Russia-Ukraine Conflict to hit Global Economy

Insight Bureau: This is not the first time tensions between Russia and Ukraine has reached a boiling point. Russia had invaded Ukraine in 2014 when rebels backed by President Putin had seized large swathes of easterrn Ukraine and have fought Ukraine’s army since then.

Impact on Global economy

A major risk event usually sees investors rushing back to bonds, generally seen as the safest assets, and this time may not be different, even if a Russian invasion of Ukraine risks further fanning oil prices — and therefore inflation.

Inflation at multi-decade highs and impending interest rate rises have made for a tetchy start to the year for bond markets, with U.S. 10-year rates still hovering close to the key 2% level and German 10-year yields above 0% for the first time since 2019.

A mild winter and extra supplies of liquefied natural gas from the United States have helped ease some of Europe’s jitters about a potential loss of Russian gas. Analysts say Russia has no interest in a complete gas cutoff, which would mean a sharp loss of revenue.

The threat to farms in eastern Ukraine and exports through Black Sea ports could reduce wheat supplies at a time when global food prices are at their highest level since 2011 and some countries are suffering from food shortages.

Ukraine is the world’s fifth-largest wheat exporter, agricultural analyst Alex Smith wrote last month in the journal Foreign Policy, and many of the countries that rely on its wheat “already face food insecurity from ongoing political instability or outright violence”. Yemen, for instance, imports 22% of its wheat consumption from Ukraine, Libya about 43%, Lebanon roughly half.

Rising energy and food prices will intensify the inflationary pressures that policymakers and central banks are struggling to ease. In the estimation of Capital Economics, a worst-case scenario of an escalating conflict and sanctions could send oil prices up to as much as $140 a barrel — international Brent crude had surged above $100 on Thursday after Russia attacked Ukraine — and force natural gas prices up, too.

That combination would add a sizable 2 percentage points to annual inflation in the world’s wealthy countries, Capital Economics estimates. In the United States, the world’s largest economy, consumer inflation jumped 7.5% last month compared with 12 months earlier, the steepest annual increase since 1982.

With inflation running hot, central banks may have less leeway — or inclination — to ride to the rescue with stimulus if the economy sputters in the face of the military conflict in Ukraine.

US Affecting

A potential invasion of Ukraine by neighbouring Russia would be felt across a number of markets, from wheat and energy prices and the region’s sovereign dollar bonds to safe-haven assets and stock markets.

Although many Americans may prefer that the U.S. stay out of the conflict between Russia and Ukraine, the brewing violence and political fallout are already hurting their wallets.

The price of oil, which has been rising over the past year, hit an eight-year high this week as traders reacted to geopolitical tensions. Gas prices are likely to surge even further if the hostilities escalate or if U.S. lawmakers pass another round of sanctions, according to experts.

The economic impact could also move beyond the gas pump, Wall Street analysts warn. Sanctions or export controls against Russia could make current semiconductor shortages even worse, while restrictions on wheat or metals could drive the fiercest bout of inflation in decades to climb even higher.

India’s scenerio

The Indian equity indices plunged sharply on Thursday as investors turned cautious after Russia announced a military operation in Ukraine. Russian President Vladimir Putin authorised a special military operation in Ukraine’s Donbass region.

As of 1:29 pm, the benchmark BSE Sensex tanked 2,005 points or 3.50 per cent to 55,270; while the broader NSE Nifty moved 614 points or 3.52 per cent down to 16,448.

Brent crude prices breached the $100 per barrel on Thursday, for the first time since September 2014, following Russian President Vladimir Putin’s announcement authorising a military operation in the Donbass region in Ukraine. Explosions were heard before dawn in Kyiv, the capital city of Ukraine, shortly after the announcement on Thursday.

While the West has termed the move an “unprovoked” and “unjustified” attack, oil prices surged and the stock markets crashed globally. While oil surged over 40 per cent to $101.2 (10.10 am IST) since December 1, 2021, when it was trading at $70.4, the benchmark Sensex at the BSE fell by over 1,750 points to 55,504 (at 10.10 am IST) and hit a day’s low of 55,148. The Rupee also fell 40 paisa or 0.5 per cent to hit 75.1 to USD.

The spike has been driven primarily by fears of supply side disruptions, following Russia’s invasion in Ukraine and Putin’s deployment of troops to separatist areas Donetsk and Luhansk in Ukraine.

High crude oil prices contributed to the increase in petrol and diesel prices that hit record highs across the country in 2021. Pump prices fell in November as the central government cut excise on petrol and diesel by Rs 5 and Rs 10 per litre respectively, and most states followed by cutting Value Added Tax.

Petrol and diesel are currently retailing at Rs Rs 95.3 and Rs 86.7 per litre, respectively, in the national capital. Since the tax cuts in November, oil marketing companies have not revised prices, even as Brent crude fell from about $84.7 per barrel at the beginning of November to under $70 at the beginning of December. Higher crude prices now could result in higher fuel prices for consumers, even though they did not get the full benefit of the fall in crude prices in November and December.

Stock-markets, today

India: -4.72%
United Kingdom: -3.3%
Spain: -4.1%
France: -4.9%
Italy: -4.9%
Germany: -5.1%
Austria: -6.5%
Turkey: 8.9%
Bulgaria: -9.4%
Poland: -11%
Russia: -50%

However, Ukrainian and Russian currencies have also suffered, with the hryvnia the worst-performing emerging markets currency year-to-date and the rouble at number five.

The Ukraine-Russia situation presents “substantial uncertainties” for foreign currency markets, said Chris Turner, global head of markets at ING.