Russia Ukraine crisis
Economic impact on India
Engineering Economics Assignment (HU 302)
Priyanshu Verma
2K19/ME/174
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Introduction
The Russian invasion of Ukraine in February was the largest conventional military attack
seen since World War II and can cause a global economic catastrophe.
India had taken a neutral stance, born of its historic strategic partnership with Russia.
This alliance, harking back to Cold War times, spans several fronts—diplomacy, defence,
nuclear energy, and technology—making Russia a pivotal part of India’s nation-building
process, especially during its infancy.
The Russia-Ukraine conflict has upended commodity markets from oil to gas and wheat
leading to the prospects of increase in inflationary pressure on countries trying to revive
their economic growth after the pandemic.
Crude oil prices continue to rise and oil companies like Shell and BP are winding up their
operations in Russia.
Russia is the world’s third-biggest oil producer and the second-most influential member
of the OPEC+ alliance behind Saudi Arabia.
Sanctions imposed by the US and other western countries on Russia, particularly
banning some Russian banks from the SWIFT global financial payment system, is
expected to make it cumbersome for many companies to do any kind of business with
Russia.
Finance Minister Nirmala Sitharaman has recently said that the Centre govt was seized
of the matter and discussions were on for a complete assessment of the issue.
Impact of sanctions:
War has immediate consequences for global trade, capital flows, financial markets and
access to technology.
There are five areas where impact was clearly visible: A sharp tanking of the Russian
ruble, a looming fear of a run on its banks, a panic reaction by the Russian central bank
to suspend the execution of all orders by foreigners to sell securities indefinitely, a
looming shortage of most consumer goods that Moscow sources from the West, and a
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worsening of terms of trade on future imports. Also, the global commodity markets are
seeing an upsurge, with crude, gas and metals spiking.
● Currency impact: The Russian ruble tanked 30 per cent versus the dollar in
offshore trading.
● Suspension of sell orders of Russian securities: Reacting to the plans
announced by the US and European Union nations to sanction Moscow’s central
bank and cut off some financial institutions from the SWIFT messaging system,
Russia’s central bank ordered professional stock market participants “to suspend
the execution of all orders by foreign legal entities and individuals” to sell Russian
securities.
● Consumer goods shortage: The impact of some of these measures would clearly
end up hurting middle class Russians, given that the country remains highly
dependent on the West for many of its consumer goods.
● Bank run: The US, EU, United Kingdom and Canada had announced that the
assets of Russia’s central bank will be frozen, which would make it difficult for it
to sell them overseas to support its own banks and companies. Also, some
Russian banks are to be excluded from the SWIFT payment network.
● Oil surge: Brent crude surged past $104 a barrel in the wake of the fresh
sanctions on Russia, one of the top global producers of oil, gas, metals and
agricultural products.
Impact on global economy (brief):
● A rising concern: Russia’s attack on Ukraine could cause dizzying spikes in
prices for energy and food and could spook investors. The economic damage
from supply disruptions and economic sanctions would be severe in some
countries and industries and unnoticed in others.
● The cost of energy: Oil prices already are the highest since 2014, and they have
risen as the conflict has escalated. Russia is the third-largest producer of oil,
providing roughly one of every 10 barrels the global economy consumes.
● Gas supplies: Europe gets nearly 40 percent of its natural gas from Russia, and it
is likely to be walloped with higher heating bills. Natural gas reserves are running
low, and European leaders have accused Russia’s president of reducing supplies
to gain a political edge.
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● Food prices: Russia is the world’s largest supplier of wheat and, together with
Ukraine, accounts for nearly a quarter of total global exports. In countries like
Egypt and Turkey, that flow of grain makes up more than 70 percent of wheat
imports.
● Shortages of essential metals: The price of palladium, used in automotive
exhaust systems and mobile phones, has been soaring amid fears that Russia,
the world’s largest exporter of the metal, could be cut off from global markets.
The price of nickel, another key Russian export, has also been rising.
● Financial turmoil: Global banks are bracing for the effects of sanctions designed
to restrict Russia’s access to foreign capital and limit its ability to process
payments in dollars, euros and other currencies crucial for trade. Banks are also
on alert for retaliatory cyberattacks by Russia.
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Impact on India:
The Russia-Ukraine crisis has stoked uncertainty in global trade and will impact oil and
other commodities, according to Sunil Sinha, research director, and principal
economist at India Ratings. India may not have a significant merchandise trade with
Russia, nevertheless, it stands to lose economically due to supply disruptions caused
by Western sanctions.
“Despite India’s limited direct exposure, the combination of supply disruptions and the
ongoing terms of trade shock will likely weigh on growth, result in a sharper rise in
inflation, and (lead to) a wider current account deficit,” said Sonal Varma, chief
economist at Nomura Holdings in a report.
Economic impact on India due to a Russia-Ukraine war even without
being part of it:-
Ban on Russia’s crude exports
In reaction to the US’s ban on all oil and gas imports from Russia, Brent crude prices
surged to nearly $130 per barrel last week, up 43% from the beginning of [Link]
is a major setback for global economic growth as Russia is one of the largest exporters
of crude oil globally. India’s trade, however, comprises only 1% oil imports from Russia,
but there could be a spillover impact in the form of high inflation and sluggish growth.
