It is about three weeks since Russia’s invasion of Ukraine begun on February 24. The war has caused huge loss of life including innocent civilians and destruction of infrastructure. The impact of war has badly affected the Ukrainian economy, but economic sanctions imposed on the invading Russia by the US and other Western countries are also affecting the Russian economy adversely. Nevertheless, the ripple effects of a sustained war are also impacting other economies of the world including two of the biggest emerging economies like India and China.
Global Impact
According to the International Monetary Fund (IMF), Russia’s invasion of Ukraine will affect the entire global economy by slowing growth and jacking up inflation, and could fundamentally reshape the global economic order in the longer term. In December 2021, the World Bank had said in its estimate that as the world moves into the third year of the COVID-19 pandemic, global growth is expected to moderate next year to 4.3 percent. Inflation is expected to ease gradually over 2022, but inflation rates are likely to remain above the target level for most of the year.
Now this forecast has to be seen in the perspective of Russian invasion of Ukraine. Growth in Russia is forecast at 2.4 percent in 2022, on the back of a continually strong oil sector, before slowing down to 1.8 percent in 2023. With vaccination rates still low, COVID-19 control measures may be called for next year, which will weigh significantly on growth. Uncertainty around inflation remains high.
In its briefing after March 4 Executive Board meeting chaired by chaired by Managing Director Kristalina Georgieva, the International Monetary Fund (IMF) said that the war in Ukraine is resulting in tragic loss of life and human suffering, as well as causing massive damage to Ukraine’s physical infrastructure. While the situation remains highly fluid and the outlook is subject to extraordinary uncertainty, the economic consequences are already very serious. Energy and commodity prices—including wheat and other grains—have surged, adding to inflationary pressures from supply chain disruptions and the rebound from the Covid‑19 pandemic. Price shocks will have an impact worldwide, especially on poor households for whom food and fuel are a higher proportion of expenses.
The IMF further said should the conflict escalate, the economic damage would be all the more devastating. The war is also eroding business confidence and triggering uncertainty among investors that will depress asset prices, tighten financial conditions and could trigger capital outflows from emerging markets. The sanctions on Russia will also have a substantial impact on the global economy and financial markets, with significant spillovers to other countries.
Impact on Europe
The Compagnie Française d’Assurance pour le Commerce Extérieur (Coface), a global credit insurer, forecasted a deep recession of 7.5% for the Russian economy in 2022 and downgraded Russia’s risk assessment to D (very high). According to it, the European economies are most at risk. It estimated at least 1.5 percentage point of additional inflation in 2022, while GDP growth could be lowered by 1 percentage point. Together with a complete cut of Russian natural gas supply, this could cost at least 4 points of GDP, thereby leading EU GDP growth close to zero – more probably in negative territory – in 2022. According to it while high commodity prices were one of the risks already identified as potentially disruptive to the recovery, the escalation of the conflict increases the likelihood that commodity prices will remain higher for much longer. In turn, it intensifies the threat of long-lasting high inflation, thereby increasing the risks of stagflation & social unrest in both advanced & emerging countries.
The global supply chain would face major disruptions due to Russia-Ukraine war. Russia is the world’s 3rd largest oil producer, the 2nd natural gas producer and among the top 5 producers of steel, nickel and aluminum. It is also the largest wheat exporter in the world (almost 20% of global trade). On its side, Ukraine is a key producer of corn (6th largest), wheat (7th), sunflowers (1st), and is amongst the top ten producers for sugar beet, barley, soya and rapeseed. On the day the invasion began, financial markets around the world fell sharply, and the prices of oil, natural gas, metals and food commodities surged. Following the latest developments, Brent oil prices breached USD 100 per barrel for the first time since 2014 (125$/b at the time of writing), while Europe’s TTF gas prices surged at a record EUR 192 on 4 March.
Humanitarian Crisis
A great humanitarian crisis is building up as people of Ukraine are fleeing to save their life. The New York Times writes: “The war in Ukraine has set off the fastest mass migration in Europe in at least three decades, prompting comparisons with the Balkan wars of the 1990s and providing echoes of the vast population displacement that followed World War II. In less than a week, the flight of Ukrainians is at least 10 times as high as the one-week record of people entering Europe during the 2015 migration crisis, and nearly double the number of refugees recorded by the United Nations during the first 11 days of the Kosovo war in 1999.” The UN migration agency estimates that nearly 6.5 million people have now been displaced inside Ukraine, on top of the 3.2 million refugees who have already fled the country. The estimates from the International Organisation for Migration suggests Ukraine is fast on a course in just three weeks toward the levels of displacement from Syria’s devastating war which has driven about 13 million people from their homes both in the country and abroad.
