What war in Ukraine could mean for you on the home front
In Britain, almost 2,000 miles away from the action in Ukraine, it’s easy to feel complacent about how war could affect our lives. Indeed, we are very unlikely to be drawn into a “hot” military conflict. But experts say that war between Russia and Ukraine will change everyday life in the UK in ways most people have not yet fully understood.
From mortgage-rate rises to bigger grocery bills, and cyber attacks to a new age of nuclear anxiety, here's how Putin’s invasion could echo around the streets of Britain.
Will my gas and electricity bills rise?
As one of the world’s largest oil and gas producers – it supplies about 40pc of Europe’s gas and is the world’s third largest producer of oil – Russia has a huge influence on markets, which ultimately hits people in Britain via our energy bills and at the pumps.
We are already facing record increases in energy bills in April, when the near-£700 rise in the energy price cap comes into effect, and record fuel prices as a result of global oil and gas supply constraints.
Household energy bills could increase yet again in October if wholesale prices remain high, which is a major risk of any further conflict in Ukraine. Energy regulator Ofgem is already considering reviewing the cap more frequently.
Britain’s direct exposure to the conflict is small as gas imports primarily come from Norway. The UK only gets around 3pc of its natural gas from Russia.
But Sarah Coles, of stockbrokers Hargreaves Lansdown, said prices would be forced upwards for British providers, despite little of their supply coming from Russia.
“While this means less threat of shortages, it’s not going to protect the UK from sky-high prices on the international markets,” she said.
Countries that normally rely on Russian gas – such as Germany, which has just frozen the approval of the $11bn Nord Stream II pipeline that was due to double the volume of Russian gas imported – will be turning to international markets for liquefied natural gas, said Ms Coles. “This will push prices up dramatically.”
Noble Francis, of the Construction Products Association, said: “We are likely to see significant double-digit gas price rises as markets react quickly before understanding the medium term impacts.”
European gas prices jumped as much as 41pc to €125 a megawatt-hour in the wake of Russia's attack on Ukraine, while the UK equivalent surged by a third.
About 85pc of UK households have gas central heating and about a third of our electricity is produced by burning gas. “This means electricity prices will rise too,” said Ms Coles.
Analysts have warned of wholesale gas prices as high as £10 per therm in Britain if Russian supplies to Europe were to be completely cut off. That is roughly 20 times higher than long-term averages and five times higher than the current high prices – and is likely to trigger energy rationing.
What does the invasion mean for food and petrol prices?
Households are already feeling the squeeze from 30-year-high inflation, tax rises and rising mortgage costs, but Putin could worsen Britain’s cost-of-living crisis even further. The ripple effects from a Russian invasion of Ukraine, dubbed “the breadbasket of Europe”, would reach shopping baskets in the UK, threatening to cause higher and more prolonged inflation.
The Bloomberg Commodity Spot Index, which tracks commodity prices, has hit another record high.
“There’ll still be significant momentum behind inflation for some time to come,” said Deutsche Bank. The Centre for Economics and Business Research, a consultancy, said that inflation in major Western economies could hit close to 10pc.
This is aligned with Capital Economics’ forecast that rising European natural gas prices will add two percentage points to headline inflation. The firm had expected British inflation to hit 8pc, so this would bring the peak up to 10pc. A rise to 10pc would be 2.75 percentage points above the Bank of England’s current forecast peak, and would be five times its 2pc target.
Wheat and corn prices have both surged as global agriculture markets prepare for a supply shock that will fuel a worldwide crisis in food prices.
Ukraine’s military suspended its ports on Thursday as Russia forces launched an invasion by land and sea. Russian forces have restricted the movement of commercial vessels in the Azov sea, effectively suspending Ukrainian maritime trade.
In Paris, milled wheat prices rose 16pc to hit a record high of €322 a ton, while Chicago-traded corn futures passed 718 cents per bushel, the highest since last summer.
The jumps triggered market circuit-breakers that cap the amount a product’s price can increase in a single session, suggest further punishing increases are yet to come.
