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One year on, what the war in Ukraine means for the Middle East

The Russia-Ukraine war continues near the frontline town of Bakhmut on February 21 Reuters/Alex Babenko
The Russia-Ukraine war continues near the frontline town of Bakhmut on February 21
  • High oil prices boost the Gulf’s power in global energy markets
  • Conflict has highlighted the region’s economic divide
  • A boon for real estate sales, but concerns over food security

A year since Russia invaded Ukraine, the war’s impacts are reverberating across the Middle East and North Africa. 

While some Gulf oil producers have prospered during the conflict, it has heaped suffering on some of the most fragile and volatile economies in the region. 

“It has contributed to the difficulties in Egypt and the worsening crisis in Lebanon,” said Scott Livermore, chief economist at research firm Oxford Economics Middle East.

“The war may not be the root cause, but it exacerbated prevailing weaknesses and vulnerabilities.” 

The Egyptian pound has fallen to record lows over the past year, inflation is soaring and the country has sought its fourth bailout in six years from the International Monetary Fund.

Lebanon is grappling with a deep economic crisis, driven by its dysfunctional banking and political systems. The country’s debt is equivalent to 150 percent of its GDP. 

“High food and fuel prices caused by the war have significantly affected these countries’ economies by destabilising currencies, increasing account deficits and reducing economic growth,” said Sorana Parvulescu, Europe, Middle East and Africa partner at consultancy Control Risks. 

“They will continue to experience high inflation and low growth for at least this year.”

For the oil-producing Gulf states, the war’s impact has been different. The IMF has forecast GCC growth of 3.6 percent in 2023, compared to a global average of 2.7 percent.

“Overall the outlook for the Gulf remains positive, especially by comparison to average global economic growth,” Parvulescu said.

“The UAE in particular benefited from a quicker than average post-Covid recovery, the Expo 2020 Dubai effect and the influx of a skilled Eastern European workforce from Russia and Ukraine.

“Saudi Arabia was able to accelerate its ambitious reform and domestic investment programme.

“Qatar’s opportunity to replace some of the Russian gas contracts, as well as the recent World Cup, have acted as wind in the sails of its economy.”

Russia Saudi
Russian President Vladimir Putin and Saudi Arabia’s Crown Prince Mohammed bin Salman discussed Opec+ cooperation to maintain oil prices. Picture: Sputnik/Alexei Nikolsky/Kremlin via Reuters
An easy win for oil producers 

The surge in oil prices since last February has given Gulf nations record budget surpluses.

Oil prices shot up after the invasion of Ukraine, with international benchmark Brent reaching $139.13 a barrel last March – its highest level since 2008 – as supply fears rippled through markets.

Prices stayed above $100 a barrel until August and have stabilised above $80 a barrel.

Sanctions affecting Russian oil exports increased global demand for oil and gas supplies from Arab countries, which are needed even more since the reopening of China. 

Kristian Ulrichsen, Middle East fellow at Rice University’s Baker Institute for Public Policy and a member of the London School of Economics’ Middle East Centre Research Group, said the conflict had been “an energy windfall” for the Gulf, which was not anticipated before 2022 when there was a stronger international focus on climate action. 

“The fallout from the Russia-Ukraine crisis has restored the centrality of oil and gas from the Gulf to global energy security debates,” Ulrichsen said.

Algeria, which accounts for 11 percent of European gas imports, could also be a potential winner, according to Diana Galeeva, non-resident fellow at the Gulf International Forum.

“EU members have looked to Algeria as they consider cutting their dependence on Russian gas and oil,” she said.

“Nonetheless, Algeria lacks the capacity to meet such demand in the short term.”

Building, Architecture, Outdoors
Dubai real estate sales have been boosted by Russian investors. Picture: Unsplash/Eslam Tawakol
Boost for real estate deals in Dubai 

The volume of property transactions in Dubai hit a record high at the end of 2022 – up 63 percent year-on-year in December.

Shut out of Western markets, Russian buyers turned their attentions to Dubai. The number buying property in the emirate rose 164 percent in the first half of 2022 compared to 2021, according to the Betterhomes agency.

“Real estate companies are perhaps the biggest winners [from the war], as Russian money has begun to flood into GCC states,” Galeeva said. 

Many Ukrainians and Russians have fled to the relative safe haven of the Gulf, helping to boost the local expatriate workforce and the local tourism sector.

CBD Corporate Services in Dubai recorded a 34 percent rise in Russian foreign direct investment into the UAE in 2022.

There is also demand among Russians and Ukrainians to apply for a UAE freelance job visa, according to HR consultancy Connect Group.

Dubai Tourism in December reported that Russia was its fifth biggest source market for visitors last year, with numbers rising 73 percent year-on-year between January and November 2022.

Seat capacity on flights between Russia and the Middle East between March 2022 and February 2023 was 27 percent higher than pre-pandemic figures, according to flight booker ForwardKeys. 

Egypt wheat
A farmer harvests wheat in Egypt. Picture: Reuters/Amr Abdallah Dalsh
Food supplies in turmoil

The global food crisis has been one of the most far-reaching consequences of the war.

Before the invasion, Russia and Ukraine together supplied around 30 percent of wheat and 20 percent of maize to global markets, according to the United Nations World Food Programme.

The halting of food shipments caused food prices to rise to an all-time high in March.

The Middle East and North Africa was hit hard as it accounted for 70 percent of Russian wheat exports in 2021, mainly driven by Egypt and Turkey.

A deal brokered by Turkey and the UN last summer led to the resumption of Ukrainian grain exports.

“Food and grain prices have stabilised to some extent, but at a higher price than pre-conflict,” said Parvulescu, adding that North Africa and the Levant would be hit hardest.

Western sanctions have also targeted Russia’s financial system, forcing many Russian banks to shut down overseas operations, including in the Gulf.

Russia’s dominant lender Sberbank is closing its UAE office this year. However, Dubai International Financial Centre said this week it had seen little interest from Russian financial firms in the past year.

While oil prices are set to remain high, political tensions and economic shocks will outlast the war, according to analysts.

Ulrichsen said: “The conflict will continue to sharpen economic divides in the Middle East and add pressure on energy-rich Gulf states to assist those that are struggling.” 

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