Ukrainian cities have been devastated by Russian bombardment. The cities, which were home to about two-thirds of Ukraine’s population of 44 million, are the focus of the Russian assault. Russian unscrupulous and unsparing attack from Kharkiv and Kyiv in the north to Mariupol in the south has destroyed businesses, homes, schools, cultural institutions and historical buildings. Russian attacks continued to hit the capital, Kyiv, and Kharkiv and Kramatorsk in the east on March 18, causing deaths and damage to an aircraft repair plant near the airport in the western Ukrainian city of Lviv.
Many women and children have fled because urban neighborhoods are becoming battlegrounds. Even hospitals were not spared. The immediate toll of the Russian airstrike that devastated a maternity hospital in the Ukrainian city of Mariupol last week was three people dead and 17 injured, but the impact did not stop there. The World Health Organization documented 31 attacks on health-care workers, medical sites and facilities thus far in the Ukraine conflict. The attack was condemned worldwide. The World Health Organization issued a statement: “To attack the most vulnerable – babies, children, pregnant women, and those already suffering from illness and disease, and health workers risking their own lives to save lives – is an act of unconscionable cruelty.”
Impact on Russia
Since the Russian invasion of Ukraine its credit ratings have been downgraded. On February 25, S&P lowered Russia’s long-term foreign currency credit rating to ‘BB+’ from ‘BBB-‘, and warned it could lower ratings further, after getting more clarity on the macroeconomic repercussions of the sanctions. Subsequently, the Moody’s Investors Service and Fitch Ratings also downgraded Russia’s credit ratings to junk level as risks mount amid international sanctions on Russia in response to the country’s invasion of Ukraine, which could undermine its capability and willingness to service debt.
The Russian Rouble plummeted to a record low against the dollar on February 28 amid an accelerating Western-led campaign to punish and isolate Moscow over its invasion of Ukraine. Investors flocked to safe-haven currencies, including the US Dollar and Yen, after Russian President Vladimir Putin put nuclear-armed forces on high alert on February 28, the fourth day of the biggest assault on a European state since World War Two. The Rouble fell about 30% against the Dollar — making it worth less than 1 U.S. cent — after the U.S., European Union and United Kingdom announced moves to block some Russian banks from the SWIFT international payment system and to restrict Russia’s use of its massive foreign currency reserves. The SWIFT is used to move billions of dollars around more than 11,000 banks and other financial institutions around the world.
The Bank of Russia, Russia’s central bank, more than doubled its key interest rate to 20% on February 28 from 9.5% as the Rouble sank 30% after new Western sanctions. The Rouble recovered ground after Russia’s central bank sharply raised its key interest rate to shore up the currency and prevent a run on banks. The currency then eased back to about 20% down. But it was trading at a record low 105.27 per dollar, down from about 84 per dollar by March 3.
The collapse in value erodes the currency’s buying power and could wipe out the savings of ordinary Russians. Russia has about $630bn (£470bn) in reserves – a stockpile of savings – built up from soaring oil and gas prices. But because a lot of this money is stored in foreign currencies like the dollar, the euro and sterling as well as gold, the Western ban on dealing with Russia’s central bank restricts Moscow from accessing the cash.
President Vladimir Putin responded on February 28 to the sanctions with an order barring citizens from transferring money outside of Russia, including for debt payments. Moscow’s stock market, which saw heavy losses last week as investors sold, was closed for the second day on February 29. Ahead of an emergency meeting between President Vladimir Putin and his economic advisers on Monday, Kremlin spokesman Dmitry Peskov said: “These are heavy sanctions, they’re problematic, but Russia has the necessary potential to compensate the damage from these sanctions.”
Impact on China
Consequent upon Russia’s Ukraine invasion, Chinese trade with the EU would face challenges due to disruptions in supply chains. China became the largest trading partner of the EU, overtaking the US in 2020. Trade between China and the EU was worth $709bn (€586bn, £511bn) last year, compared with $671bn worth of imports and exports from the US. If the Ukraine crisis halts China-EU freight train services or leads to a slower operation efficiency, there will be adverse impact to EU and China’s trade. Chinese exporters with exposure to Ukrainian markets have delayed shipments, while some factories with business in Russia have been waiting for payment from their clients.
However, for the present China’s exports to Russia surged 41.5% in the first two months of 2022, topping growth with other countries while imports from Russia rose 35.8%. China Exports to Russia was US$50.58 billion during 2020, according to the United Nations COMTRADE database on international trade. If war continues there might be negative impact on the bilateral trade, especially in the wake of economic sanctions on Russian financial systems and firms and individuals.