Russia and Ukraine are huge producers of products including grains and vegetable oil. Collectively, they globally supply 29pc of wheat, 19pc of corn and 80pc of sunflower oil. Although they primarily supply Asian and North African markets, the conflict will choke global supply as buyers scramble to secure imports from elsewhere and drive up prices for a range of products, from bread to biofuels.
Michael Magdovitz, a commodities strategist at Rabobank, said the impact could be “catastrophic” if ports are still closed when harvests begin in the spring and summer.
“Grain markets are not incredibly resilient at the moment because stockpiles are quite low for grains already,” he said. “There's a lot of questions about whether or not we can get a substantial resupply. With Ukraine and Russia out of the market, it's impossible to.”
Russia is also the world’s second-largest exporter of oil. The price of Brent crude has hit $105 per barrel, surpassing $100 for the first time since 2014. Capital Economics consultants forecast that in a worst case scenario, oil prices could rise to between $120 and $140 per barrel.
“This is going to feed fairly quickly through to even higher fuel prices on forecourts,” says Coles.
Petrol prices last week hit a record high of £1.49. Now, the price will edge past £1.50, she says. “Diesel has already breached this milestone, and is on its way even higher.”
Cyber warfare attacks
Western powers are unlikely to deploy hard military power. Instead, Britain and the US are more likely turn to their world-leading cyber-capabilities in GCHQ and the National Security Agency in a bid to get the Kremlin to back down.
This could, it is feared, start a catastrophic cyber war between Russia and the West. The modern world is dependent on software, much of which is insecure and vulnerable to infiltration. Critical infrastructure could be targeted in an escalating tit-for-tat, transforming our day-to-day lives.
At the mildest level of cyber war, Russian hackers would target important Western websites. We saw a preview of this strategy in 2007, when hackers shut down websites for major Estonian banks, newspapers and government departments, shortly after Estonia removed a statue of a Soviet soldier from its capital. NATO sent in cyber experts to end the attack.
Hackers could also target internal military IT systems, as in 2019 when the US disabled Iranian computer systems controlling rocket and missile launchers. GPS navigation on military vehicles could be redirected.
In the worst-case scenario, Russian hackers would target national infrastructure – essentially, a much larger version of the 2014 global WannaCry cyber hack, which left some GPs in the UK unable to access patient data. Banks, transport networks and power stations would be among potential targets. Cash point machines would fail, leaving consumers unable to access money. Passenger trains might even be derailed, some fear.
After Russia hit Ukraine with a series of cyber attacks in the run-up to invasion, signs have already emerged that those efforts have spilled over into other countries.
Cyber security company Symantec has said infections have spread into Latvia and Lithuania, both members of NATO and the EU.
Lukasz Olejnik, a cybersecurity researcher and former cyberwarfare adviser to the Red Cross, said the cyber risk to organisations and companies outside Ukraine was “extremely high”, and that Russia might launch attacks on the West to divert attention
“Another risk is retaliatory cyber attacks or simply giving the West ‘something to do locally’, so they are not ‘too bored’,” he said.
In a 2012 editorial in the Wall Street Journal, US president Barack Obama painted a bleak picture. “In a future conflict, an adversary unable to match our military supremacy on the battlefield might seek to exploit our computer vulnerabilities here at home,” Obama wrote.
“Taking down vital banking systems could trigger a financial crisis. The lack of clean water or functioning hospitals could spark a public health emergency. And as we’ve seen in past blackouts, the loss of electricity can bring businesses, cities and entire regions to a standstill.”
Spread of misinformation
Russia has been a master of propaganda for decades, but the battle for cyberspace has seen it move beyond state control of its newspapers and television channels towards much less transparent means.
In “troll farms” based in major Russian cities, government-backed keyboard warriors have infiltrated or set up social media groups and news websites, aiming to sow distrust in Western politicians or divert attention away from troops inside Ukraine’s border.
Much of the misinformation is directed at Russian citizens, attempting to shore up domestic support for war, or in Ukraine. But the Kremlin is also fighting a global information battle, particularly to citizens in emerging economies – meaning doctored images and old videos presented as recent footage could well crop up on a news feed near you, relying on users willing to share something that is just too good to check. Favourite themes include accusing Ukrainians of being neo-Nazis, or committing genocide against ethnic Russians.
