February 14, 2022 (MLN): The looming war situation between Ukraine and Russia could have complications for Pakistan as it could further disrupt energy supplies, exacerbate food insecurity, and another rally in semi-conductor chip prices which may likely deteriorate its current account.
A direct impact can be witnessed in the import of wheat into Pakistan from Ukraine. In FY21, Pakistan imported 39% of its total wheat imports from Ukraine. Any disruption in wheat imports would result in higher food prices in addition to higher energy prices, a report by Ismail Iqbal Securities noted,
Ever since the annexation of Crimea by the Russian army in 2014, tensions between Russia & Ukraine have remained elevated. With the Ukrainian’s regime continuous push to join NATO forces, tensions have boiled down to a level in 2021 which have never been witnessed before. All sides supposedly support an international peace effort there, but little progress has been made.
Presently, the build-up of Russian combat formations around Ukraine's borders is extraordinary.
U.S. President Joe Biden spoke to his Ukrainian counterpart Volodymyr Zelenskiy on Sunday and agreed to continue diplomatic efforts to try to resolve the crisis, the White House said.
In light of these recent developments, it is expected that trade in this region will be impacted and will cause commodity prices to remain elevated. The report is of the view that major exports from Russia are less likely to be disrupted. Therefore, any price rally generated in Russia’s major export products is expected to last in the short term. On the other hand, we expect major disruptions in Ukraine’s wheat, metals and minerals exports if there is any prolonged warlike scenario.
This recent escalation in Ukraine did not go unnoticed in the commodities markets and a price reaction was witnessed in different energy commodities. Brent hit a seven-year high of USD95 a barrel on fears that a possible invasion of Ukraine by Russia could trigger U.S. and European sanctions that would disrupt exports from the world's top producer in an already tight market.
With the likelihood of gas disruption to the EU, power producers started to stockpile coal which resulted in a rally in coal prices (Richard Bay: USD 196 per ton, up by 43% CYTD).
To note, Russia being the second-largest producer of crude oil and natural gas is a vital energy player in the global energy markets. Europe remains the major destination for most of the Russian Federation's exports. During 2019, more than 60% of Russia’s energy exports have gone to European countries (USD: 135bn) via a network of pipelines.
Going by the report, this possible fallout may possess a significant risk to Pakistan’s economy and different business sectors operating in the economy.
In energy commodities, it foresees a short-term price rally to be witnessed in crude oil, LNG, and coal prices which may dwindle Pakistan’s current account situation further, adding more pressure on the Pakistani rupee.
For other commodities, the report highlighted the major risk to the Automobile sector in the wake of any chip shortages to occur. On the other hand, the steel industry is expected to witness high raw material prices & finished goods prices.
In the short run, price rally in finished steel products such as CRC, rebars & tabular steel might result in inventory gains, however, in the medium-term demand destruction is likely to occur due to already higher prices, it added.
However, the recent important development has been surfaced, saying that Ukraine could drop its bid to join NATO to avoid war with Russia, the BBC quoted the country's ambassador to Britain as saying, in what would amount to a major concession to Moscow in response to the build-up of Russian troops on its borders.
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