On March 13, Morgan Stanley lowered India’s GDP forecast for the fiscal year 2023 by
50 basis points to 7.9%, citing risks to macro stability due to high crude oil prices.
It was noted that more risks could arise if global growth conditions weaken further,
which would hamper India’s export and capital expenditure cycle.
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Inflationary concerns
India depends on imports to meet up to 85% of its crude oil needs. The surge in
international oil prices to a 14-year high will now result in broader price pressures.
Rising oil prices could speed up already rising inflation.
Rising oil prices will also impact the current account deficit, which is the difference
between the values of goods and services imported and exported.
Morgan Stanley pegs retail inflation at 6% for the fiscal year 2023, much higher than the
RBI’s 4.5%.This has increased the risks of a higher import bill and, in turn, a widening of
India’s current account deficit (CAD). The CAD is expected to widen to 2.6% of the GDP
in the financial year 2023, up from 1.7% last year, according to a report by Nomura
Research. This is likely to dent the rupee, which recently plunged to its record low of
76.98 a dollar.
Russia and Ukraine are two of the biggest exporters of raw material. But now Ukraine’s
exports have been halted while Russia has become the most sanctioned nation in the
world. All the price spikes are expected to further contribute to the racing inflation that
central banks are now hoping to target. Some of the items that are feeling the heat of
Russia's war include edible oils, grains , metals, chemicals, fertilisers, gas utilities,etc.
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Recent surge in global crude could intensify the pressure on the state-owned oil
retailers. Calibrating price hikes is now more complex, given the cascading inflation
impact that could follow the increase. India imports most of its requirement of
sunflower oil from Ukraine, and the two countries now at war are also two of the world’s
biggest producers of wheat.
Economic recovery
The rise in crude prices poses inflationary, fiscal, and external sector risks. Oil-related
products have a share of over 9% in the WPI basket — and a 10% increase in crude
would lead to an increase of around 0.9% in WPI inflation. A larger oil import bill will
impact India’s external position; it is also likely to increase subsidies on LPG and
kerosene, pushing up the overall subsidy bill.
FPI sentiment, rupee
Foreign portfolio investors have been selling their holdings in Indian equities over the
last four months. This outflow is likely to continue over the coming days. As FPIs pulled
out, domestic institutions emerged as net investors.
Equity investors
While markets may remain volatile, retail investors should look at the DII investment
pattern. If DIIs are investing amid the sharp fall in markets, retail investors too should
not panic — and should increase their investments if they are underweight in equities.
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Experts say that the current geopolitical concerns will not impact long-term
fundamentals and prospects of businesses, and investors should take the fall in
markets as an opportunity to invest in mutual funds and high-quality blue chip
companies.
Gold outlook
In times of uncertainty and inflation, gold emerges as the asset class of choice for
investors. It is important to note that at a time when equities have been falling, gold has
risen sharply.
Trade
India runs a trade deficit with Russia, with exports declining while imports are
increasing. Oil forms a major part of our import basket from Russia. 8 percent of our
total imports have been imported from Russia in FY22 so far.
Banking
Banking sector has remained resilient to the Russia-Ukraine conflict so far. Profitability,
asset quality and capital adequacy has risen to a new peak with profitability of banks in
Dec’21 quarter, as well as YTD FY22 seen touching new highs.
Recent developments in Indian economy as a follow-up:
● India's top lender SBI will not process any transactions involving Russian entities
subject to international sanctions imposed on Russia.
● Besides, Indian Oil Corp (IOC) said it would no longer accept cargoes of Russian
crude and Kazakh CPC Blend cargoes on a free on board (FOB) basis due to
insurance risk.
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Conclusion: National considerations
India will see an immediate impact on inflation (already ruling at high levels) with rise in
fuel and food prices.
Other prices will also rise as supply bottlenecks get aggravated due to sanctions and
the war situation.
The investment climate will deteriorate due to the uncertainty.
Capital flows into the country will decline leading to a further decline in the stock
markets. The P/E ratio was already ruling at high levels and such a big shock was bound
to hit stock prices.
Demand for gold is likely to increase leading to its increased import. This along with the
high bill for petro goods will mean that the import bill will rise.
Exports are likely to be hit due to the decline in growth in the world economy and
de-globalization.
With capital flows declining the Balance of Payment which was already turning adverse
will deteriorate further. Consequently the rupee will weaken compared to the dollar
which will aggravate inflation further.
All these factors, uncertainty, demand, investment, inflation and BOP, will reduce the rate
of growth of the economy which was badly hit by the pandemic.
Budgetary arithmetic will also be impacted.
Expenditures will increase while real revenues will be hit due to slow down and other
difficulties. The already high fiscal deficit will increase further and in such
circumstances, it is the social sector and capital account expenditures that are
curtailed. The support to the poor then declines.
It will face difficulty in procuring defence equipment already contracted since both the
rich countries and the Russians will delay deliveries, given their own requirements.
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Way forward for India:
India will have to strengthen its economy on its own.
The public sector will have to play an important role since the private sector will not be
able to boost itself on its own when demand is short.
The country will have to strengthen its R&D.
Social sectors will have to receive a much higher priority so that the productivity of
workers rises and their degrading living conditions improve. That will not only provide
the market for growth of the Indian economy but strengthen the country.