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After months of massing troops near Ukraine’s borders, Russia has invaded the neighbouring country in Thursday. The attack ordered by Russian President Vladimir Putin sent shockwaves beyond Europe and shook the volatile energy and financial markets globally, and in Asia.
The Russian invasion that began on 24 February 2022 initially pushed stock markets worldwide into the red and caused a rally in commodity prices.
“Asia will feel the consequences of rising energy prices and lower foreign demand,” says Priyanka Kishore, Head of India and Southeast Asia Economics at Oxford Economics. However, given the region’s weak economic and financial links with Russia and Ukraine, it would not be as exposed as Europe and the US to the conflict.
According to the group’s calculations, Russia’s invasion of Ukraine will slow Asia Pacific’s real GDP growth by 0.15 percentage points in 2022, compared to their no-conflict baseline, while inflation may rise by 0.4 percentage points.
Commodity prices remain elevated
The ongoing conflict between Russia and Ukraine can hurt Asia through multiple channels, one of which is higher commodity prices. Following the attack on Thursday, oil prices hit seven-year highs and pushed above the $100 mark for the first time since 2014. Given Russia’s role as the second largest crude oil exporter, the conflict is expected to have far-reaching implications for energy markets.
In 2021, around 37% of Russia’s crude exports, or 1.9 million barrels per day (bpd), went to Asia, primarily to China, South Korea, and Japan, according to Sushant Gupta, research director at consultancy Wood Mackenzie, Reuters reports.
“Any disruptions to oil flows from Russia in a context of low spare capacity in other regions could easily send oil prices to $120 per barrel (bbl). A halving of Russian oil exports would likely push the Brent oil price to $150 bbl,” says Natasha Kaneva, Head of Global Commodities Strategy, J.P. Morgan.
Furthermore, the conflict is posing a risk to agricultural markets. Russia is the world’s leading wheat exporter, while Ukraine is the world’s fifth-largest wheat exporter and one of the top four maize exporters. According to data from the Food and Agriculture Organization (FAO), Ukraine supplied 28% of Malaysian, 28% of Indonesian, and 21% of Bangladeshi wheat consumption in 2020.
According to Nomura analysts Aurodeep Nandi and Sonal Varma, food and energy accounts for nearly half of the consumption expenditure in Emerging Asia.
“Sustained rise in oil and food prices is likely to have an adverse impact on Asia’s economies, manifested through higher inflation, weaker current account and fiscal balances, and a squeeze on economic growth. In such a scenario, India, Thailand, and the Philippines are the biggest losers, while Indonesia would be a relative beneficiary,” stated the analysts.
Besides this, metal markets are also likely to suffer. Ukraine possesses large reserves of iron ore, manganese ore, titanium and coal reserves. Meanwhile, Russia is a major supplier when it comes to commodities, with raw materials accounting for almost 40% of its exports. If alternative sources are not readily available, limited exports from these countries could also impact Asian economies.
According to Erik L. Knutzen, Chief Investment Officer, Multi-Asset Class, at Neuberger Berman, “Russia’s importance in the world’s energy, aluminum, palladium, platinum, nickel and copper markets means that sanctions are likely to exacerbate already growing shortages in these raw materials.”
Inflationary pressure building up
Even before the attack on Ukraine, inflation was rising in a number of advanced and emerging economies. A hike in energy and food prices now might add to the pressure. Recent figures are already pointing to a pickup in Indonesia, the Philippines as well as South Korea. This would put pressure on Asia’s central banks to hike rates even quicker than predicted.
According to the Oxford Economic analyst, higher inflation and deteriorating deficits will increase the pressure on twin deficit countries – India, Indonesia and the Philippines, especially with Reserve Bank of India and the Bangko Sentral ng Pilipinas delayed policy normalisation.
Kelly Chung, Senior Fund Manager at Value Partners suggests that the Russia-Ukraine tensions will have relatively less impact on Asia compared to the west. “Outside of China, inflation is more under control, including Taiwan and most of Southeast Asia. In these markets, we are not seeing central banks in a hurry to increase interest rates. The only exception is South Korea, which started to increase interest rates last year.”
