Russia’s invasion: Who will suffer more?

February 25, 2022 (MLN): After Russian troops' invasion in Ukraine, the prospects of severe sanctions disrupting energy and commodities markets, posing a big threat to a global economy as the oil market cannot afford large supply disruptions in the ongoing military operations due to low inventories and declining spare capacity.

Russia being the second-largest producer of crude oil and natural gas is a vital energy player in the European energy markets. Both Europe and Russia have a mutual dependency. Tougher sanctions could dent Russia’s supplies, affecting its revenue from Europe. While European consumers might pay a steeper bill on the back of shifting of supply at a high cost.

Since the news of Russia attacking Ukraine made headlines, oil prices in the international market hit high on Thursday, rising above $100 a barrel for the first time since 2014, exacerbating concerns about disruptions to the global energy supply.

Ever since the annexation of Crimea by the Russian forces in 2014, tensions between Russia & Ukraine have remained elevated. However, Russia’s natural gas supplies to Europe have largely uninterrupted.

With the Ukrainian’s regime continuous push to join NATO forces, tensions have reached a boiling point in 2021 which has never been witnessed before. Historically, oil prices witnessed higher when Russia invaded and subsequently annexed the Crimean Peninsula from Ukraine in February 2014, the Brent crude touched $105.85/bbl.

All of this comes when global oil supplies remain tight due to pandemics. Given the current shortfall in global oil markets, and the inability of the Organization of the Petroleum Exporting Countries (OPEC) to ramp up the production for filling this big gap if Russia faces severe sanctions, the west is working on a deal to bring Iranian oil as an alternative supply.

Yet the risks are enormous with high commodity prices if markets absorb the full economic implications of this invasion.

On the domestic front, Russia’s action against Ukraine could have serious complications for Pakistan as it could further disrupt energy supplies, exacerbate food insecurity, and another rally in semi-conductor chip prices.

Further deterioration of the geopolitical situation can push oil prices even higher that can have a devastating effect on the country’s growth prospects as it can create further inflationary pressure that may dwindle the country’s current account situation further, adding more pressure on the Pakistani rupee.

Meanwhile, for other commodities, the major risk is associated with 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 addition, power producers piled up coal inventory given a fear of gas disruptions to Europe and also due to supply chain issues resulted in the rally in coal prices, with Richard Bay hovering at $204 per ton, up 51% from the start of this year.

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