Russia Ukraine Conflict: Serious Economic Fallouts For Indian Economy

The Russian invasion of Ukraine which unfortunately is still on, will have long lasting and serious repercussions on the whole world. Clearly, the biggest impact is on the loss of human lives and massive destruction of Ukraine’s infrastructure. It will take years, if not decades, for things to get back to normal, if ever, but one suspects that it will be very difficult to restore status quo ante on various aspects of the economy and on geo political relationships. From an economic standpoint, the reality is that we are living in an interconnected world, and the implications of such a war, certainly the most aggressive of the last several decades, is bound to have massive geopolitical and economic fallouts. Clearly, no one wins in a war and that would be true of this one as well. The impact on the Indian economy will be wide ranging and deep in various ways – some of it indirectly as a result of global fallouts and some of it directly so.

As readers would obviously know, there are a large number of sanctions that have been imposed on Russia and that has already led to isolating Russia from the global financial system. The key sanctions include:

- Freezing of USD 630 bn of its foreign exchange reserves.
- Targeting Russia’s 10 largest financial institutions which hold about 80% of the banking sector assets.
- Several Russian banks have been banned from the Swift International payments network.

Although not a sanction per se, with Visa, Mastercard and American Express have suspended their services in Russia; this means that any cards issued by banks globally on this network will not work at Point of Sale terminals or ATMs. Given that Visa and Mastercard control nearly 90% of credit and debit card payments, this would be an economic disaster from a
Russian standpoint.

Impact on Indian economy – Global fallouts
Russia is a country of almost 15 cr people with a USD 1.7 trillion GDP. It has 30% of the world’s natural resources and its main exports are oil and gas. The implications of countries being reluctant to buy from Russia has already had a major impact on oil prices and clearly, that already has had a serious impact on the Indian economy. The budget deficit for FY 2022-2023 has been predicated on oil being between USD 70-75 per barrel and we are currently already at approximately USD 120 + per barrel; the implications on inflation, foreign exchange rate will be very direct, and the indirect implications will be on various industries including the auto segment, petrochemicals and various other industries dependant on oil derivatives.

Russia has huge coal reserves, the 2nd largest in the world and the price per tonne of coal has gone up from USD 87 to USD 220. Russia is also a huge exporter of wheat, corn and soyabean and those prices have also been impacted; in terms of specifics, global wheat prices have shot up by over 90% year on year and corn prices by over 33% to give just two examples. Similarly, palm oil and phosphoric acid prices have also shot up significantly.

There are much broader fallouts as well; supply chains will get disrupted, travel will become extremely expensive and tourism overall will be badly hit with consequential cascading effect on the entire hospitality industry. This will obviously also impact India. Russia also supplies the global semi conductor industry with rare metals and this will have an impact on chip manufacturing which is already very challenged currently.

Coming to Ukraine, while it is a much smaller economy at USD 185 bn and a population of 4.14 crore, the reality is that the interconnect and its physical positioning, which is what seems to have led to the war, will also have serious global fallouts; Ukraine is a major supplier of crude sunflower seed oil and to some extent metallurgic products, plastics and polymers. It also has significant engineering talent and therefore, an overall impact on the information technology industry, which is of particular relevance in the context of acceleration towards
digitisation.

Trade with Russia and Ukraine
India’s trade with Russia is approximately USD 10 bn which is 1.3 per cent of India’s total trade. India imports only 2 per cent of its oils from Russia. About 62 per cent of the oil imports come from the Middle East, 14 per cent from Africa and 12% from North America. With the huge spike in oil prices, India’s fiscal maths could go for a complete toss.

India also imports a significant amount of precious and semi-precious stones, mineral oil, boilers, nuclear reactors and fertilisers from Russia, and all of this trade can be badly hit, with consequential cascading impact. India also imports a significant amount of coal (almost USD 1 bn per year) from Russia, and one has to see the implications of that, as well particularly since coal prices had already shot up even pre war. In terms of exports, whilst relatively small, electrical machinery and equipment, pharmaceutical products, organic chemicals and vehicles.

An extremely worrisome aspect of this war vis-à-vis India is India’s dependence on defence equipment from Russia; Russian T72 and T90 battle tanks are a critical part of the India army, 70% of Indian fighter aircrafts are Russian, and India’s defence import plans include manportable short range defence systems from Russia. The implications of the war and India’s need to do a tight rope walk vis-à-vis the dependence on Russia for defence, will therefore be a major issue, not only in terms of trade, but in terms of geopolitical relationships. In relation to Ukraine, India imports a significant amount of agricultural products, particularly sunflower seed oil and in terms of exports, these are relatively small, but pharma is the
largest.

India and Russia cross border investments
Indian oil companies have multibillion dollar investments in Russian oil fields at various locations, but still relatively small compared to India’s oil requirements. On the converse side, Russia’s Rosneft already has a controlling stake in the 20 mn tonne p.a. Essar refinery (now Nayara Energy). Also, both sides have been reiterating their commitment for long term supplies of crude oil and LNG to India and increased Russian stake in India’s petrochemical
markets through investments.

Impact on capital markets and forex
The capital markets around the world have taken a massive hit; just in 3 weeks virtually, 20% of market cap has been wiped out in India, and that in turn will have significant impact on various segments, including real estate, the demand for automobiles and indeed even demand for day to day items, particularly when coupled with other inflationary pressures. The LIC IPO which was to be opened shortly, already seems to be pushed back to the next fiscal year and this will be a major impact on the Governments finance, especially given the uncertainty of the overall divestment process in the context of the capital market situation.

Summing up
It is obvious that this is a war that never should have been, but it is unfortunately a reality and the impact has been and will be huge. Even if the war ends shortly, the face off of relationships will have long ranging effect on world geopolitics, and indeed, the world economy. Redrawing relationships and global trade seems to be a major challenge of the next 5-10 years, if not more.

The author is  Managing Director - Katalyst Advisors

Ketan Dalal .

Guest Author Managing Director - Katalyst Advisors pvt ltd