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Ukraine war: The economic impact on India

Mar 25, 2022 12:28 PM IST

India's energy security, rising prices of commodities beyond the energy sector, and the direct impact of the war on India-Russia energy ties are key concerns. 

The war in Ukraine has brought the world to the brink of “Knightian uncertainty”, where the geopolitical risks are so varied that they become immeasurable. These uncertainties range from the threat of nuclear detonation – as Russian President Vladimir Putin put his country’s nuclear forces on high alert – to a global imbroglio on the scale of the 1970s energy crisis; it also includes the spectre of a new Cold War fought between a Western-led bloc and a Chinese-Russian coalition in two theatres of action, Europe and the Indo-Pacific.

PREMIUM
These uncertainties range from the threat of nuclear detonation – as Russian President Vladimir Putin put his country’s nuclear forces on high alert – to a global imbroglio on the scale of the 1970s energy crisis. (REUTERS)

In addition to the supply chain crisis following the Covid-19 pandemic, we now face major disruptions in global logistics and payments as a result of Western sanctions on Russia and possible secondary sanctions on countries that do business with Russia. The Brent oil price is around $115 per barrel, but future forecasts range from $150 to $300.

Hindustan Times - your fastest source for breaking news! Read now.

For India, staying non-aligned represents the least geopolitical risk. The cost of joining the West with full gusto risks alienating India’s most important military partner, Russia, which accounts for 62% of India’s arms imports since 2010. Staying overtly silent on Russia also risks jeopardising India’s links with the United States (US) and Quad, which seek a rules-based order in the Indo-Pacific. India has little choice but to continue walking this tightrope, evident in Prime Minister Narendra Modi’s recent calls to both Putin and Ukrainian President Volodymyr Zelensky.

Although India has little direct interest in Ukraine, it is impacted by the profound economic changes brought about by the war.

First is the impact on India’s energy security. Rising oil prices are a burden on the government since the majority of oil imports are undertaken by government-owned companies; this is likely to also increase India’s oil and gas subsidies in the medium-term. The oil price trajectory remains dependent on external factors, including policy measures taken by oil-producing nations, geopolitical issues such as the Iran nuclear deal that could bring another one million barrels per day (bpd) of crude into the market, and sanctions on Russia’s energy sector. Some of this can be hedged by India’s exports of finished petroleum products such as diesel, which forms the largest part of the country’s export basket. With state elections having come to a close, the government will also pass on the cost of rising oil prices to the consumer, a process that has already begun.

Second is the impact of rising prices of commodities beyond the energy sector, including agricultural products such as vegetable oils (particularly sunflower oil), and minerals such as gold, nickel, coal and palladium, which also affect sectors such as jewellery and auto components. India is among the largest global importers of these products, and government-owned companies account for the lion’s share of mineral imports.

Third is the direct impact of the war on India-Russia energy ties. Although Russia accounted for only 0.5% of India’s energy imports between 2010 and 2020, lifting oil from Russia will remain difficult and continue only in small quantities in the short-term given that most banks, shipping companies and insurers remain fearful of Western sanctions.

More importantly, India’s government-owned oil companies have invested $16 billion in Russian oil and gas assets. These investments may well be written-down if sanctions on Russia remain in place. Another casualty is Rosneft-owned Nayara Energy, which operates India’s second-largest refinery and some 6,000 fuel retail outlets. Nayara raised $528 million through a State Bank of India-led consortium to expand into petrochemicals with a polypropylene plant in Gujarat; this project is likely to be stalled as long as sanctions remain in place.

Unfortunately, there is little to nothing India can do to influence rising oil prices, nor can New Delhi fully shield itself from the impact of sanctions on Russia. Indian firms also remain susceptible to secondary sanctions if they continue doing business with Russia, and will also find it difficult to use intermediaries.

So, what can India do?

India should first increase its strategic petroleum reserves from the 9.5 days of emergency stock to the 90 days recommended by the International Energy Agency. It would be wise to expand the mandate of the Indian Strategic Petroleum Reserves Limited and set expansion targets, which could help the country prepare for energy disruptions that are likely to continue in 2022.

New Delhi can also lobby to receive specific waivers to continue engaging with Russia in strategically indispensable sectors such as energy and defence. India cannot afford to let its guard down by stalling essential defence imports from Russia at a time when China is becoming increasingly assertive on the Sino-Indian border. The government needs to rapidly infuse more funds to promote renewable energy, which remains the quickest path to energy independence. Government subsidies for fossil fuels are today seven times more than the allocation to renewable energy; this needs to be reversed, and quickly.

In all this geopolitical manoeuvring in Europe, we must not lose sight of the larger picture: The outcome of the war in Ukraine will have ramifications on the changing global order, one where China looks to challenge the United States and expand its influence. If the China-Russia relationship strengthens further, India may be forced to recalibrate its relationship with Russia and cosy up further to Quad.

