Impact of Russia-Ukraine Conflict on Indian Economy

Introduction

On 24^th February, 2022, Russia & Ukraine entered into a conflict, which has affected the Indian Economy, resulting in consequences & impacts on different areas & aspects. In a United Nations (UN) meeting, India abstained from voting. India has maintained a neutral stance in the UN meeting. 40 days elapsed since the start of this conflict. Moving on further, let’s discuss few key points of Russia-Ukraine conflict & it’s impact on India & it’s economy:

1.Immediate Adversities:

1. As the conflict broke out, Sensex crashed by 2700 points due to panic selling, nervousness amongst the investors leading to Rs. 7.5 lakh crores being wiped off from the stock market. The Russian stock market nose-dived by 50% which in turn had a significant impact on all the Asian stock markets. The conflict also triggered the gold & crude oil prices which were almost at their highest which we shall discuss further.
2. India has limited connects relating to banking & corporate sector with both the countries so impact shall be negligible on such areas, as per the report given by SBI. Various Non-Russian organizations operating in Russia terminated their operations due to the conflict, and majority of them were from or related to US , for example PayPal, Mc Donald’s, Disney, et cetera.

2.Crude Oil & Gold Prices:

1. Russia is the one of the largest crude oil producers in the world & due to the sanctions imposed by the US on Russia, crude oil prices are expected to rise further due to the ongoing tensions. The sanctions may also lead to an increase in the crude oil prices, and it has already crossed the $100 per barrel mark ($108 as on 5^th May, 2022), which is highest since 14 years & its price was already up by 45% in the first 6 months of 2021(was rallying to $80 per barrel). But there shall be a negligible impact on India as of now as India imports most of it’s oil needs, but majority of it comes from Middle East as logistics & transportation is cheaper due to the geographical positions of countries. Russia has a large area covered where it can supply oil through pipeline to the Europe & neighbouring countries, through road to the countries residing in the south of Russia & via sea route to the western countries through Alaska.
2. Gold prices also spiked to $2000 per ounces. During the conflict, the equity market became volatile, so many of the investors shifted from equity & other investments to gold investments as gold is considered as a safe haven during such situations. Such market sentiments were also one of the factors which lead to an increase in the gold prices & fall in the equity & other markets.
3. On 30^th March 22, Russia has also decided to peg the Russian ruble with gold, where 1 gram of gold = 5000 rubles till 30^th June 2022. So, because of this, Russian ruble has already gained its lost valuation back & there is a good possibility that it’s valuation may even increase further. As ruble is gaining its valuation back, Russia may also increase its gold supply, it may even strengthen the ruble further. Russia is 3^rd largest gold supplier in the world & it may be able to increase its gold supply easily. In simple terms, if ruble gains significant valuation, demand for US Dollar may decrease as it would be costlier buy gold in terms of dollars as compared to ruble & people may shift from dollar to ruble.

3.Higher Inflation:

1. Due to this ongoing conflict, petrol & diesel prices are already on the peak. Prices of the commodities in India are highly influenced by the petrol & diesel prices. When the prices of the petrol & diesel are increased, the transportation & logistics costs will also increase which will lead to an increase in the prices of the domestic as well as international commodities. Oil prices are also expected to rise further. Because of this, India will have an adverse impact as India imports around 80% of its oil needs. India imports $205 Billion worth of oils & minerals, $832 Million worth of precious stones, $609 Million worth of fertilizers from Russia, so increase in the prices of such commodities may lead to considerable inflation in the country.
2. Russia supplies crude oil, natural gas, and other resources to most of the Europe, and Russia is also one of the largest wheat producers in the world & accounts for more than 18% of the international exports, India also imports 84% of the sunflower oil from Russia and if all these supply chains are halted, it will have a significant negative impact leading to inflation & such other circumstances.

4.Favourable movements on commodities which India exports:

1. Russia & Ukraine, both are one of the major grain producers & exporters around the globe, and due to this conflict, exports relating to such commodities are being halted & there is a potential vacuum in the market. For instance, Russia & Ukraine are one of the leading wheat producers in the market, but due to war, supply of wheat is getting disrupted, so here vacuum is already being filled by India by increasing wheat exports.
2. Wheat from Gujarat, Rajasthan & Uttar Pradesh is being delivered at Rs. 2,400 to Rs. 2,450 per quintal as against Rs. 2,100 per quintal or so, that too in the span of hardly 15 days. The only thing to consider Indian Government needs to carefully manage both, India’s overall domestic stock availability as well as exports. Prices of edible oil, vegetable oil, oilseeds are also skyrocketing.
3. There is also a potential availability of benefit to the mustard oil growers in Rajasthan & Uttar Pradesh, who are set to market their crops in the coming weeks. At present the mustard prices are ruling above Rs. 6,500 per quintal which is above minimum support price of Rs. 5,050 per quintal. Cotton prices are also elevated because synthetic fibre is getting costlier. Brent crude oil is one the largest factor for uplifting prices of the above-mentioned commodities as well as other commodities. India must carefully observe & analyse the current scenario, and act accordingly, so that there may be a potential possibility of favourable outcome in many such areas from this ongoing conflict.

5.Potential Opportunities for India:

1. During this conflict, US & its many ally-based organizations decided to terminate their operations in Russia. SWIFT (Society for Worldwide Interbank Financial Telecommunications) is an international organization which is connected with more than 200 countries & 11000+ banks worldwide, handled more than 4 crore transaction in a single day, decided to cut ties with Russia.
2. There is a vacuum due to this situation, and it can be filled by India’s own UPI (Unified Payments Interface). UPI usage has grown considerably in the past few years, and UPI has even developed to an extent where digital payments can be made even without internet. UPI in financial year 21-22, crossed $1 Trillion mark in transactions If UPI is able to fill such vacuum it shall be a great leap for India in the finance sector by UPI being the vacuum filler & replacing SWIFT in Russian market.
3. Nepal also adopted UPI for P2P payments thereby helping its businesses in achieving growth. NPCI (National Payments Corporation of India) needs to onboard as many people & banks as soon as possible because India needs to become a superpower without majorly depending on weapons. Also, past few days ago, RuPay card was launched in Nepal after Bhutan, Singapore & United Arab Emirates. If India upshifts this to another level & on a larger scale it might be able to capture such markets in larger countries like Russia as well.
4. The Aviation Industry is also grounded in Russia as large number of aircrafts may be on lease agreements that may be suspended or insurance cover is stopped as home country are bent on making the sanctions hurt. India may help its ally by sending in some aid & thereby establishing itself in such industries leading to increase in the forex exchanges & revenues from such operations.

(This article represents the views of the authors only and does not intent to give any kind of legal opinion on any matter)

Author:

Darshan Gohil

Associate Consultant | Email: darshan.gohil@masd.co.in