Impact of Ukraine-Russia War on UK Economy: Circular Flow Model

This report analyzes the impact of Ukraine-Russia war on UK economy considering the circular flow model. It discusses short-term and long-term effects, suggestions for UK government, and recommendations for the Central Bank of UK.

Contemporary Business
Environment

Contents
INTRODUCTION...........................................................................................................................1
MAIN BODY ..................................................................................................................................1
Question-1 Explain the short-term and long-term impact of present condition prevailing in
Ukraine and Russia on UK economy considering circular flow model.......................................1
Question-2 Briefly discuss some of the suggestion that UK government implement to manage
the negative effects of the ongoing war between Russia and Ukraine.......................................2
Question-3 State some of the recommendation that can be provided to the Central Bank of
United Kingdom to control the prevailing situation in the economy...........................................4
CONCLUSION................................................................................................................................5
REFERENCES................................................................................................................................6
Books and Journals:.....................................................................................................................6

INTRODUCTION
The representation of Circular Flow depicts how cash flows in an economy. Funds flow
from manufactures to labours and move back to the manufactures in form of payment for their
goods. It divides the financial system in two chief participants namely businesses and family
circle (Reisman, 2018). This report highlight the impact and influence of Ukraine- Russia war on
UK economy considering the circular flow of income. The report demonstrate passing and
abiding impact of Russian aggression on the financial structure of UK. It also states the
economic suggestion that may be given to the higher authority and central bank of UK to solve
and control situation prevailing in the economy.
MAIN BODY
Question-1 Explain the short-term and long-term impact of present condition prevailing in
Ukraine and Russia on UK economy considering circular flow model.
To understand how cash and fund flows in an economy, it is necessary to briefly study
the circular flow of income. The influence of Ukraine- Russia will affect the inflation rate and
negatively affect the UK economy. The increase in the inflation will eventually influence the
consumption and expenditure pattern of the consumers. (Chortane and Pandey, 2022) Impact of
the prevailing war between Russia and Ukraine is briefly discussed below.
 UK Russia trade- As a result of the prevailing condition the trade relation between
Russia and UK is negatively affected. Russia accounts for 0.7% and 1.5% for the export
and import of commodities respectively. The UK is the biggest exporter of vehicles and
other equipment or appliances. Their trade relation is probably to disrupt due to the
disputing situation going on between two powerful nation. The firms will face logistics
issues in importing and exporting of goods within the countries. Shipping giants such as
Maersk and MSC has already impose suspension on all the bookings related to cargo
from the country, and it has covered all the entry points from Baltic and Black Sea ports
and in East Russia. However, there are some exemption which has been provided for
essential products such as medical equipment and staple food. International business is
already withdrawing their services from Russia due to reputation concern. It can be
assumed that the Russia invasion will further decrease the global GDP level by 0.5% in
2022 and 2023.
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 Global Gas Price- Russia serves as the major exporter natural resources, the estimated
production of natural gas is 17% and oil is 12%. The ongoing conflict between Ukraine
and Russia results in higher prices of natural gas globally. The increase in oil prices
eventually increase the price of diesel and fuel, and this will lead in further enhancement
is the cost of raw material use to create other products. Therefore, any disturbance with
the supply chain of natural resources will affect the price in UK massively as a result of
direct trade links (Abbasi, 2022). An increase in the price will not only influence the UK
economy but it will have a long lasting impact of the European region and the whole
world and this will adversely affect the GDP of the world.
 Shortage of staple food- Ukraine and Russia both are the major producer of agriculture
goods. Together they account for 80% of sunflower oil trade. Due to their conflicting
situation the price of staple food is likely to increase globally, raising cost of wheat and
meat. In order to conquer this particular situation UK government must try to increase the
production of staple food.
Question-2 Briefly discuss some of the suggestion that UK government implement to manage the
negative effects of the ongoing war between Russia and Ukraine.
