion of Ukraine. We use Eurostat’s HICP at the finest possible level of disaggregation according to the COICOP nomenclature to distinguish price increases in (notably) energy, food, housing and transport (next update 17 June 2022),
  2. We then use Eurostat’s Household Budget Surveys (HBS 2015) to identify the structure of consumption by income quintile (using hbs_str_t223 database).
  3. We then estimate the impact of price hikes in euros and in % of income by income quintile for each of the member states of the Union and per product identified using HICP from Eurostat, from which seasonal patterns are removed1 (allowing for monthly analysis).
  4. We offer an analysis and visualization of the information. Updated and complementary data are accessible at https://ofce.shinyapps.io/siwu/.
  • 1 We use a loess smoothing algorithm giving results close to X11/X13 procedures from the Census Bureau.

  • 1.3 Context

    The most important tensions concerning price hikes in Europe today come from the gas market (see Figure 1). Gas is one the main source of energy in Europe (at the beginning of the crisis, it represented 21.5% of EU’s primary energy consumption ; 32.1% for households) and Russia is the main supplier. Furthermore, gas was relatively cheap: the average final household price for kWh is 6.5 cents against 21,6 cents per kWh from electricity. The EU imported 80% of its total gas needs, around half of it (43%) from Russia. Other suppliers included Norway (24%), Algeria (13%) and the US (7%). On March 8th, the Commission published a plan (REPowerEU) to reach compete independence from Russian fossil fuel “well before the end of the decade”. However, in the short term, supplier substitution is hard as most of these imports come through pipelines and infrastructures for Liquefied natural gas (LNG) is insufficient. As for now, Russia has cutoff gas supplies from Nord Stream 1 (which has been cut off probably indefinitely by suspected sabotage). The share of Russian gas in EU imports has dropped to 9% in September 2022.

    Also, the fear of an embargo has had a huge impact on gas prices in Europe this summer. Dutch TTF Gas Futures (February 2023) peaked at 342 euros in August 2022, against 30 euros at the same time in 2021. It decreased to 200 euros in mid-September (and is now trading at 145 euros on October 24) : stock capacities are being replenished and the autumn weather is mild. It is still a five-fold price increase.

    This affects directly wholesale electricity prices as gas is a major contributor to EU electricity production. Consumers across the European Union have different exposures to energy price increases, depending on nationality, income, mode of transport and domestic heating. Households represent a quarter (26%) of final energy consumption. National exposures of households to energy prices differ greatly. If we look at energy consumption in housing by households, at the EU level, space heating represents according to Eurostat (2019) 63% of consumption; and 32% of energy consumption is provided by gas.