The impact of the Russian-Ukrainian conflict on India is likely to be limited to a spike in commodity prices (mainly oil and gas) in the short term. This will need to be monitored if the conflict lasts longer and escalates in other parts of Europe. Russia is a major exporter of fuel, chemicals and metals, according to ICRA’s recently released report titled “Russia-Ukraine Head-to-Head – Commodity Price Risk for India”.
In reaction to the conflict, most G7 countries have announced sanctions against Russia, trying to limit their trade. However, these sanctions have so far not covered trade in essential commodities (i.e. energy).
India’s trade with India is minimal
India’s trade with Russia is very minimal at around 1% and is mostly related to commodities. Considering that most of the sanctions announced so far exclude commodity trading, the impact on India appears limited.
Regarding the likely impact, Aditi Nayar, CIFAR’s Chief Economist, said: “Macroeconomic implications of the geopolitical crisis will mainly come from the surge in crude oil prices, as Russia does not hold a significant share of the basket. Indian trade. Although the INR has been relatively constrained in 2022 so far, despite high crude oil prices, pessimistic global sentiments as well as a stronger US dollar could weaken the INR going forward. On the positive side, India’s large foreign exchange reserves and a current account deficit that is expected to remain below 3% of GDP even if crude averages $100/barrel in FY2023. , should avoid a depreciation of the INR beyond 78.0/USD. in H1 CY2022. »
CIFAR has analyzed the potential implications for certain sectors such as upstream oil and gas, gas utilities, refining and marketing, ferrous and non-ferrous metals (aluminum, steel, etc.), chemicals and fertilizers.
Commodity prices at historic highs
Commodity prices tend to reach historic highs, mainly driven by metals and natural gas. In addition, the surge in oil prices near $100 a barrel has given further impetus to commodity-induced inflationary pressures. Some sectors could gain such as upstream oil and gas and ferrous and non-ferrous metals. Domestic natural gas prices are also expected to increase due to higher prices at international hubs and these, along with high crude oil prices, will have a positive impact on upstream business EBITDA.
However, there could be potential negative implications for some of the sectors where oil/gas is a primary input, such as chemicals, gas utilities, refining and marketing, fertilizers, etc. Rising oil prices may be passed on to the end consumer which could have a negative impact on the growth in demand for petroleum products. City Gas Distribution entities may have to pass on price increases in a gradual manner, which would lead to some lag in the full pass-through of costs and, therefore, pressure on margins. Any negative impact on gas availability in Europe could also lead to a contraction in the chemical industry, which can have a cascading effect on global prices for specific products.
Rohit Ahuja, Head of Research and Outreach, said: “At the initial stage, we believe the implications for India would be limited to higher commodity prices. However, there are risks of an escalation of this conflict in other parts of Europe and a further spike in commodity prices.
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Posted: Monday, February 28, 2022, 2:46 PM IST