As far as supply of energy to China is concerned, there would be little or no disruption in the short run. The source of China’s crude oil and natural gas imports is diverse, with long-term contracts accounting for a large proportion of all deals. As long as all parties comply with the contracts, imports can remain stable.
However, China would have to resort to certain adjustments in its exchange rate system. The depreciation of Rouble has also compelled the China’s Foreign Exchange Trade System (CFETS) to set a wider trading band between the Chinese RMB Yuan and Russian Rouble “in accordance with the requirements of market development”. It widened the daily trading band for the RMB exchange rate with the Rouble, allowing the currency cross to trade 10% in either direction of a daily midpoint set by China’s central bank, up from the previous 5%.
It is also expected that the Rouble –Yuan swap deal done earlier between the two countries would not have much disruptive effect. The swap deal, which has a maximum quota of 150 billion Yuan over 815 billion Roubles, is effective for three years, but extendable upon agreement. This does not pose any threat because under the Swap deal currency transfers would only take place when one side initiates a swap and the initiator of a currency swap should stick to the exchange rate of the day when the actual transaction takes place – instead of a fixed rate – and return the same amount of currency plus interest.
Impact on India
The effect of the Ukraine war on the Indian economy began with the SOS to bring back its trapped students and citizens from Ukraine. On March 16, while giving statement in the Rajya Sabha On the government’s effort to evacuate stranded Indians, External Affairs Minister S Jaishankar revealed that over 22,000 Indian citizens have returned home safely, adding that a large number of students elected to stay back despite several advisories. Some reports pointed out that Russia has threatened to shut its gas pipeline to Germany and warned of crude price at $300 a barrel.The rising international crude oil prices could also put pressure on Indian import bill as the country imports about 70% of its requirements of energy. The crude oil price has touched 130 dollars a barrel. Now it is feared to go up further, depending on how the conflict in Europe progresses. At an average crude oil price of 120 dollars a barrel, it is estimated that Indian economy would face an additional burden of 70 billion dollars in FY23 above the FY22 level. This additional burden would be 1.9 per cent of GDP. Higher crude oil prices are major headwinds for a couple of sectors including aviation, paint, tyres and oil marketing companies. However, since India imports only about 2% of its crude oil from Russia, there would not be any major disruption in energy supply.
India is also facing pressure on its exchange rate. The Rupee is close to 77 a Dollar. Despite the Reserve Bank’s attempts to manage this fall, the INR has been Asia’s worst-performing currency in 2022. Several brokerages, banks and treasury departments fear the INR might plunge below 80 a dollar.
According to Crisil Research report, the conflict between Russia and Ukraine is disrupting supplies of agricultural commodities and is likely to have a deep impact on India’s farm sector. Both the Black Sea nations are major suppliers of key commodities such as wheat, sunflower oil and corn. On its part, India is an exporter of wheat and a major importer of edible oils, including sunflower oil. Thus, while the conflict creates opportunity for exports, it is also set to have an adverse impact on the import bill due to higher prices.
The ongoing Ukraine-Russia conflict has disrupted India’s edible oil market which gets more than 90 percent of its sunflower oil from Russia and Ukraine. The resultant increase in retail prices could worsen if the war continues to rage on. India consumes about 25 million tonnes of edible oil each year, of which it imports about 55 percent, making it the largest importer of edible oils in the world. In the financial year ending March 2021, it imported about 13.35 million tonnes of edible oils worth more than $10.5bn. Of this, palm oil accounts for about 56 percent, soybean oil for 27 percent, and sunflower for about 16 percent. Crisil report has underscored that Ukraine conflict would adversely impact India’s fertizer imports as well and push up the input cost to the Indian farmers.
On the positive side, it would create an opportunity for wheat and maize exports. India produces 14% of the global production of wheat, equal to the combined share of Russia and Ukraine; it can cater to the demands of countries like Egypt which imported major part of their wheat requirement. It must, however, be note that due to huge domestic demand India has only 3% share in global wheat export market.
As Russia has been denied supply of some necessary commodities and spares by the countries of Europe and China due mainly to economic sanctions and exclusion from the SWIFT system of payments, India can revive its mechanism of Rupee-Rouble trade. In recent past as Western economic sanction on Russia increased, the Rupee- Rouble trade has increased from 6% of the total Indo-Russian trade of $9 billion to 30%.
Ratings agency Moody’s Investors Service in its report has said that the crisis has not derailed global economic expansion but has rather dented it. It has now lowered its 2022 growth forecasts for India by 0.4 percentage points. Moody’s expects the Indian economy to grow by 9.1% this year (Vs the 9.5% forecast earlier), followed by a 5.4% growth in 2023.