Part of the military invasion of Ukraine is likely to include an effort to suppress reports on the ground, allowing Russia to control the narrative.
Twitter said on Wednesday it had mistakenly removed accounts posting about Russian military movements, although the company denied it was the result of a bot campaign to flood its moderation team with reports.
On Thursday the company provided advice to users on how to delete accounts or make them private if they feared reprisals.
When using Twitter in conflict zones or other high-risk areas, it’s important to be aware of how to control your account and digital information.
Every situation is different, so here are some things to consider:— Twitter Safety (@TwitterSafety) February 24, 2022
Sparking confusion or apathy is often just as effective as changing minds. That is why online propaganda can be so effective – and difficult to spot. Its goal is simply to get enough people to take their eye off the ball.
Volatility for your investments
Oil prices have already been pushed to a seven-year high of $97 a barrel, as investors fear that Russia will tighten its supply on the commodity. Experts have predicted it could rise beyond $100, which though bad for consumers could be good for the British stock market given energy giants like BP and Shell make up a big part of the FTSE 100 index.
Jason Hollands, of the broker Bestinvest, says rising energy prices would ramp up inflationary pressures and likely lead to continued interest rate rises.
“Banks are beneficiaries from this, so I would encourage investors to think more broadly about the effect of inflation and rising rates rather than focus on energy prices rises alone,” he says. Hollands highlights the Artemis UK Select and Jupiter UK Special Situations funds, both of which are invested in some of Britain’s largest banks and have delivered returns of 15 per cent and 21 per cent respectively in the past year.
Meanwhile, on the continent, the crisis has cast a shadow over Europe’s largest companies. The Stoxx Europe 600, which tracks the performance of the largest businesses in the region, has already slipped four per cent this month.
This will come as a blow to investors who have recently bought European shares as a hedge against inflation. The region is typically good at taking inflation in its stride, thanks to luxury brands like Moët Hennessy Louis Vuitton and Kering (who own Balenciaga and Gucci among others) that can pass on rising costs to their customers.
The price of gold – usually considered a safe haven in the stock market – could see a jump in the coming weeks. In the past year or so it has remained relatively flat, which was unusual when inflation was so high. It’s now up more than five per cent this month, partly because of the Ukraine crisis, but also due to concerns that American stocks are slowing down. As the market grows more anxious of geopolitical volatility, the yellow metal’s price could tick further upwards.
Farewell to McMafia money
From Premier League football clubs to Scottish shooting estates, Britain has long been a playground for Russian billionaires with money to burn. So what would happen if they were subject to sanctions? Would the Annabel’s dancefloor clear out, Mayfair’s supercar dealers see a crash in sales and Britain’s top private schools face a fall in admissions?
One sector that could certainly feel the ripple effects from the crisis is the luxury property market. Since the threat of invasion began to build, some say interest from Russian buyers in high-end British property (generally concentrated in certain pockets of London) has stalled. Mark Pollack, co-founding director of Aston Chase, says people appear to be “sitting on their hands and doing nothing, waiting to see how this plays out”.
The scrapping of the “golden visa” scheme (dropped by Home Secretary Priti Patel this week as part of a “crackdown on illicit finance and fraud”) could also have an impact. The scheme offered fast-track residency to anyone wealthy enough to invest £2 million or more here. Since it began in 2008, the Home Office has issued 2,581 investor visas to Russian citizens. Peter Wetherell, chairman of Mayfair property company Wetherell, says the effects of ditching the scheme are still “unfolding at the moment”.
Mortgage rate rises
The Bank of England has already put interest rates up twice in three months in a bid to rein in these building inflationary pressures, but economists warn Threadneedle Street’s rate-setters could need to go faster and further on hiking borrowing costs if Russia launched an invasion.
