The Sunset from Kiev
THE eruption of Russo-Ukrainian hostilities, and the ensuing sanctions regime that is being mulled against Moscow, are likely to have economic repercussions far beyond the Black Sea.
Although the sunset of conflict seems remote from Islamabad’s point of view, and Pakistan enjoys good relations with both Russia and Ukraine, the economic consequences to the world economy, including Pakistan, could be quite severe.
In large part, this is attributable to the import exposure to oil & gas, and the consumption weightage of food & energy, in Pakistan’s economic structure.
The immediate economic fallout of the Russia-Ukraine conflict has already been quite severe, but is likely to worsen: international oil prices surged past $100 (first time since 2014), European natural gas index jumped by +60%, the Russian Ruble fell by -15%, and the Russian stock market fell by -30%.
The devastation on the Ukrainian side is likely much worse but difficult to assess at this stage.
Sanctions are to be implemented against Russia by the West, but they fall short of the total excommunication of the country from the international financial system (SWIFT), for now.
Russia’s war strategy had foreseen and planned for economic reprisals, which led it to grow its war chest of foreign reserves and also diversify them significantly.
Whereas Russia had $350 billion in foreign reserves in 2015, it entered the current conflict with $600 billion in foreign capital reserves, out of which roughly one-fifth is in dollars, one-third in euros, one-quarter in gold, and one-tenth in renminbi.
Yet the question of whether this is a sufficient buffer remains to be seen. Emerging markets like ours generally do not have such a scale of buffers, but will nevertheless have to grapple with the current account, consumer inflation and currency repercussions of this conflict, and that too in an existing environment of difficult IMF-imposed austerity.
The most immediate channel of turbulence will be in energy prices, which the government has been raising under IMF pressure for the past year in any case.
Whereas average price at pump was Rs 111 in February 2021, it was already at Rs 159 the week before Russo-Ukrainian hostilities flared up.
The prices at the pumps are likely to soar from here in the event of sustained hostilities and the disruptions to international oil prices, thus further undercutting the local consumer’s purchasing power.
The government itself will feel the squeeze as it restocks fuel supplies through imports at new prices.
Oil & gas have typically amounted to more than a third of the import bill, and the cost-push inflation will swell this proportion, even as the government has been trying to reduce the widening current account deficit.
If Western Europe faces economic hardship in Russian retaliation for sanctions, this might also hurt Pakistani exports since the region is a major export destination for textiles and adjacent categories.
This would then further pressure the currency, which is no longer actively managed by the central bank under IMF pressure.
Aside from the oil price impact, Pakistan may also be affected by international food price inflation, since Ukraine and Russia are among the breadbaskets of the world as major exporters of wheat.
This impact would depend in part on the crop yields this year in Pakistan, but given the growing requirements to feed a ballooning population, Pakistan may need to tap into world food markets at a time when food prices will be rising substantially.
In short, Pakistan must keenly observe the sunset from Kiev, not least due to the economic repercussions that might ensue.
Sadly, even without the crisis in Eastern Europe, IMF-imposed austerity had already been making the Pakistani consumer miserable through higher electricity, fuel, and food prices.
Now, the most significant determinants of economic difficulty will be in (1) the path to cessation of hostilities between Russia and Ukraine and (2) the severity of sanctions against Russia and the probability and degree of retaliation based on those sanctions.
Pakistan has already articulated its mature approach towards the resolution of hostilities and its own amity towards both countries.
The PM went on with the visit to Moscow as had been planned earlier, laying emphasis on maintaining normalcy in the world, as countries begin to move their economies past the pain of the pandemic.
But further economic pain is yet to come for countries like Pakistan which depend on world commodity prices and Islamabad must, therefore, continue to insist on timely and peaceful resolutions of conflicts for the betterment of the world.
—The writer is the Director for Economic Affairs and National Development at the Centre for Aerospace and Security Studies (CASS).
