These are terrifying times for the people of Ukraine and horrifying for the rest of the continent, witnessing a major power invading a European neighbor for the first time since World War Two.
Hundreds have died already in what Germany has dubbed “Putin’s war”, both civilians and soldiers. And for Europe’s leaders, this invasion has brought some of the darkest hours since the 1940s.
How Pakistan is going to get affected by the Russia-Ukraine crisis?
For Pakistan, the worries are both political and economic. Not that politically Pakistan has a major role to play in the conflict, but picking sides would further alienate the country in a singular orbit.
Pakistan is warming to closer ties with Russia, thus all diplomatic measures to promote the peace process must be made. Pakistan’s economy must be prepared for a sustained increase in oil prices above $100 per barrel. If imports are not curtailed and exports do not grow, we may need to raise the interest rate to near 12% or pressure on the rupee could push it to near Rs200 a dollar.
Russia is a global player in major commodities which include oil, gas, aluminum, steel, wheat and copper. Beginning with oil, Russia is a major player in global crude oil export, it accounts for 12% of global market shares. Due to recent escalations, oil prices have crossed 100 dollars per barrel. This will directly have a negative impact on Pakistan from an economic perspective. This will have led to an increased price of oil in Pakistan as well.
The cement sector in Pakistan will also be affected. The cement sector’s main raw material is coal, the price of coal is estimated to be 205 dollars. This causes a significant price increase in Pakistan as well. Russia is a major player in the metal industry and the second-largest manufacturer of aluminum so if there is a price escalation, then there will be a negative impact on auto manufacturers and auto assemblers. The same is the case with semiconductors as well.
Are we going to witness tougher times for Pakistan’s economy?
The macro impact of war tensions is on the agricultural industry. Russia is the biggest exporter of wheat. Russia and Ukraine combined account for 11 billion exports to the world. If the prices of the wheat increase due to ongoing tensions then Pakistan will have no choice but to increase its imports to meet the market value.
The induced inflationary pressures would be irreversible. Hence, a stress test is a must along with contingency plans.
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If the Russia-Ukraine issue worsens, oil prices could rise to $100-120 per barrel, putting Pakistan’s economy on a collision course with the rest of the world.
Such a drop would be so severe that even lenders like the IMF would be unable to bail it out, resulting in sovereign defaults.
To conclude Mr. Zahid explained that as long as the crisis continues there’s going to be hefty pressure on the major commodity markets like oil and wheat so the best thing would be to deescalate the tensions as soon as possible.
Source: Usman Zahid, executive director at AKD securities