War Economy: A Global Perspective, and How to Protect Your Financial Standing

War economy is the term used to describe the organization of a country's production capacity and distribution during a time of conflict. War economy involves making substantial adjustments to consumer production to accommodate defense production needs, such as rationing, resource allocation, and conscription. War economy also affects the global economy via financial sanctions, commodities prices, and supply-chain disruptions.

In this article, we will examine the concept of war economy and how the current wars in Israel-Gaza and Ukraine-Russia influence the global economy, using the data and sources up to 2023 October 19th, as this is the date today.

Israel-Gaza War

The war between Israel and Hamas started on October 7th, when Hamas militants crossed from Gaza into Israel and murdered more than 1,400 people, most of them civilians. Israel responded by putting Gaza under siege and launching air strikes that have caused massive collateral damage. Israel is also preparing for a ground invasion of Gaza.

The war has had a significant impact on oil prices, as the Middle East is a major oil-producing region and any disruption to its supply could affect the global market. Oil prices rose to $93 per barrel on October 18th, up from $82 per barrel before the war started. The OECD estimated that the war was one of the main factors that slowed global economic growth in 2022 to 3.1%, and projected it to slow further to 2.2% in 2023. The war has also affected Europe's economy the most, where growth in 2023 is projected to be just 0.3%.

The cost of rebuilding Gaza after the war is expected to be enormous. The World Bank estimated that it would be about $349 billion, which is larger than Gaza's pre-war GDP and three times greater than all the assistance commitments to Gaza since the start of the war. However, it is unlikely that Israel will pay any reparations to Gaza, as it blames Hamas for starting the war and killing its own people. The allies have seized and frozen billions of dollars in assets owned by Hamas and its supporters, which could be transferred to Gaza, but the legal implications need to be explored.

Ukraine-Russia War

The war between Ukraine and Russia started on 24 February 2022, when Russia invaded Ukraine with a large-scale military operation that quickly captured Crimea and parts of eastern Ukraine. Ukraine resisted with its own forces and with the help of NATO allies, who provided military aid and support. The war has escalated into a bloody stalemate, with both sides suffering heavy casualties and using advanced weapons.

The war has had a severe impact on trade, as Ukraine and Russia are both important trading partners for many countries, especially in Europe. The US and the EU have imposed tough sanctions on Russia, targeting its central bank, its sovereign wealth fund, some of its banks, and its energy sector. These sanctions have prevented Russia from accessing its foreign-exchange reserves, borrowing money, converting currencies, and exporting oil and gas. Russia has retaliated by imposing counter-sanctions on Western goods and cutting off gas supplies to Europe.

The war has also affected commodities prices, especially for gas, base metals, and grains. Gas prices have soared to record highs in Europe, as Russia is the largest supplier of gas to the continent and has reduced its exports by 40%. Base metals prices have also increased, as Ukraine is a major producer of iron ore, steel, aluminum, and copper. Grains prices have risen as well, as both Ukraine and Russia are among the top exporters of wheat and corn in the world.

The cost of rebuilding Ukraine after the war will be enormous as well. The RAND Corporation estimated that it would be about $500 billion, which is more than Ukraine's pre-war GDP and six times greater than all the assistance commitments to Ukraine since the start of the war. Ukraine has demanded reparations from Russia, but Russia has refused to pay anything. The allies have seized and frozen hundreds of billions of dollars in assets owned by Russia and its elite, which could be transferred to Ukraine, but the legal implications need to be explored.

How to protect your financial standing during wartime

The world is witnessing a surge of violence and instability, in addition to Hamas’ terror actions and Russia’s invasions, there are also nuclear threats posed Iran and North Korea. Conflicts and stand-offs like these have global implications, not only for peace and security, but also for the economy and global stock markets.

How can you safeguard your wealth from the consequences of war? Here are some tips to help you prepare for a personal financial crisis and protect your assets in the current situations.

1.     Gather financial and critical personal, household and medical information. Make sure you have copies of important documents, such as identification cards, passports, bank statements, insurance policies, etc. Store them in a safe place or online where you can access them easily in case of an emergency.

2.     Consider saving money in an emergency savings account that could be used in any crisis. Experts recommend having at least three to six months of living expenses in a liquid account, such as a savings account or a money market fund. This can help you cover unexpected costs, such as medical bills, repairs, or relocation expenses.

3.     Keep a small amount of cash at home in a safe place. In case of a power outage or a bank closure, you may need cash to buy essential items or pay for services. However, do not keep too much cash at home, as it may be stolen or damaged by fire or flood.

4.     Scrutinize your bills to see where you might be spending money you don’t have to spend and pay them on time. Cut down on unnecessary expenses, such as eating out, entertainment, or subscriptions. Paying your bills on time can help you avoid late fees, interest charges, or penalties. It can also improve your credit score, which may be useful if you need to borrow money in the future.

5.     Make it a priority to pay down your credit card debt and look for cards with low interest rates. Credit card debt can be expensive and stressful, especially if you have high interest rates or multiple cards. Try to pay more than the minimum amount each month and focus on the card with the highest interest rate first. You can also look for cards that offer lower interest rates or balance transfer options.

6.     Do the proper maintenance on everything from your home to your health to avoid expensive problems down the road. Keeping your home and car in good condition can prevent costly repairs or breakdowns. Getting regular check-ups and vaccinations can help you stay healthy and avoid medical emergencies. Investing in preventive measures can save you money and hassle in the long run.

7.     Diversify your portfolio and invest for the long term. Though war and defense spending can amount to a sizable portion of the U.S. GDP, wars often have little sustained impact on stock markets or economic growth at home. Markets largely have ignored recent conflicts related to the Middle East and Iran. A broader regional war, however, may have a more severe impact, especially on oil and other commodity prices. Therefore, it is wise to diversify your portfolio across different asset classes, sectors, regions, and currencies. This can help you reduce your risk and benefit from different sources of returns. Moreover, you should invest for the long term and avoid panic selling or buying based on short-term fluctuations. 

History shows that stock markets have often quickly recovered to pre-invasion levels only a matter of days or weeks after armed conflicts or standoffs begin. As long as you have a sound investment strategy and stick to it, you can weather the storm of war.