More than two months after the beginning of Russia’s barbarian invasion of Ukraine on 24 February, prospects for a resolution of the war seem increasingly unlikely. As the conflict has intensified, Western sanctions against Russia have continued to pile up, with no less than six waves of sanctions imposed by the European Union.

In this context, a rapid lifting of economic sanctions and a return to the pre-war situation seems completely illusory. For Poland this situation brings some chances in potential FDIs and more political clout.
Economic Turmoil
In an adverse environment, the war in Ukraine will have few winners and many losers. The importance of the countries directly involved – mainly Russia, but also Ukraine and Belarus – in the production of many commodities and the fears of supply disruptions have led to a surge in prices, which remain at very high levels.
Inflationary pressures, already prevalent in most regions, are thus exacerbated, leading to a decline in household disposable income and, ultimately, in consumption, as the current anxiety-inducing environment and very high uncertainty will, in all likelihood, encourage precautionary savings. Volatility and uncertainty will also weigh heavily on the investment decisions of companies whose financial situation, despite record-high cash buffers, is also likely to deteriorate significantly as production costs keep increasing or remain high.
Beyond Central and Eastern European (CEE) economies, which have significant economic linkage and trade flows with Russia, Western European countries are the most exposed due to their high dependence on Russian fossil fuels. While the shockwave will be felt differently and at varying times in different parts of the world, no region will be spared from imported inflation, supply chain disruptions, and the resulting global trade sluggishness.
The war will also have a significant negative impact in the US, where the Fed will be forced to conduct more interest rate hikes than initially expected, with massive consequences for the rest of the world. As with any significant monetary tightening by the Fed, most emerging markets will indeed have to follow suit in order to avoid capital outflows and currency depreciation – especially those with large current account deficits and/or high short-term external debt.
On top of this, political risk has increased significantly due to the pandemic: this issue will remain more topical than ever, as supply difficulties and soaring food prices are likely to fuel social tensions.
It is worth mentioning that the balance of risks is clearly tilted downwards, as headwinds are accumulating, most notably the resurgence of COVID-19 cases in China, which will fuel both global inflationary pressures and supply chain disruptions. In such a context, the choices that monetary authorities are currently facing are probably as difficult as they are crucial, in an environment combining decades-high inflation, loose fiscal policy, and very high levels of public and private debt.
As the economic consequences of the war in Ukraine will mainly materialize from the second half of 2022 onwards, they will obviously affect 2022 GDP growth figures, but even more so those for 2023 and beyond. In other words, scars are likely to be deep and, beyond human casualties, the economic consequences will be felt for years after this new war on European soil has ended.
Slower Growth, Higher Inflation
While it is still too early to predict how the global economy will redesign itself after the successive shocks of the early 2020s, the perception we have since the beginning of the pandemic still applies: the world has shifted, and nothing will ever be the same.
While Ukraine will experience a historic recession due to the stoppage of many activities while the war lasts, the Russian economy will also be strongly impacted by Western sanctions and the departure from the country of most Western companies. It is also no surprise that the other countries that appear to be the most affected are those that are close to the countries at war, both geographically and economically: the European economies, with an estimated net negative effect of ~1-2 pp. on 2022 GDP growth. For Poland this means growth of about 4-5%.
While the shockwave will be felt differently and at varying times in different parts of the world, Central and Eastern European countries are already experiencing the consequences of the war. Foreign trade dependence on Russia is particularly high for the Baltic countries, which are expected to suffer directly from the Russian downturn.
In March, despite government measures to limit that impact, several CEE countries recorded double-digit inflation: Estonia, Lithuania, the Czech Republic, Poland and Romania. In order to try to curb inflation, CEE central banks have continued monetary tightening.
Russia completely halted gas supply to Poland and Bulgaria. The suspension came after Putin signed a new decree in late March requiring EU buyers to pay in rubles for Russian gas via a new currency conversion mechanism.