The Ukraine war has adversely affected the inflation and this is likely to create massive
pressure on UK financial stability. (Mao, et.al, 2018). Briefly studying the circular flow and its
current impact and influence on economy can assist the administration and the Bank of England
adjust fiscal and monetary policy to improve their economy. The economic suggestion that
government of United Kingdom may implement are stated below-
 Increase in countries gas production- In order to overcome from the increasing price
of the natural gas the government of United Kingdom must work on increasing domestic
gas production. The British management is constantly seeking to increase its in house
production and reduce dependence of imports from Russia. (Ponomarenko, et.al, 2018)
UK has crushed all the trade relation with Russia, and it didn't imported any commodity
like coal, oil and gas form Russia in June (Gaio, et.al, 2022). The authority of UK has
boosted their supply of natural gas by 26% this financial year to meet the needs of its
people. By drilling the North Sea the officials of UK is planning to increase their energy
supply by 3.5 billion cubic meter. The UK natural gas is likely to trade at 347.35
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GBp/Thm by the end of this quarter. Along with UK Europe is also hunting to find a
suitable alternative to energy supplies to satisfy the demands of its people.
 A cut or suspension of import duties on crude oil- The higher administration of UK
must suspend import duties imposed on crude oil, refined palm oil and soybean oil to
provide a respite to the customers amid the conflicting situation which has lead to
increase in the price of gas and oil globally. The administration must work with other
division and implement valuable strategies to find an alternative source to fulfil demands
for oil and gas. The government is closely coordinating with United States and European
Union to reduce their dependence on Russia to import oil in response to Russian
aggression in Ukraine and ensure alternative supplies of fuel products. This will impose
significant pressure on Russian economy and affect their power to impose further distress
on the people of Ukraine. The market has already boycott the Russian oil which has
affect their economy as 70% of the Russian oil is suffering to search for a consumer. Due
to the sharp depreciation of the currency, Russian business and households will find it
much more expensive to import goods which will eventually cause a decline in the
universal demand.
 Reduction of national insurance- National insurance is the UK second largest tax, they
are paid by employees and self employees on their earnings. The National Insurance is
imposed on individual aged 16 or above. The UK government is planning to postpone the
projected increase in corporation tax of 25% and reduce tax for enterprises in specifies
zone. National insurance is not imposed on other income, such as rental income from
property, income from savings and investments, private pensions, state pensions and
other social security benefits. This will reduce the pressure among people and will
improve the lifestyle of the individual and eventually enhance overall economy of United
Kingdom.
 Increment of universal credit- Universal credit is designed to support people who are
working on low income. The UK government must formulate this to help people who are
applicable for this scheme. This will diminish the pressure caused by conflicting situation
between Russia and Ukraine in the UK economy. A total of 114000 Universal credit
recipients will receive assistance in increasing their salary.
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 Introduce small business support scheme- The UK government must support small and
medium size business that will play an important role in improving whole UK economy.
Through a variety of assistance programmes and tactics the UK government must work to
encourage small and medium sized business. This will enhance the lifestyle of people and
improve the overall economy which has been affected by Russian illegal invasion in
Ukraine. This will also solve the problem of unemployment as many business have
collapsed due to Russia- Ukraine situation and pandemic.
In addition to placing further sanctions on Russia and Belarus, the UK administration is
helping Ukraine in numerous ways by providing assistance to improve its financial condition,
and giving support through defensive military. The suggestion and recommendation such as
Increase interest rate, Reduction in natural insurance, Increase in universal credit, Sustenance of
government bonds, Increase in the reserve ration of other British banks and Increase in service
charges of commercial banks to mitigate the negative effect caused by Russian aggression on
Ukraine which has effected United kingdom economy.
Question-3 State some of the recommendation that can be provided to the Central Bank of
United Kingdom to control the prevailing situation in the economy
Some of the economic recommendation that can be implemented by central bank of UK are as
follows-
 Increase interest rate- The Bank of England increased its interest rate as in the fight
against a global wave of inflation brought by conflicting environment between Russia
and Ukraine. This will limit and prevent inflation in the economy, the increase restrict
consumers from making larger purchases and make borrowing more expensive. (Alvi,
2022). The Bank of England is set to raise its key interest rate by 50 bases point to
control inflation. The interest rate highlighted by Bank of England will dominate the
interest imposed on bank loans, credit cards and car lending.