Hari Seshasayee is an adviser, Government of Colombia, and a non-resident fellow of the Woodrow Wilson Center

The views expressed are personal

 

The war in Ukraine has brought the world to the brink of “Knightian uncertainty”, where the geopolitical risks are so varied that they become immeasurable. These uncertainties range from the threat of nuclear detonation – as Russian President Vladimir Putin put his country’s nuclear forces on high alert – to a global imbroglio on the scale of the 1970s energy crisis; it also includes the spectre of a new Cold War fought between a Western-led bloc and a Chinese-Russian coalition in two theatres of action, Europe and the Indo-Pacific.

PREMIUM
These uncertainties range from the threat of nuclear detonation – as Russian President Vladimir Putin put his country’s nuclear forces on high alert – to a global imbroglio on the scale of the 1970s energy crisis. (REUTERS)

In addition to the supply chain crisis following the Covid-19 pandemic, we now face major disruptions in global logistics and payments as a result of Western sanctions on Russia and possible secondary sanctions on countries that do business with Russia. The Brent oil price is around $115 per barrel, but future forecasts range from $150 to $300.

Hindustan Times - your fastest source for breaking news! Read now.

For India, staying non-aligned represents the least geopolitical risk. The cost of joining the West with full gusto risks alienating India’s most important military partner, Russia, which accounts for 62% of India’s arms imports since 2010. Staying overtly silent on Russia also risks jeopardising India’s links with the United States (US) and Quad, which seek a rules-based order in the Indo-Pacific. India has little choice but to continue walking this tightrope, evident in Prime Minister Narendra Modi’s recent calls to both Putin and Ukrainian President Volodymyr Zelensky.

Although India has little direct interest in Ukraine, it is impacted by the profound economic changes brought about by the war.

First is the impact on India’s energy security. Rising oil prices are a burden on the government since the majority of oil imports are undertaken by government-owned companies; this is likely to also increase India’s oil and gas subsidies in the medium-term. The oil price trajectory remains dependent on external factors, including policy measures taken by oil-producing nations, geopolitical issues such as the Iran nuclear deal that could bring another one million barrels per day (bpd) of crude into the market, and sanctions on Russia’s energy sector. Some of this can be hedged by India’s exports of finished petroleum products such as diesel, which forms the largest part of the country’s export basket. With state elections having come to a close, the government will also pass on the cost of rising oil prices to the consumer, a process that has already begun.

Second is the impact of rising prices of commodities beyond the energy sector, including agricultural products such as vegetable oils (particularly sunflower oil), and minerals such as gold, nickel, coal and palladium, which also affect sectors such as jewellery and auto components. India is among the largest global importers of these products, and government-owned companies account for the lion’s share of mineral imports.

Third is the direct impact of the war on India-Russia energy ties. Although Russia accounted for only 0.5% of India’s energy imports between 2010 and 2020, lifting oil from Russia will remain difficult and continue only in small quantities in the short-term given that most banks, shipping companies and insurers remain fearful of Western sanctions.

More importantly, India’s government-owned oil companies have invested $16 billion in Russian oil and gas assets. These investments may well be written-down if sanctions on Russia remain in place. Another casualty is Rosneft-owned Nayara Energy, which operates India’s second-largest refinery and some 6,000 fuel retail outlets. Nayara raised $528 million through a State Bank of India-led consortium to expand into petrochemicals with a polypropylene plant in Gujarat; this project is likely to be stalled as long as sanctions remain in place.

Unfortunately, there is little to nothing India can do to influence rising oil prices, nor can New Delhi fully shield itself from the impact of sanctions on Russia. Indian firms also remain susceptible to secondary sanctions if they continue doing business with Russia, and will also find it difficult to use intermediaries.

So, what can India do?

India should first increase its strategic petroleum reserves from the 9.5 days of emergency stock to the 90 days recommended by the International Energy Agency. It would be wise to expand the mandate of the Indian Strategic Petroleum Reserves Limited and set expansion targets, which could help the country prepare for energy disruptions that are likely to continue in 2022.

New Delhi can also lobby to receive specific waivers to continue engaging with Russia in strategically indispensable sectors such as energy and defence. India cannot afford to let its guard down by stalling essential defence imports from Russia at a time when China is becoming increasingly assertive on the Sino-Indian border. The government needs to rapidly infuse more funds to promote renewable energy, which remains the quickest path to energy independence. Government subsidies for fossil fuels are today seven times more than the allocation to renewable energy; this needs to be reversed, and quickly.

In all this geopolitical manoeuvring in Europe, we must not lose sight of the larger picture: The outcome of the war in Ukraine will have ramifications on the changing global order, one where China looks to challenge the United States and expand its influence. If the China-Russia relationship strengthens further, India may be forced to recalibrate its relationship with Russia and cosy up further to Quad.

Hari Seshasayee is an adviser, Government of Colombia, and a non-resident fellow of the Woodrow Wilson Center

The views expressed are personal

 

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