Longer-term Western sanctions against Russia will result in a steady rise in commodity prices and global inflation. This would have a negative impact on global growth, resulting in weaker demand for South Asian exports from abroad.
--BY RAJENDRA PRASAD KOIRALA
The annexation of Crimea and the capture of important government facilities in the country's east by pro-Russian separatists exacerbated the Ukraine crisis in early 2014. This is part of a larger pattern. Russian President Vladimir Putin's methods against the sovereign states of the former Soviet Union appear to fit a bigger pattern of destabilisation that began more than a decade ago, from support for separatists in Moldova to the now appearing iconic war in Georgia. The consequences of Ukraine's current violent war are being felt around the world. This begs the question of where Ukraine and other troubled former Soviet countries are headed, and what the international community can do to help.
It felt like a Cold War situation, a dangerous occurrence from another period. On the border with a neighbour, an unpredictable Russian leader was amassing troops and tanks. A deadly East-West conflagration was feared. The Cold War then escalated when Putin authorised Russian forces to attack Ukraine. Immediate and far-reaching consequences followed. Following Russia's full-scale invasion on February 24, Europe is now witnessing the largest mobilisation of military since 1945. Moscow was denied the quick win it had hoped for, with major towns across the country, including Kyiv, the capital, still impregnable. The Russian attempt has been hampered by an under-equipped military and fierce resistance from Ukrainian forces and civilian resistance groups. Nonetheless, Russia possesses superior military force, and its President Putin has stated that his ultimate goal is to conquer Kyiv, destabilise Ukraine's democratically elected government, and swallow the country into Russia's orbit.
The invasion has the potential to destabilise the already fragile post-Soviet region, with major implications for Europe's security system since the 1990s. Putin has long grieved the fall of the Soviet Union which resulted in the loss of Ukraine and other nations. Now it looks that undermining NATO, the military alliance that helped hold the Soviets in check, is part of his plan. Russia presented a list of far-reaching demands to restructure that organisation before invading, which NATO and the US rejected.
Since 2019, President Volodymyr Zelensky and his Servant of the People party have ruled Ukraine. Ukraine has struggled with the social and economic implications of the COVID-19 throughout Zelensky's administration, despite some resistance and delays.
Within Ukraine's internationally recognised borders, the US supports the country's sovereignty and territorial integrity, as well as the implementation of domestic reforms. Ukraine has been a major recipient of US foreign and military aid in Europe and Eurasia since its independence in 1991, particularly following Russia's invasion and takeover of Ukrainian land in 2014.
Following the fall of the Soviet Union in the early 1990s, NATO moved eastwards, eventually absorbing the majority of the European countries that had previously been part of the Soviet sphere of influence. Lithuania, Latvia, and Estonia, all of which were originally part of the Soviet Union, as well as Poland, Romania, and others, joined NATO.
As a result, NATO has pushed hundreds of miles closer to Moscow, putting it on the Russian border. In 2008, it announced that it intended to enlist Ukraine at some point in the future, albeit this remains a long-term goal. Putin has called the dissolution of the Soviet Union "one of the greatest disasters of the 20th century," claiming that it robbed Russia of its rightful place among the world's great powers. During his 22 years in leadership, he has focused on rebuilding Russia's military and reasserting the country's geopolitical might. Putin has also stated that Ukraine is inherently a cultural and historical component of Russia.
When enormous protests in Ukraine threw out a president loyal to Putin, relations between the two countries deteriorated dramatically. Crimea, which is part of Ukraine, was quickly attacked and occupied by Russia. Moscow also stoked a separatist insurgency in Ukraine's Donbas area which continues to rage despite the deaths of over 13,000 people.
Putin appears focused on turning back the clock more than 30 years, building a large, Russia-dominated security zone akin to Moscow's authority during the Soviet era. He plainly wants to lure Ukraine, a 44-million-strong country, back into Russia's sphere of influence, despite the fact that he is 69 years old and possibly nearing the end of his political career. In December, Russia submitted NATO and the US with a set of formal requests that it claimed were necessary to safeguard its security. The most important of these is a commitment that Ukraine will never join NATO, that NATO will reduce its forces in Eastern European nations that have already joined, and that the 2015 cease-fire in Ukraine would be implemented — though Moscow and Kyiv disagree on what that means. The key demands were dismissed out of hand by the West. The strong stance of Moscow has stoked Ukrainian nationalism, with citizen militias planning a long-term guerrilla battle in the case of Russian control. As in the past, the Russian president may attempt to rally nationalists at home by concentrating on a foreign threat. Nonetheless, since the assault began, thousands of Russians have come to the streets to protest the war, some at considerable personal risk.
