When Putin’s tanks crossed the Ukrainian border on 24 February, the economic consequences reverberated across Europe. Even the Belgian economy, almost entirely independent from Russia, did not escape the consequences.
The Russian economy, despite being roughly equivalent to the combined Benelux area, is rich in natural resources. Russia is a leading exporter of timber, oil, gas, aluminium, diamonds, gemstones, gold, palladium, titanium, iron, steel, and uranium among other precious resources.
Before the war, resource rents accounted for around 10.7% of Russia’s total GDP, or roughly $157 billion, according to World Bank data.
Russia’s stranglehold on energy exports, suspected manipulation of prices last year, and threats to shut off much of Europe’s energy have sent gas and oil prices to all-time highs.
Many European producers have been forced to significantly reduce or stop production due to the sky-high price of oil, gas, and electricity.
International sanctions, as well as disruptions to logistical networks caused by warfare, have all but ended Russian natural resource deliveries to Europe, apart from fossil fuels, which Europe is still reluctant to entirely wean itself away from.
Over two months since the beginning of the war, supply-side issues are now being widely felt by most sectors of the Belgian economy. In March, National Bank of Belgium statistics demonstrated that nearly two-thirds of companies in manufacturing, wholesale, and construction were noticeably disrupted.
No industry spared
Many industries are now facing major shortages, rampant inflation, spiralling costs, and paralysed supply chains.
The Belgian construction sector, having lost one of its primary sources of wood imports, has witnessed material prices rise by 16% since the start of the year.
Other crucial materials such as steel, non-ferrous metals, PVC, and insulation materials are now facing major shortages. As a result, 62% of construction companies furloughed employees in March and April.
The sudden drop in Russian and Ukrainian wheat and vegetable oil exports has wounded the Belgian food production sector. Certain finished products can easily be replaced or substituted. But when shortages hit grains and oils, no easy substitutes can be found.
In April, around 40% of Belgian food producers announced plans to significantly reduce or halt their business. Bakers, foodstuff manufacturers, livestock producers, and brewers have struggled to keep afloat and are faced with grain shortages.
The Belgian Federal Government recently allowed the food sector a greater degree of flexibility in labelling products due to a severe shortage of grains and oils used in the production of much of our processed foods.
Energy shortages also now seem extremely likely. If future sanction packages succeed in coercing European states into a full abandonment of Russian energy imports, then the inflationary pressures are likely to continue to rise.
Due to sanctions and shortages, energy traders have warned of energy shortages facing Europe, which will affect not only consumers, but also power-hungry industries.
Rapidly escalating energy prices drove Belgian inflation to a record 8.31% in April. Around 10% of Belgian companies spend over 20% of their total costs on energy alone in recent months.
Domestic agriculture has received a beating due to sky-high fertiliser costs. Energy costs pushed fertilisers up by 80% last year, and now another 30% since the start of the year. The World Bank estimates that this trend is set to continue for the foreseeable future.
Supply shortages may soon be felt by ordinary workers too. Significant lay-offs have yet to materialise, however, the deteriorating situation could give way to increased redundancies in the near future.
Belgium’s unique automatic wage indexation, which is intended to protect employees from rapidly rising inflation, has largely hurt businesses. The National Bank has revealed that around 31% of small businesses and 49% of large businesses view higher wages as an obstacle to production.
Where does this all lead to? Economists will be carefully watching the situation on the ground in Ukraine. Any further escalation, any abrupt disruption of energy supply, or other supply-side shocks will undoubtedly hit the markets hard.
What is clear, the longer the war in Ukraine drags on, the more drastically the Belgian economy will suffer. The first, most probable visible consequence of shortages, will be the rationing of certain critical goods.
Limited rationing has already reached several major supermarket chains in Belgium.
At the end of March, Colruyt, Lidl, Aldi, and Carrefour began rationing supplies of vegetable oils and flour. Colruyt suggested that the move was due to abnormal demand, rather than a shortage, however, this type of rationing could quickly become the norm.
In an interview with the Flemish newspaper De Morgan, KU Leuven economist and lecturer Hylke Vandenbussche warned that all the signs suggested that the “European economy could end up in a war mode.”
Still time to prepare
Vandenbussche stated that he could not rule out the possibility of the rationing of goods across the Belgian economy.
“I do not exclude this, because raw material shortages are at the basis of the current problems in many sectors…if all the companies in that sector are unable to deliver, you have a problem. The essential input of many industries is now under pressure,” Vandenbussche said.
The economist says that the time for action is now. Industry federations should work to create “buffer stocks” of critical goods which are essential for the safe running of Belgian supply chains.
In the event that the war further impacts the markets, buffer stocks will help protect shelves from panic buying and will facilitate rationing.
The economist also suggests that the Belgian economy should consider a short-term restriction on the export of raw materials which are currently in shortage.
Wood, which is currently in short supply in the construction industry, for example, would be removed from overseas sale and used in the internal market.
If Belgium wants to be prepared for the storm to come, radical preparations need to be made to cover the flanks of the national economy. Likewise, on the European level, the economy is far from prepared for the worst.
“We are very vulnerable as the EU. Our house is still a long way from being in order,” Vandenbussche said.