City forecasters at Capital Economics believe it would keep “inflation higher for longer” through climbing fuel costs and likely mean faster rate rises at the Bank of England. That would instantly pile on pressure, particularly on Britain’s 2.2 million homeowners with variable rate mortgages that are tied to the Bank of England’s policy.
Financial markets are already pricing in five more Bank of England hikes this year, taking interest rates from 0.5 per cent currently to 1.75 per cent and levels last seen in 2008.
The average mortgage rate on new lending would double to an eight-year high of 3.2 per cent if the Bank’s base rate went to 2 per cent by the end of 2023, according to Capital Economics. Economists already expect the red-hot housing market to cool this year but price growth could slow more quickly if rate rises pick up even faster than anticipated.
Slower post-pandemic recovery
Our economy’s lightning-quick post-pandemic recovery could also be dampened if business, household and stock market confidence is knocked by a deepening Ukraine crisis, though economists are playing down the impact of any stock markets and confidence struggles.
James Smith, ING economist, explains: “If there’s a big hit to financial markets, then maybe there’s a bit of feed through to investment intentions and that sort of thing but I'd say it's quite an indirect route.”
Philip Shaw, chief economist at Investec, says any stock market slide would depend on the “intensity of any conflicts”, pointing out that the Crimea annexation in 2014 had little impact.
Another migration crisis
Millions of Ukrainians could be displaced, forced to flee to safer territory – a smaller version of the refugee crisis sparked by the Syrian civil war in 2011. Few refugees will travel as far as Britain; instead they are likely to aim for Poland, Hungary, Romania, and Slovakia (collectively, those EU countries have 31 border crossings with Ukraine).
Warsaw is readying itself for a massive influx. “We have to be prepared for the worst-case scenario and [we have] been taking steps so as to be prepared for a wave of up to a million people,” Polish minister Maciej Wąsik said recently.
Counterintuitively, a war could also mean fewer Ukrainians travelling to the UK to pick vegetables, adding to our worker shortage. In 2020, Ukrainians made up about 90 percent of foreign workers who arrived in Britain on the seasonal agricultural workers scheme (the post-Brexit system designed to fill gaps in the labour market). But most apply to work here through agencies. If those agencies pull out of Ukraine in the event of war, experts fear it could trigger a worker shortage in Britain.
The UK’s seasonal agricultural employers have become “extremely dependent on Ukraine for labour supply”, says Rob McNeil, deputy director of the Migration Observatory at Oxford University. “Disruption in Ukraine … could create challenges in recruitment.” He stresses, however, that everything is uncertain.
War in Ukraine could also lead to an increase in asylum applications from those Ukrainians who are already in the UK (legally) to work. "[Ukrainians] who enter the UK under the seasonal agricultural workers scheme may find themselves in a situation where ... it’s challenging for them to then return home,” says McNeil. “How the UK government deals with that will have to be considered.”
New age of nuclear anxiety
Anybody who was alive between the Sixties and Eighties will remember the first age of nuclear anxiety. Threat of atomic annihilation loomed large in the minds of ordinary people. Schoolchildren rehearsed “duck and cover” drills; householders built nuclear fallout shelters in their garden.
Thermonuclear war remains very unlikely, but the prospect of Western powers engaging in escalating economic and cyber conflict with Russia leaves some experts feeling nervous. The Russian state controls an estimated 4,500 nuclear warheads. Some international relations theorists wonder whether we might be entering a second age of nuclear anxiety.
“People concerned with their daily lives might see that the confrontation is taking place between Russia, a nuclear armed state with medium range ballistic missiles parked in Kaliningrad right now,” says Dr Frank Sauer, senior researcher at Bundeswehr University Munich and author of Atomic Anxiety: Deterrence, Taboo and the Non-Use of U.S. Nuclear Weapons. Those missiles could reach Berlin in about seven minutes, he adds.
“I don’t expect this but, in a worst case scenario, this could escalate into a nuclear exchange. There is a scenario of the Russians escalating quite early on with tactical nuclear weapons with comparatively small yields, to gain escalation dominance and signal to NATO that they will not be deterred from further action. And small yield still means many, many times the explosive yield of the Hiroshima bomb.”