President Joe Biden stated in early December that his administration would not consider deploying soldiers to fight for Ukraine because Ukraine is not a member of NATO and thus does not fall under its collective defence obligation. Instead, the US has given anti-tank and anti-aircraft weapons to Ukraine, expanded its military posture in NATO countries bordering Russia, and dispatched an additional 7,000 troops to Europe. In order to reassure NATO partners in Eastern Europe, the Pentagon has also approved the deployment of an armoured brigade combat team to Germany. Officials from the Obama administration have warned that the US may support an insurgency in Ukraine. But the actual stumbling block is money.
Biden has imposed strong penalties intended at cutting off Russia's top banks and several billionaires from much of the global financial system, as well as blocking the country from purchasing crucial American technology for its defence, aerospace, and maritime industries. Biden has also imposed penalties on the corporation sponsoring a Russian-Germany energy pipeline.
Global Impact of the Conflict
Food and fuel shortages are a result of the conflict in Ukraine. "With dwindling supplies and rising food costs, the world's poor may be forced to go hungry," said World Trade Organization (WTO) Director-General Ngozi Okonjo-Iweala. According to the WTO, the greatest immediate economic impact of the Ukraine crisis has been sharply increased commodity prices. Food, energy, and fertiliser supplies from Russia and Ukraine are also under peril as a result of the conflict. The WTO cautions that blocking grain imports through Black Sea ports might have "potentially grave ramifications" for food security in developing countries. According to new findings from the Global Crisis Response Group (GCRG), the war in Ukraine is triggering a three-dimensional crisis including food, energy, and money, which is having alarming cascade repercussions on a world economy already battered by COVID-19 and climate change.
"We are presently in the midst of a perfect storm," UN Secretary-General António Guterres stated. "The Ukrainian people cannot withstand the bloodshed that is being perpetrated against them." And the world's most vulnerable people cannot become collateral damage in yet another calamity for which they bear no blame."
"This is something our world cannot afford. We must act now," said the Secretary-General, who called for immediate, tangible, and coordinated action to help the most vulnerable countries and populations avoid the interconnected catastrophes. "We have the ability to address this three-dimensional challenge. We have the ability to absorb the impact."
A perfect storm is brewing
Russia and Ukraine, as two of the world's breadbaskets, supply around 30% of the wheat and barley we consume. Russia continues to be the world's top natural gas exporter, second-largest oil exporter, and a major fertiliser producer. Food, oil, and financial markets have all been badly impacted by the war, with commodities prices reaching new highs. In 2022, the global economy is expected to decrease by 1%.
According to preliminary estimates, 1.7 billion people in 107 economies, predominantly in Africa, Asia and the Pacific, and Latin America and the Caribbean, are exposed to at least one of three dangers. When paired with the already disastrous effects of the COVID-19 problem and climate change, even a single risk can lead to debt trouble, food shortages, and outages.
The international community must respond quickly. The GCRG's Steering Committee led by UN Deputy Secretary-General Amina Mohammed came up with some major recommendations regarding the impending threats by the Russia-Ukraine war. The brief makes a number of recommendations to avoid and respond to the triple crisis, including keeping markets and trade open to assure the availability of food, agricultural inputs like fertiliser, and energy. It also urges international financial institutions to deliver funds for the most vulnerable countries as soon as possible, while also ensuring that sufficient resources are available to build long-term resilience to such shocks.
In terms of food, the brief calls for the immediate supply of funding for humanitarian food aid, in addition to keeping markets accessible and ensuring that food is not subject to export restrictions. Food producers, who are facing rising input and transportation expenses, are in desperate need of assistance for the coming growing season.
In terms of energy, it urges countries to employ strategic stockpiles and additional reserves to assist alleviate the current energy crisis. More crucially, the world must speed up the deployment of renewable energy, which is unaffected by market swings, in order to phase out coal and other fossil fuels. "Now is also the moment to transform this crisis into a chance. We must strive towards phasing out coal and other fossil fuels while also speeding renewable energy deployment and ensuring an equitable transition," said the Secretary-General.
In terms of financing, the brief urges the international financial system, particularly G20 countries and development institutions, to provide flexible, urgent, and substantial assistance for least developed countries, as well as debt relief under current circumstances.
"We must save emerging countries from financial ruin." The international financial system "have deep pockets," according to the Secretary-General, who is requesting that funds be made available to "economies that need them the most so that governments can avoid default, provide social safety nets for the poorest and most vulnerable, and continue to make critical investments in sustainable development."
