The war in Ukraine has evolved from a regional security crisis into a persistent economic shock that is re‑wiring the flows of energy, capital and goods. Nearly three years on, its effects are no longer acute dislocations to be weathered and forgotten; they are structural adjustments that will define the next cycle. For businesses and policymakers, the old map is out of date.

Energy markets: Europe pays to change supplier, not consumption

The most visible shift has been Europe’s rapid pivot away from Russian pipeline gas. The continent has replaced molecules, not demand, leaning on liquefied natural gas from the US, Qatar and West Africa. The substitution has carried a premium. Infrastructure—regasification terminals, floating storage, expanded interconnectors—has been built at speed and cost. Power prices have eased from their 2022 peaks but remain structurally higher than the 2015–2019 average, embedding a competitiveness gap for energy‑intensive industry from chemicals to aluminium.

Russia, meanwhile, has rerouted discounted barrels to India, China and Turkey, facilitated by a growing "shadow fleet" that skirts G7 price caps and insurance rules. This has blunted sanctions’ bite while permanently redrawing seaborne trade routes. For crude and product markets, longer voyage distances mean tighter tanker availability and higher freight costs in any period of stress. The upshot is a more brittle energy system with fatter risk premia.

Inflation and monetary policy: shock becomes regime

The initial inflation burst was driven by energy and food. But the second‑round effects—wage adjustment, pass‑through into services, and precautionary price‑setting—have proven sticky. Central banks responded with the sharpest tightening cycle in four decades. Even as headline inflation has retreated, core measures have been slow to return to target. Monetary authorities now face a narrower corridor: tolerate above‑target inflation for longer, or risk overtightening into a supply‑constrained world.

The lesson for macro policy is that geopolitical supply shocks are not one‑off disturbances. They recur and overlap—war, pandemics, shipping disruptions—and require frameworks that can accommodate persistent relative‑price changes without destabilising expectations. Fiscal authorities, for their part, have expanded energy subsidies and windfall taxes; these are politically durable and will complicate consolidation efforts.

Trade fragmentation: from just‑in‑time to just‑in‑case

Sanctions, export controls and countersanctions have accelerated a shift from hyper‑globalisation to a more bloc‑aligned system. The granular data show rising trade among geopolitical “friends” and slower growth across contested corridors. Multinationals are adding redundancy—nearshoring to Mexico, friend‑shoring to eastern Europe, China‑plus‑one in south‑east Asia. The result is higher upfront capex and slightly higher unit costs in exchange for resilience. Equity investors now prize optionality in supply chains; boards demand second sources as a condition for growth projects.

“Security of supply now commands a premium—and it is showing up in prices.”

FX and capital flows: a stronger dollar with more volatility

War‑time uncertainty has supported the dollar and other safe‑haven assets, complicating inflation control outside the US. Europe’s terms‑of‑trade shock weakened the euro; energy importers across Asia faced similar pressures. Portfolio flows have been more sensitive to geopolitics, with episodic sell‑offs when the conflict surprises. Sovereigns with credible monetary frameworks and deep local markets have weathered bouts of stress; others have had to rely on FX intervention or capital controls.

Commodities and food security: the Black Sea corridor’s knife‑edge

Ukraine’s role in global grain, sunflower oil and fertiliser exports is material. Disruptions to Black Sea shipments have intermittently tightened supplies, pushing up prices and stoking food insecurity from north Africa to south Asia. Alternative routes—Danube river ports, rail into the EU—help, but they are costlier and capacity‑constrained. Fertiliser markets remain entangled with natural gas pricing, linking harvest outcomes to energy geopolitics more tightly than before.

Defence and fiscal trajectories: guns, butter and the bond market

Nato members are raising defence outlays towards—and beyond—the 2% of GDP benchmark. Germany’s Zeitenwende has been halting but real; central and eastern Europe are moving faster. The procurement pipeline—air defence, artillery shells, drones, cyber—will extend for years. Combined with ageing populations and climate investment, this points to structurally higher public spending. The bond market will demand credible medium‑term fiscal anchors if rates are to remain contained.

Corporate strategy: pricing power and balance‑sheet discipline

Companies that secured long‑term energy contracts, diversified inputs and invested in efficiency are emerging with reinforced competitive positions. Those that relied on spot markets or single‑source suppliers have paid a margin penalty. Pricing power has become the critical differentiator: brands and oligopolies have passed on costs; fragmented sectors have not. Balance‑sheet discipline—terming out debt before rates rose, maintaining liquidity buffers—has been rewarded in equity multiples.

Transition finance: a faster, messier path

The war has paradoxically accelerated parts of the energy transition. Europe’s renewables build‑out and heat‑pump adoption have quickened as a strategic imperative. Yet coal use rose in 2022–23 as a bridging fuel, and grids are a binding constraint. Capital is available, but permitting and supply‑chain bottlenecks slow deployment. The medium‑term picture is a faster, messier transition with intermittent spikes in power prices when weather or outages collide with thin reserve margins.

Risks to watch

Escalation that targets critical infrastructure—pipelines, power cables, ports—would transmit quickly to prices.
A reversal of grain export arrangements could re‑ignite food‑price inflation and social risk in vulnerable importers.
Sanctions leakage tightening could reroute more oil, raising freight and insurance costs even if volumes persist.
A sharper slowdown in Europe’s manufacturing core would test political support for prolonged aid commitments.

The bottom line

The war’s economic imprint is durable: higher baseline energy costs in Europe; a premium for supply security embedded in prices; elevated defence spending; and a re‑architecture of trade that privileges resilience over maximal efficiency. For executives, the task is to hard‑wire flexibility—second suppliers, stronger liquidity, contractual hedges—into operations. For policymakers, a credible blend of investment in capacity (grids, LNG, munitions) and renewed fiscal discipline will be needed to keep inflation expectations anchored and growth potential intact.

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