21 March 2022, NIICE Commentary 7717
Liza Gupta

Introduction

The February 2022 invasion of Ukraine by Russia has sparked uncertainty, turmoil, geo-political and business risks throughout the world. As the news of the invasion spread, stock markets crashed globally, and there is a speculation of increase in price of oil, gas, wheat, gold, metals, etc. While the world has yet not come out of the disruptions caused in trade and commodities due to the COVID-19 pandemic, it could not afford further changes in country’s balance sheets emanating out of the concerns from the Russian military action in Ukraine. With the blockage of the ports in Ukraine and the global sanctions faced by Russia, the prospects of macroeconomic issues and supply chain management is on the risk of facing issues.

Implications faced by the World

The current impasse would slowdown the global economy and would increase prices of the commodities and cause inflation. The stock prices have gone lowest since the pandemic and the market of crypto currency is also declining. This has led people to start investing in safe-haven assets like US treasury bonds.

One of the foremost impacts would be the disruption in the supply of energy. European countries, primarily Germany, are heavily dependent on Russian energy imports and gas supplies. With the war and the removal of Russia from SWIFT payments system, there would be huge spook faced by various businesses and people in terms of high heating, gas and energy costs. While, USA might turn out to an alternative supplier of energy and gas imports by asking suppliers like Qatar, Iran, and Venezuela which would create alternative markets and energy supplies for Europe.

The war would lead to a sudden increase in the food prices. Russia and Ukraine produce large quantities of wheat and export around 30 percent of it throughout the world. These countries also trade 32 percent barley and 17 percent corn with other countries. The war and the sanction have halted these exports and the countries dependent on Russian and Ukrainian food grains are likely to face food inflation due to the rapid decrease in its demand and look for alternatives for their domestic consumption. The supply of sunflower oils from Russia would also hit. This would further hamper the FMCG (fast-moving consumer goods)  industries that rely on oils for their production. These companies are now finding alternatives such as palm oil, the demand and prices of which are further stocked. Further, Russia also supplies fertilizers to various countries but the sanctions would derange their supply and cause inflation in the production and prices of agriculture commodities. Businesses in countries such as China and India have great chance and are stepping up to replace the exports of wheat and the supply of other commodities to the nations.

The impact of the war would also have an effect on global transport. The shipping routes through Black Sea is being diverted and the insurance companies are demanding a notification prior to trade in the region. The export of grains from Romania and Kazakhstan also stopped because of this halt in Black Sea. The rail freight between the neighbour countries would also face a hit due to the sanctions. Over that, the fear of cyberattacks on the major global supply chain is further a point of contention for the businesses.

The supply chain of pharmaceutical producers and semiconductors would also disrupt since Russia is the largest producer of palladium and produces other rare metals such as scandium, grade-neon, platinum, Nickle, copper and iron which are essential materials for the production of computer chips, buildings, aerospace, automobile and other industries. The companies have already started looking for diversification but this would require time and long-term investments and would cause inflation throughout. With Putin banning the export of around 200 products, the tensions have escalated further. With war, tourism sector is gravely impacted and many businesses and people lose their way of earning. Many businesses like Nike have suspended operations in Russia.

European banks have also provided loans to Russia and that would face a brunt because of decline in payments system. Even the Ukraine’s growing tech-industry would be disrupted. The whole tech-world of Ukraine- its tech-specialists, architecture, design, clusters that served many European tech-giants would also face a hit.

Implications faced by India

Russia is India’s 25th largest trading partner and the implications of the war are a key-risk for many sectors in India. One of the areas that would be impacted is the defence sector. Russia is India’s larger defence supplier and over 80 percent of the defence equipment’s in India are imported from Russia. With the decline of SWIFT payment system to Russia, India would not be able to pay the defence companies and would also not be able to maintain its defence equipment.

India is the third largest importer of crude oil and crude oil accounts 20 percent of the country’s total import bill.  The likelihood of surge in crude oil prices would account for increased inflation, current deficit accounts, and would also hamper various industries that use crude oil as a raw material. While aviation, automobile, paint, tyre and oil marketing business companies would face the brunt but companies such as exploration companies would benefit from the increased price.

The India automobile industry, hoping to recover from the pandemic’s demand effect, would face severe brunt since the prices of oil would hit severely along with an increase in the price of metals such as palladium, steel, aluminium and nickel. The rise in crude oil has also sparked the price of Aviation Turbine Fuel (ATF) and will also impact the prices of petrol and diesel. This higher oil prices will have ramifications on the currency which will depreciate and led to the rise of inflation.

Various Indian domestic companies have set up business in both Russia and Ukraine apart from exporting products to them. With the escalation the developments, these businesses would be impacted. Dr. Reddy’s Laboratory and Sun Pharma, both pharmaceutical companies and Carborundum Universal have strong presence in both Russia and Ukraine and export products to these countries would be hardy hit. Tea- exporting businesses would also take a toll since Russia is one of the largest importers of Indian tea. Apart from that, Indian companies and consumers would face the shortage of supplies of the sunflower oil imported from Russia and Ukraine.

The war impacts every aspect of life and the disruption in economy and businesses is one of them. But the loss of one business could be an opportunity for other businesses to expand. Since the wheat supplies from Russia and Ukraine have stopped, India could step up and take challenged to increase the production of wheat and fulfil the demand of the world.

Conclusion

With the current halt in the flow of materials and the hit of supply chain, there is a quick need for countries to diversify their trade, otherwise situations like these would severely impact their economies and businesses. The world demands an abrupt need for the cessation of the conflict and the arrival of a diplomatic solution between both countries, otherwise, the conflict would spread beyond its borders and would have ramifications to impact the businesses around the world.

Liza Gupta is Research Intern with NIICE.