While Poland reported that its gas storages were 80% full and had invested in infrastructure enabling imports from other directions than Russia, it still needs to secure alternative supplies for the remainder of the year in an already tight global market. Bulgaria imports 90% of its gas needs from Russian sources.
Bigger Role for Poland and the US in Europe
Russia’s offensive against Ukraine also creates an opportunity for Poland to show leadership. Until the war, this country had been relegated to a European purgatory for its conservative domestic politics. But Poland was one of the first countries to ship large quantities of anti-armor weapons and tanks to Ukraine, while serving as a logistics hub for Western supplies and hosting several million Ukrainian refugees. Polish Prime Minister Mateusz Morawiecki traveled to Kyiv in a show of support with his counterparts from Slovenia and the Czech Republic.
The United States is back—at least for now. It has returned around 20,000 troops to Europe, mostly to NATO’s eastern front-line countries: Romania, Poland, and the Baltic states. US weapons continue to trickle into Ukraine. US President Joe Biden has traveled to Poland and, tellingly, did not criticize the conservative government. At least for now, the Democratic administration has decided that lashing out at an ally for policies not aligned with progressive liberals is counterproductive and does not advance regional security.
There is, however, lingering doubt on whether the United States will reassert itself as the key arbiter of Europe. The Biden administration was hoping to subcontract regional balances to a partner while resetting relations with its rivals. In Europe, that meant bestowing on Germany the mantle of regional leader while resetting relations with Russia. Such an approach is now problematic, if not impossible. Germany has no continent-wide authority to lead Europe after decades of failed policies and a morally bankrupt position on Russia’s war. And there is no way of resetting relations with Russia short of abandoning both Ukraine and NATO’s eastern allies.
China is the bigger threat that the US faces. The US remains an indispensable power but needs to act through European counterparts. It remains to be seen whether Biden is willing to place his bets on the UK, Poland, and other NATO allies that are now defending European security against Russia. Sweden and Finland, although members of the EU, applied for NATO membership, showing that EU security policy does not exist without American troops.
Central European FDI Magnet
Western powers started the process of disinvestment in Russia with hundreds of companies limiting their presence on the Russian market. CEE countries have resilience, often built up through war-torn histories that have delivered robust economies in the 21st century and still are safe places to invest. There might even be some new opportunities in attracting investors, who have been previously investing in Russia.
As CEE countries shelter Ukrainian refugees, this is a potential opportunity, because the Lithuanian economy grew at such a fast rate in 2021 that the country has experienced a labour shortage. With the caveat that the best possible outcome is that all displaced Ukrainians are able to return home safely, these refugees would be assets to the talent pools of Poland and other CEE countries.
It comes as no surprise that in any significantly challenging situation, major investors review their business continuity plans. The business community remains calm and still takes decisions with a long-term perspective. The aggressive and unpredictable nature of Russian and Belarussian governments will certainly leave an impact on their ability to attract FDI for as long as it takes for their governments and the direction of their politics to change significantly.
The inflow of foreign direct investment (FDI) into Poland in 2021 hit a record high of USD 24.8 billion, an increase of 82% from pre-pandemic 2019. Poland was 14th in the world and third in the EU, behind Germany and Sweden, in terms of the value of FDI inflows in 2021.
Poland’s earlier recorded highest inflow of FDI was in 2007 and was USD 19.9 billion. After the results of 2021, the cumulative value of FDI into Poland is USD 269 billion, making it 16th in a worldwide ranking.
According to the FDI Markets report, in 2019-2021 foreign investors in Poland contributed to the creation of 339,000 jobs, the most in Europe and 19% of all jobs created thanks to FDI in the region.
Poland's record results in 2021 confirm that Poland benefited from the global trend of shortening supply chains in connection with the pandemic and the US-China trade war.
To sum up, there are clearly significant reputational risks associated with investing in an international pariah state or a country occupied by a foreign power. So for the time being more foreign investors will seek investment projects in Central Europe rather than the East. When Ukraine is in a more stable situation, investments will pour in and Polish companies will come first.