The Economic and Financial Implications of Modern Warfare: A 2025 Perspective

As the world grapples with numerous geopolitical conflicts- Ukraine to the Red Sea and beyond… United Kingdom has now overtaken the United States to become Russia's second most hated country; and the US joint Israeli airstrikes in Iran—the economic repercussions of warfare extend far beyond the battlefields¹. For finance professionals, these developments will be redefining the principles of risk management, asset valuations and financial planning.

This article examines the current financial and accounting implications of war through a practical economics perspective whilst integrating pertinent economic theories too¹.

1. Inflation and Energy Price Volatility

Doctrine: Cost-Push Inflation Theory

The classical cost-push inflation model explains the current global price rises: as war constrains supply (e.g., oil or food), the derived demand for inputs rise, leading to broader inflation. The Russia–Ukraine war and Middle East shipping disruptions have led to energy and food inflation, exacerbated by market speculation and uncertainty.

Finance and Accounting Implications:

• Budget volatility and inflation adjustments in forecasts.

• Increased use of hedging instruments under IFRS 9 to manage commodity risk.

• Reassessment of discount rates used in impairment testing (IAS 36), as inflation (or indeed hyperinflation- IAS 29) erodes real returns.

• In unprecedented circumstances the complete devaluation of a countries currency where there is then a fundamental shift on using another (stable) currency as a medium of exchange as a functional and reporting currency. (IAS 21).

 

2. Trade and Global Supply Chain Fragmentation

Doctrine: Ricardian Trade Theory vs. Strategic Trade Theory

While Ricardian theory emphasises comparative advantage in a globalised system, current developments point toward strategic trade theory instead, where national security and resilience are prioritised over efficiency calls. Supply chains are becoming regionalised or onshored to reduce imports and related tariffs.

Finance and Accounting Implications:

• Capital expenditure (CAPEX) is rising as firms localise supply chains.

• Reorganisation of operating segment clusters for analysis reporting (IFRS 8).

• Exceptional line items becoming more prevalent as corporates’ exit war-torn regions.

• Increased working capital needs due to inventory (IAS 2) buildups.

• Balance sheet stress-testing is more sensitive to currency and geopolitical scenarios.

3. Defence Spending and Fiscal Policy

Doctrine: Keynesian Military Multiplier vs. Crowding Out

Keynesian economics suggests military spending can stimulate demand during downturns. However, the crowding out effect warns that excess government borrowing may raise interest rates and suppress private investment—particularly relevant as sovereign debt levels rise globally.

Finance and Accounting Implications:

• Rising discount rates in DCF techniques due to sovereign yield shifts or indeed any corporate working out IBR rate for IFRS 16.

• Long-term government bond revaluation losses in bank and pension fund portfolios (IFRS 9, IFRS 13). Including volatile BAA yield to maturity rates.

• Public-private partnerships (PPPs) for defence or energy independence projects may increase.

4. Refugees, Labour Markets, and Human Capital

Doctrine: Solow Growth Model & Human Capital Theory

The Solow model emphasises labour as a growth input, while human capital theory values skills and education. Refugee inflows challenge fiscal capacity in the short run but can add to labour force productivity in the medium-to-long term.

Finance and Accounting Implications:

• Labour cost planning must consider both wage inflation and demographic shifts.

• Post-employment benefit obligations (IAS 19) could be affected by changing actuarial assumptions.

• Training investments may be capitalised or expensed depending on IFRS interpretations.

5. Market Volatility and Geopolitical Risk Premiums

Doctrine: Efficient Market Hypothesis (EMH) vs. Behavioural Finance

While EMH posits that markets price in all available information, wars introduce uncertainty that often leads to behavioural anomalies—e.g., overreactions or risk aversion. This is evident in the surge in gold and U.S. Treasury prices following escalations.

Finance and Accounting Implications:

• Fair value measurements (IFRS 13) must now incorporate higher volatility and less liquidity in inputs.

• Geopolitical Value at Risk (VaR) models are being incorporated into treasury risk management.

• Intangible asset valuation must consider reduced investment sentiment in conflict zones.

6. Sectoral Divergence and Capital Allocation

Doctrine: Schumpeterian Creative Destruction

According to Joseph Schumpeter, conflict can accelerate innovation by disrupting incumbent industries and giving rise to new ones. Defence tech, cybersecurity and renewable energy have seen growth due to redirected capital and R&D efforts.

Finance and Accounting Implications:

• Impact of (IAS 36 & 38) goodwill and intangibles in M&A deals based on new growth drivers.

• Strategic capital budgeting: Shift toward resilience and security-focused investments- payback over ROI.

• Sector rotation in portfolio strategy driven by macro-themes like militarisation and energy independence.

7. ESG and Ethical Finance in Wartime

Doctrine: Stakeholder Theory and Double Materiality

Wars force a reassessment of ESG priorities. While stakeholder theory encourages alignment with all stakeholders, double materiality—the idea that external impacts affect financial performance—has led to a revaluation of sustainability metrics in war-afflicted regions.

Finance and Accounting Implications:

• Sustainability disclosures under IFRS S1/S2 or EU CSRD must include geopolitical risk factors.

• ESG fund rebalancing: Defence and surveillance firms are being reconsidered as “sustainable” under national security lenses.

• Assurance standards for conflict-affected assets are becoming more rigorous.

  
  

8. Currency Instability and Financial Globalisation

Doctrine: Mundell-Fleming Trilemma

Trilemma asserts that a country cannot simultaneously maintain a fixed exchange rate, free capital movement and an independent monetary policy. In warzones, capital controls and monetary tightening have destabilised currencies, challenging central banks and MNCs.

Finance and Accounting Implications:

• Translation risk and FX revaluation in consolidated financials (IAS 21).

• Increased use of natural hedging through operational relocation.

• Cross-border treasury structures (e.g., in-house banks) being redesigned for resilience to prevent cash blocks or the creation of payment factories.

Finance in the Fog of War

Warfare is no longer a peripheral macroeconomic risk—it is a central driver of capital flows, inflation dynamics and corporate financial strategy. Whether viewed through Keynesian, neoclassical, or behavioural lenses, the economic doctrines discussed here underline the structural changes underway.

I see a new trend where focus will be on enhancing scenario-based forecasting and stress testing; embedding geopolitical risk factors into investment appraisal models; and updating internal control frameworks to account for rapid regulatory and ethical shifts. Ultimately, finance and accounting professionals will need to play pivotal role in navigating uncertainty, allocating resources and enabling long-term resilience in an increasingly fragmented world order.

Dee Singh Kothari is a senior partner in Kothari Partners

¹ Opinions expressed in this article are solely of the authors -Article 10, HRA 1998. The author does not agree or endorses any acts of war, nor takes any political sides nor is affiliated to any political party be it in the UK or overseas.

This article is about the application of economic doctrines and accounting guidance interpretations in the context of the current circumstances to help connect the dots. Information gathered by third parties news agencies and used here has not been independently verified and thus the author will not be held liable for any errors or omissions in the information provided.

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