Russia-Ukraine crisis: What a war could mean for the Indian economy
Will Russia actually invade Ukraine? Will such an act mutate into a full blown war between Russia and the members of the North Atlantic Treaty Organization (NATO)? The answer to these questions will depend on how the US and its NATO allies deal with Russian objection to potential inclusion of Ukraine in the military alliance.
In case a conflict does break out, what will its repercussions be for India, especially its economy? Here are three charts which can throw some light on the issue.
Crude petroleum prices are already on fire, a military conflict could send them higher
This year’s Economic Survey expects crude petroleum prices to be in the range of $70-75 per barrel over the course of fiscal year 2022-23. Crude prices have been above $90 per barrel for more than a week now. Tensions between Ukraine and Russia have been a major reason for the recent spike in crude petroleum prices. “Both benchmarks (for petroleum prices) hit their highest since September 2014 on Monday (February 14), with Brent touching $96.78 and WTI reaching $95.82”, Reuters reported. “Oil prices steadied on Wednesday (February 16) after retreating more than 3% in the previous session as investors gauged the impact of easing Russia-Ukraine tension against a taut balance between tight global supplies and recovering fuel demand”, the story added.
To be sure, analysts continue to maintain that even without the conflict they are likely to remain high. However, a military conflict with Russia is bound to worsen the situation. According to data from the US Energy Information Administration (US-EIA), Russia had a share of 12.5% to 13% in global crude oil production, which is almost half of the total crude oil production in Organization of Petroleum Exporting Countries (OPEC) in the middle east (west Asia) region. If crude prices stay at current levels, or worse, increase even more, most of the budgetary calculations could become redundant as the government would face a triumvirate of economic challenges on the fiscal (it will have to cut taxes), inflation and current account front.
The energy impact of a military conflict involving Russia will not be limited to crude oil prices alone. Western Europe is also dependent on natural gas supplies from Russia to a very large extent (40% according to a Reuters story) and a disruption in supplies, which is what will happen with a military conflict, will generate additional tailwinds for energy prices in Europe. This is bound to feed into global inflation. This again is bad news for India.
The trade repercussions of Russian conflict with the West
If Russia does invade Ukraine and there is a larger conflict involving US and its other NATO allies, it is to be expected that US and other advanced countries will impose economic sanctions on Russia. Often, these sanctions also hold for countries trading with an aggressor.
How will it impact India’s international trade? Data from the Centre for Monitoring Indian Economy’s (CMIE) database shows that Russia has been losing its importance when it comes to trade with India. Before the collapse of the Soviet Union, Russia was an important export destination for India and it had a share of almost 10% in India’s total exports. This number has come down to less than 1% by 2020-21. To be sure, India’s overall trade has increased in this period. Russian imports had a share of 1.4% in India’s total imports in 2020-21. While the potential disruption on current trade might not be so high, a conflict and resultant sanctions could hinder India’s plans to increase its trade and investment relations with Russia. “Enhancing trade and economic cooperation between India and Russia is a key priority for the political leadership of both the countries as is clear by the revised targets of increasing bilateral investment to $50 billion and bilateral trade to $ 30 billion by 2025”, says a brief on India-Russia economic relations on the website of the Indian embassy in Russia. India’s total trade with Russia in 2020 was $9.31 billion, the brief adds.
But it might be difficult to immediately substitute Russian military imports
The relatively insignificant headline trade numbers notwithstanding, sanctions on Russian exports could create a problem for India’s defence requirements. According to a March 2021 factsheet by Stockholm International Peace Research Institute (SIPRI), Russia was the second largest global arms exporter in 2016-2020 and India was its largest export destination accounting for 23% of Russian defence exports. Globally, Russia accounted for 20% of global arms exports during this period, down from 26% between 2011-2015. “The overall decrease in Russia’s arms exports between 2011–15 and 2016–20 was almost entirely attributable to a 53% drop in its arms exports to India…Although several large Russian arms deals with India, including for combat aircraft, were completed by 2020, India placed new orders for a variety of Russian arms in 2019–20. The ensuing deliveries will probably lead to an increase in Russian arms exports in the coming five years”, the factsheet says.
“Over the years, (India-Russia) cooperation in the military technical sphere has evolved from a purely buyer-seller relationship to joint research, design development and production of state of the art military platforms. Production of the Brahmos cruise missile is an example of this trend. The two countries are also engaged in joint design and development of the Fifth Generation Fighter Aircraft and Multi-Role Transport Aircraft”, the website of the Indian embassy in Moscow says.
To be sure, Indo-Russian defence ties have been facing headwinds even without the risks of the present conflict. On the one side India has strengthening its strategic alliance with the US -- seen in decisions such as becoming a part of the Quad -- and on the other, its sourcing of military equipment from Russia has been coming under greater scrutiny. While the US might have chosen to kick the can down the road earlier, given India’s strategic importance in its efforts to pose a challenge to China, a direct conflict with Russia might change this approach. To surmise, it might be difficult for India to sit on the fence if Russia does enter into a military conflict with the West. Its economic consequences, will not be insignificant.