 Increase reserve ratio of banks- The central bank must increase the reserve ratio that
has to be kept with other British commercial banks to control inflation caused by Ukraine
war. Reserve ratio is defined as a portion of deposit that commercial bank must retain in
cash in accordance with monetary policy derivatives. (Abbassi, Kumari and Pandey,
2022). All British banks have committed to sustain a minimum reserve ratio rate of 12 %
and other finance institution of at least 10%. Some of the other financial institution who
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does not come under the subject of reserve ratio have voluntarily agreed to keep 50% of
their borrowed capital in specified category of central administration fund.
 Increase the service charges to Banks- The Bank of England must formulate a strategy
and increase the service charges on other commercial banks in order to overcome form
the effects of Russia- Ukraine war. According to this the commercial banks will have to
compensate higher amount as compared to the previous rate. (Yarovaya and Mirza, 2022)
This strategy will elevate the growth of small-scale and medium size banks in the
boundaries of nation and in the due course it will benefit the consumer.
 Sustenance of government bonds- A government bond can be defined as a liability
where an individual grant money to the central authority with an agreed rate of interest.
The administration can use these fund to improve the infrastructure of the country or they
can spend funds on new plans and projects. The investors can earn a set income by
granting loan to higher authorities. The Bank of England is likely to cut the pace of bond
purchases as the British economy seems to be recovering from conflicting situation and
the pandemic. This will help in controlling rising inflation in UK economy.
CONCLUSION
The above report analyses the effect of Russia's illegal invasion and aggression in
Ukraine on the United Kingdom economy while taking circular flow of income into account. The
circular model portrays the continuous transfer of money from suppliers to consumers and the
amount is transferred back to suppliers is terms of the price for their products (Wise, 2022).
Trade relation between Russia and UK has been adversely affected due to this conflicting
condition. The report also highlights some of the suggestions and recommendation that must be
implemented by UK government and central bank or Bank of England to control the present
situation.
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REFERENCES
Books and Journals:
Chortane, S.G. and Pandey, D.K., 2022. Does the Russia-Ukraine war lead to currency
asymmetries? A US dollar tale. The Journal of Economic Asymmetries, 26, p.e00265.
Abbasi, K., 2022. Russia’s war: Why The BMJ opposes an academic boycott.
Reisman, D., 2018. Circular Flow and Social Class. In Thomas Robert Malthus (pp. 185-208).
Palgrave Macmillan, Cham.
Mao, J., Li, C., Pei, Y. and Xu, L., 2018. Value Flow of a Circular Economy. In Circular
Economy and Sustainable Development Enterprises (pp. 127-149). Springer, Singapore.
Ponomarenko, T., Khudolei, V., Prokopenko, O. and Klisinski, J., 2018. Competitiveness of the
information economy industry in Ukraine. Problems and Perspectives in
Management, 16(1), p.85.
Gaio, L.E., Stefanelli, N.O., Júnior, T.P., Bonacim, C.A.G. and Gatsios, R.C., 2022. The impact
of the Russia-Ukraine Conflict on Market Efficiency: Evidence for the developed stock
market. Finance Research Letters, p.103302.
Wise, J., 2022. Ukraine conflict: Global research community reviews links with Russia.
Abbassi, W., Kumari, V. and Pandey, D.K., 2022. What makes firms vulnerable to the Russia–
Ukraine crisis?. The Journal of Risk Finance, (ahead-of-print).
Alvi, Z.M., 2022. Russia-Ukraine Conflict: Sanctions and Effects on the World. International
Journal of Social Science and Economic Research (IJSSER), ISSN, pp.2455-8834.
Yarovaya, L. and Mirza, N., 2022. The price reaction and investment exposure of equity funds:
evidence from the Russia–Ukraine military conflict. The Journal of Risk Finance, (ahead-
of-print).
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