According to the World Bank's baseline prediction, Ukraine's poverty rate will rise from 1.8% in 2021 to 19.8% in 2022, based on the USD 5.50 per day threshold rate. It went on to say that simulations established by the UN projected that a more severe and protracted war may result in roughly 30% of the people living in poverty. According to the World Bank, the recent rise in food prices could drive an additional 40 million people below the USD 1.90 per day poverty level, citing estimates from writers of a Centre for Global Development blog.
Similar worries were expressed by the IMF. "Steeper price hikes for food and fuel may generate a greater risk of unrest in several countries, from Sub-Saharan Africa and Latin America to the Caucasus and Central Asia, while food insecurity is expected to worsen in parts of Africa and the Middle East," the IMF stated in its report in March. The fighting disrupted the planting and harvesting seasons in Ukraine, destroying important farms, stores, infrastructure, and output, particularly in eastern Ukraine. Furthermore, the fighting has prevented transportation from the Black Sea, from where approximately 90% of Ukraine's grains are exported. It had claimed that rising prices could contribute to societal tensions across the Middle East and North Africa, particularly in countries with weaker social safety nets, fewer job possibilities, limited fiscal headroom, and unpopular administrations. Egypt, for example, buys over 80% of its wheat from Russia and Ukraine.
Additionally, the IMF stated that domestic production and a growing dependence on rice rather than wheat might alleviate food concerns in Asia. "Expensive food and energy imports will raise consumer prices," the report added, "but subsidies and price caps for fuel, food, and fertiliser may mitigate the immediate impact—but at a cost to the budget."
With Russia as a key natural gas provider, energy is Europe's "main overflow conduit." According to the World Bank, European natural gas prices have risen particularly steeply as a result of limited spare capacity, including import and export ports, and the necessity that natural gas be transported as liquefied natural gas.
According to the IMF, economies that rely on oil imports would have larger fiscal and trade deficits, as well as higher inflation. Higher prices, on the other hand, may favour exporters in the Middle East and Africa. In the long run, the battle could radically change the global economic and geopolitical order if supply chains are reconfigured, payment networks are fragmented, energy trade shifts, and countries reassess reserve currency holdings, according to the report.
Due to a lack of willingness to acquire Russian during the ongoing tensions, Urals trade at a USD 20/bbl discount to Brent. According to the World Bank, "by late March, the price of Brent crude oil had fallen significantly, to above USD 100 per barrel, with the market falling after the United States declared intentions to release about 1 million barrels of oil per day from its reserves over a six-month period."
According to the International Energy Agency, "Oil prices had already been growing before the war, following a revival in demand that accompanied the global economic recovery, and after supply concerns reappeared when OPEC+ output fell short of projections despite minimal spare capacity."
Increased supply-chain interruptions, as well as higher fuel prices, according to the IMF, could be problematic. Global value chains may be harmed by disruptions, penalties, and higher commodity prices. According to the World Bank, this might worsen existing issues, resulting in longer delivery times and higher manufacturing costs for enterprises worldwide.
Despite the fact that Russia and Ukraine account for less than 3% of global exports and 2% of global imports, the conflict and subsequent sanctions have harmed trade connectivity by disrupting transit routes, particularly for maritime container shipping and air freight traffic, according to the financial body. Shipping expenses have also risen due to increasing fuel prices and insurance fees.
Supply chains for high-value commodities and crucial components, such as those in the automobile and electronics industries, were hit by trade disruptions between Europe and Asia. According to the World Bank, the fighting has made it harder for European carmakers to obtain crucial components such as electrical systems manufactured in Ukraine. Several assembly lines have been suspended as a result. The food, construction, petrochemical, and transportation industries have all been affected by bottlenecks.
The World Bank also mentioned the global impact on services trade, noting obstacles such as airspace closures, travel restrictions, sanctions, and rising fuel prices. In terms of total foreign departures, Russia and Ukraine are among the top ten countries, and they are an important source of revenue for tourism-dependent countries in Europe, East Asia and the Pacific, the Middle East, North Africa, and South Asia.
Finance and Debt Servicing
Emerging markets and developing economies have high debt levels, according to the World Bank. These economies account for over 40% of global GDP, according to their calculations. Following the epidemic, policymakers faced a difficult option between reducing inflation and ensuring economic recovery.
