Impact of Russia-Ukraine War on India

In today’s blog, we see the impact of a war between Russia and Ukraine on India.

So, before we understand the implications let us understand why is Russia invading Ukraine in brief,

Essentially, the battle over Ukraine is a battle for influence and power. Ukraine's government, now under President Volodymyr Zelenskyy, has pivoted toward the West in recent years, aspiring to join the EU and NATO and to move away from its post-Soviet orbit of Russia.

NATO happens to be a military alliance of several European and North American countries. NATO constitutes a system of collective security, whereby its independent member states agree to mutual defence in response to an attack by any external party.Russian President Vladimir Putin has decried the dissolution of the Soviet Union as a catastrophe and over his 22-year rule in Russia, he has sought to rebuild Russia's power base and sphere of influence over former Soviet states, like Belarus, Georgia, and Ukraine something of the jewel in the crown in the USSR, and a natural buffer state against Europe.

Putin wants NATO to walk back —he doesn’t want NATO to welcome Ukraine to its fold — a country that borders Russia. Which can be a threat needless to say. NATO meanwhile doesn’t want to cede to these requests considering they believe any sovereign country should have the right to decide its fate — including Ukraine.Putin on 24th February said it aims to “demilitarise” and “de-Nazify” Ukraine. He authorized military operations in Ukraine and launched a large-scale invasion of Ukraine by land, sea, and air, marking it the biggest attack on the European state since World War Two. Ukrainian citizens were empowered to carry firearms and join the army, Ukraine is not giving up without a fight

Western leaders aren't willing to send in their troops to fight on Ukraine’s behalf. Instead, sanctions have been imposed on Russia which is designed to cripple Russia's economy and force President Vladimir Putin to halt military action.This worsening situation has the world worried, as it has wider security and economic implications for several countries, including India, with growth yet to come back on track following the Covid-19 outbreak.

Markets

Indian equities crashed to nearly 5% on February 24 after Russia started invading Ukraine. Investors lost almost Rs 13 lakh crore on BSE today after Russia invaded Ukraine amid global opposition to the attack. While Russia's Moscow Exchange (MOEX) dipped more than 50% once the trading started after a two-hour suspension.

Bilateral Trades

India imports sunflower oil, inorganic chemicals, plastic and polymers, iron and steel, and others from Ukraine. While India exports pharmaceuticals, machinery, chemicals, and food products. India is the third-largest exporter, in value terms of pharmaceutical products to Ukraine. India’s main imports from Russia include fuels, mineral oils, pearls, precious or semi-precious stones, machinery and equipment, and fertilizers. While major export items from India to Russia include pharmaceutical products, electrical machinery, and equipment, organic chemicals, and vehicles.

Brent Crude Oil

Crude is the biggest macro headwind for India. Crude oil surged to $105.79 for the first time since 2014. Russia is the second-largest oil exporter after Saudi Arabia and the world’s top producer of natural gas. Well, how does this affect India? India imports more than 80% of its oil which accounts for around 25% of India’s total imports.

If the price of oil increases, then the government will have to shell out more to import oil. A $10/barrel increase in oil price increases Fiscal Deficit by 0.43% (as a % of GDP). Also, a $10/barrel increase in oil will raise inflation by 0.49% roughly (Source: RBI Paper released in January) and RBI would have to take measures to curb the inflation since it is already above RBI’s tolerance level of 6%.

Grains

The Ukraine-Russia crisis would not just affect crude oil and natural gas but various essential commodities like wheat. Grain prices can also inch higher since both Ukraine and Russia contribute to a great number of exports to the world.

Now, it’s the waiting game for us to know if the sanctions do give a blow to Russia’s economy or not, what is Putin’s plan and where is the future of Ukraine headed. Till then we pray for everyone’s safety.

Thank you.

Regards,

Jash Chheda,

Kautilya,

IBS Mumbai.