Effects of Russia-Ukraine conflict on Asian Economies - Hindustan Times
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Effects of Russia-Ukraine conflict on Asian Economies

ByHindustan Times
May 23, 2022 01:01 PM IST

The study has been authored by Ananya Raj Kakoti is an associate with Indian-Political Action Committee (I-PAC) and a scholar of international relations, Gunwant Singh is a scholar of international relations, Jawaharlal Nehru University.

The ongoing Russia-Ukraine conflict has a great potential to hamper the post-Covid economic recovery of the Asian/Southeast Asia region. With the war entering its fourth month, the effects are already visible in different economic spheres, with the energy sector being the worst hit. The war in Ukraine will have far-reaching economic consequences on Asian economies as Russian energy is the major driver of the economic growth in the region. When it comes to the Southeast Asian region, particularly the Association of South East Asian Nations (Asean) nations, they do not have direct economic links with Russia, however, there has been a surge in commodity prices, especially oil, which has become fairly expensive, thereby augmenting the producer and consumer price inflation in the region.

The war in Ukraine will have far-reaching economic consequences on Asian economies as Russian energy is the major driver of the economic growth in the region.(Bloomberg)
The war in Ukraine will have far-reaching economic consequences on Asian economies as Russian energy is the major driver of the economic growth in the region.(Bloomberg)

Russia being the third largest petroleum producer in the world and Asia counting for 35% of global oil consumption, the supply chain disruptions due to economic sanctions on Russia are bound to drive the oil prices higher. All of the eight South Asian economies are net oil importers hence making them vulnerable to the oil shocks by making the cost of production more expensive thereby aggravating the prices of consumer goods. Rising oil prices have a direct relation with rising food prices, with food production being an energy-intensive sector. As most of the Asian economies are consumption-based with food and energy accounting for nearly half of the consumption expenditure, the rising oil prices will affect the emerging Asian markets more than any other region of the world.

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The rise of commodity prices, especially oil, nickel, wheat and corn is the direct impact of the Russia-Ukraine war on major Southeast Asian economies. This trend is more concerning for Singapore, Vietnam and Thailand, who are net importers of these commodities from the conflict-ridden region. Thailand has seen a constant increase in producer and consumer price inflation owing to the surge in commodity prices. In Vietnam there has been a shortage of oil and instances of petrol hoarding are also being recorded which is further escalating the price. In Vietnam, Malaysia, and Indonesia, the impact of rising oil prices is evident in the transport, housing, electricity, gas and other sectors, However, not all the Southeast Asian economies are directly affected, such as Indonesia, Malaysia, and the Philippines. The low energy consumption will help these economies to curb the impact of rising oil prices on inflation. In contrast, Singapore and Thailand being relatively high petrol and energy-consuming economies, the rise in oil prices, is translated to domestic price rise. Consumer demand has still not recovered from the Covid crisis. The prolonged rise in commodity prices has revived the fears of stagflation. Further, the poverty alleviation efforts which were disturbed during the pandemic will continue to halt in the wake of the war and income inequality will further increase.

India, a net importer of oil will be severely impacted as oil imports are bound to significantly increase and will further increase the trade deficit which it has with Russia; it will also affect the foreign exchange (forex) reserves. Further, it will make the Indian rupee depreciate. China is the single largest consumer of Russian oil exports; for comparison, according to the US Energy Information Administration data, in 2020 out of the 42% of Russia’s oil export to Asia and Oceania, 31% of Russian oil was exported to China. The country faces a risk of declining company profits and a steady decline in people’s spending power along with slower demand for its exports, due to the rise in oil prices. Inflation is bound to increase in Japan due to a steady increase in oil prices. The high cost of energy is transferred to the end consumers, thereby declining the consumer demands. South Korea’s export industry is expected to lose a lot due to high oil prices. It is the manufacturing industry that fuels its export industry and is highly dependent on its energy imports. The higher prices are trickling down and are causing a hike in the prices of consumer products which will hamper the economic growth of the country.

To deal with the ongoing situation arising out of oil supply disruptions owing to the Russia-Ukraine crisis, the governments of the Asian and Southeast Asian nations, particularly those who are net oil importers should look out for alternative oil suppliers, such as Saudi Arabia and Venezuela, to secure their energy requirements. Regional groupings in Asia such as Asean and the South Asian Association for Regional Cooperation (SAARC) can be used to create pressure on Organisation of Petroleum Exporting Countries, and International Energy Agency member states to increase the supply of oil and reduce the rising oil prices. In the long run, the oil-dependent states should work toward diversifying their energy supply and look for other alternative sources of renewable energy. Energy efficiency could also go a long way in controlling soaring oil prices. However, gradually transitioning towards renewable sources of energy to drive economic growth is the only way to reduce oil dependency.

(The study has been authored by Ananya Raj Kakoti is an associate with Indian-Political Action Committee (I-PAC) and a scholar of international relations, Gunwant Singh is a scholar of international relations, Jawaharlal Nehru University.)

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