According to the research, geopolitical tensions have "darkened the picture" for emerging countries who are major commodity importers or rely on tourism or remittances. External borrowing costs are rising across Africa, according to the report, with bond spreads widening by an average of 20 basis points. Furthermore, the equation has shifted for nations with high debt, low reserves, and payments due soon, such as Sri Lanka, which was seeking IMF aid to service its debt burden.
According to the World Bank, financial spillovers are most likely to be felt in advanced economies with exposure to Russian financial assets, such as some Italian, French, and Austrian banks. Their commercial relationships and local presence provide them access to the sanctioned country's economy. "As a result, European bank equities have lost more than a fifth of their value since the start of the war," according to the same research, "although good capital adequacy and liquidity ratios have buffered the damage."
Impact in South Asia
The crisis between Russia and Ukraine erupted in late February 2022. After recording the worst economic performance since the Great Recession, the world economy was just beginning to recover from COVID-19. The world economy's outlook for 2022 appears to be grim, and South Asia will be hit as well.
Rising inflation has outpaced the recovery of the actual economy. Advanced economies have started to withdraw the monetary boost provided during the pandemic, taper quantitative easing, and raise central bank interest rates, signalling monetary policy tightening.
Supply chain disruptions and rising gasoline costs had made managing global inflation and growth challenging before Russia's invasion of Ukraine. The invasion has pushed up commodity prices because Russia and Ukraine jointly account for a major percentage of global oil, gas, and other commodity supplies. Concerns over the timing and extent of monetary policy tightening by major central banks have caused volatility in global financial markets.
South Asia will be directly impacted mostly by trade links, particularly rising commodity prices, as the area is a net importer of commodities. The picture has already started appearing in this region. Inflation in South Asian economies had been growing relative to global competition even before the invasion. The new commodity price shock will increase the gap even more, raising the region's relative cost of production and eroding the competitiveness of low-wage and energy-intensive firms. South Asia has a stronger reliance on fossil fuels for energy generation than the rest of Asia.
Reduced global demand for the region's goods and services, as well as increased volatility and uncertainty in financial markets, has started emerging as an indirect impact on the region, leading to capital flight to safety.
The direct impact will result in higher relative inflation immediately, while the indirect impact will result in lower economic growth in the second cycle, resulting in stagflation. The length of the conflict, the intensity of Western sanctions against Russia, and Russia's policy response will decide the economic impact on South Asia. Individual South Asian countries will be affected differently depending on their economic linkages to Russia and Ukraine, as well as their global growth and financial market ties.
Longer-term Western sanctions against Russia will result in a steady rise in commodity prices and global inflation. This would have a negative impact on global growth, resulting in weaker demand for South Asian exports from abroad. In the aftermath of the epidemic, inflation in South Asia increased, widening income disparities and forcing more people into poverty. A complete invasion scenario is likely to raise inflation in the region, stifling growth and widening wealth disparities.
A long-term battle in South Asia might have far-reaching and devastating consequences. A full-scale European war is the worst-case scenario. Because Russia is playing a 'chess game' with the West, including keeping its nuclear forces on high alert, the situation could worsen further. The impact of the worst-case scenarios on South Asia would be greater than the whole economic impact of the COVID-19 pandemic. It has the potential to send the world economy into its second recession in three years, with regional implications.
India may be able to maintain positive (but slower) growth for a while due to its larger domestic market. Bangladesh is primarily reliant on exports and remittances, therefore reduced external demand will have an impact on the country's growth.
Bhutan, Nepal, the Maldives, and Sri Lanka, all of which have smaller economies and are more exposed to external shocks, may see faster growth decreases in the short term than India and Bangladesh. Pakistan's economy is also expected to suffer from a number of flaws. Tourism and trade would suffer in small countries like Sri Lanka and the Maldives. Russia and Ukraine are important tourist markets for these countries. For example, Russia buys about 20% of Sri Lankan tea. Nepal will not remain an exception to it.
In the midst of rising global uncertainty brought on by the Russia–Ukraine conflict, economic management in South Asia will be tough. Domestic demand management methods that make use of existing monetary and fiscal policy can help India lessen the growth impact. Other South Asian countries will be forced to contract their economies in order to absorb the effects of reduced external demand and unstable financial market conditions, forcing more people into poverty.
At last, the question arises as to how our government and concerned authorities along with Nepal Rastra Bank have made required preparation for the impending threats we are soon going to encounter. Inflation, food crisis, price hikes have already appeared in the nation and economists are quite scared of it.
(Rajendra Prasad Koirala is a PhD scholar. He can be reached at [email protected] for comments)