The geopolitical tensions between Russia and Ukraine, and the possibility of them turning into an armed conflict, have a very concrete impact on the economy and society, both globally and nationally. What could they mean for Romania?

At the beginning of this year, the oil price was almost double the previous year. The causes of this upward trend are complex: among them, the most significant are the restrictive policies applied in the context of the pandemic, the increase in consumer appetite on the slope of the recovery of economies in the previous year, and geopolitical tensions. A materialization of the tension between Russia and Ukraine in an armed conflict could lead to an even greater increase in the price of a barrel of oil — a simulation by our colleagues at RSM US estimates that, in this case, the price could reach $110 per barrel (so +20%). Rising oil prices are an inflationary factor, and inflation is one of the biggest dangers to an economy.

What socio-economic impact could the conflict have in Romania?

If the United States economy is sufficiently developed to manage to reduce the negative impact of oil price increases on the Gross Domestic Product (from 0.3% to 0.15% for every $10 increment), we cannot say the same about the Romanian economy.

The negative impact of the increase in the price of oil could be felt both in the population and in the business environment because this increase is a factor generating inflation — and inflation is one of the biggest dangers to an economy.

For citizens, this impact would translate into a decrease in purchasing power, generated by massive increases in energy, transportation, food, etc. prices, correlated with the relatively lower pace of wage growth. The recent, uncontrolled, and chaotic liberalization of the energy market, which generated exponentially higher costs (in the case of Enel, the tariff per kWh increased in January 2022 compared to December 2021 by approximately 70%), contributed to a chain increase in prices. A further increase could be tragic for the population, especially for vulnerable communities living on the poverty line. The energy cost is in the price structure of all goods and services produced and traded in the national economy. An increase in it immediately causes price increases, which can easily get out of control.

The impact could also be significant for companies: decreases in turnover, loss of control over production costs, and decrease in profitability and investment capacity, simultaneously with an increase in the degree of indebtedness, with a direct impact on possible entries into bankruptcy procedures and collective redundancies.

The higher price of the barrel will add costs to the retail price of the products and services provided by the companies; these costs could be so high that the market no longer allows for their immediate recovery.

At the macro level, we can expect decreases in the economic growth rate, followed by a chain of negative effects, not only economic but also social: closures of commercial companies, layoffs, and increases in unemployment. And that could cause a new exodus of the adult population. Let's not forget that the massive migration of the Romanian labor force towards Central and Western Europe started precisely in such a context, in which unemployment was very high, and the rates of economic growth recorded by Romania had insignificant positive values or even recorded negative values.

It is clear that we are currently facing major challenges, but they are not insurmountable. Even if, at the global level, Romania has relatively few levers of influence, at the national level, it can rely on specialists who could identify solutions to be put into practice by the governors through the adoption and implementation of anti-inflationary commercial and fiscal policies, in close collaboration with the National Bank, which should adopt appropriate monetary policies and correlated with government approaches.