The Russia-Ukraine crisis and its implication on India

Economic impact

Global

• Oil and gas prices, amongst other commodity prices, have escalated very quickly. They are expected to remain high as long as the uncertainties persist.
• Global inflation may result in the US Federal Reserve (Fed) raising rates more aggressively. However, deflationary pressures may compel the Fed to act otherwise and go with fewer hikes this year.
• The ECB may want to hold rising rates because of the possible impact on growth.
• Flight to safety has led to capital outflows in emerging nations.
• Military actions and the presence of warships have disrupted trade routes in the Black Sea—a key transit point for several important commodities, agricultural products (such as wheat and corn), and dry bulk exports. Disruptions are already impacting their prices.
• The conflict may disrupt supplies from the Nord Stream pipelines to EU, thereby, leading to energy shortages and inflation

Domestic

• Heightened uncertainties weigh on inflation and growth outlook
• Faster capital outflows in the short term - India is the second-most impacted nation year-to-date.
• Strong depreciation pressures on the domestic currency - India is the second-most impacted nation year-to-date.
• Rising import bill and a current account deficit could impact reserves in the short term.
• The RBI may be compelled to raise policy rates sooner and support the domestic currency.

Geopolitical developments

• Many other nations are closely watching how the rest of the world is responding to Russia’s recent move. This will have implications on how they approach geopolitical issues with their neighbouring countries.
• The unrest in the South China Sea could hurt neighbouring economies. This could prolong the global crisis of the electronics supply chain. Could this lead MNCs to re-orient their electronics supply chain and relocate to regions such as India? Only time will tell.
• India has historic economic and defence ties with Russia. However, over the past two and half decades, the US has become the biggest trading and investment partner. India will have a difficult challenge managing the relationship in case the US decides to impose bans on Russia.
• This will have implications on NATO and its rising influence as member countries decide to allocate larger resources towards defence. Germany has committed itself to raising defence spending to the NATO target of 2 percent of the GDP.

Impact on the Financial Services sector

• Continuous foreign fund outflows, heavy selling in domestic equities could weigh on the equity markets and India’s market valuations
• Extreme volatility in commodity, equity, and debt markets can erase the wealth of investors and possibly postpone major IPOs
• Inflationary pressure and rapid capital outflows may compel the RBI to abandon its dovish monetary stance and raise interest rates in the next policy meeting
• The cost of funds could go up for banks and NBFCs, leading to softening of credit demand.
• Processing bank payments to and from Russia could get impacted with sanctions that exclude Russia from the SWIFT payment system, which is used to transfer funds internationally by more than 11,000 financial institutions. Exporters to Russia may face issues in receiving payments.
• Implications on Indian banks are likely to be minimal as trade finance businesses for Indian banks are of limited trade size between India and Russia. Only one Indian bank has exposure to Russia with a balance sheet of US$100 million
• The risk of cyber-attacks on financial institutions could increase
• Financial conditions of companies with significant exposure to Russia and Europe could come under stress– auto, oil and gas, oilseeds, electrical and electronic equipment, fertiliser, pharmaceutical, tea, etc., will have a short-term impact on their finances as trade gets hampered

Possible bifurcation of global finance

• Development of a global financial architecture – this shows the possibility of the ability of the West to disrupt it at arm’s length
• Several nations may try to move away from USD and push for an alternative financial system
• Rise of parallel cross-border payments
• Adoption of cryptocurrency – to circumvent sanctions and inflation

Impact on the consumer sector

• India depends on Russia for imports of food and edible oil (sunflower oil) and fertilisers. Russia and Ukraine account for 80 percent of India’s total sunflower oil import in 2020-21. As Ukraine suspends operations at its ports, this will likely disrupt the supply chain
• Some of the other dependencies on Russia are fuels, mineral oils, pearls, precious or semi-precious stones, nuclear reactors, boilers, machinery and mechanical appliances, electrical machinery and equipment. Ukraine supplies mostly agricultural products, metallurgical products, plastics and polymers to India
• Russia and Ukraine are important markets for Indian tea and the total exports to these countries stood at 30.89 million kg and 1.6 million kgs respectively in Jan-Nov 2021. The ongoing tensions are likely to impact India’s tea exports causing an oversupply situation in the domestic market and consequent fall in prices.
• On consumers, rising inflation and a possible hike in policy rates could weigh on consumer sentiments and purchasing power.

Impact on the Life Sciences and Healthcare sector

• Russia accounts for 2.4 percent of total pharmaceutical exports from the country while Ukraine has a share of 0.74 percent. India exported pharmaceuticals worth US$24.5 billion in FY21. India exported nearly US$591 million worth of pharmaceutical goods to Russia in FY21, nearly 6.95 percent growth over the previous year, whereas Ukraine contributed over US$181 million in FY21 with a YoY growth of nearly 44 percent.
• With the increasing Russia-Ukraine tensions, the Indian pharma sector might witness turmoil in the overall export of drugs and intermediates.
• A depreciated currency could boost export-oriented sectors like pharmaceuticals.
• Sanctions against Russian banks may impact remittances of outstanding trade receivables from that country.

Impact on the Government & Public Services sector

• Rising oil prices due to the disruption in oil and gas supply is likely to hit government finances and could lead to cutbacks in capital outlays. Importing oil from other major producers, such as Venezuela and Iran, is already very challenging.
• India imports significant quantities of defence equipment from Russia. Defence sector supply chains could get strained and impact the operational availability of Russian origin platforms.
• Defence exports of items developed in partnership with Russia could get hampered.
• Imports of defence equipment currently underway could also be impacted due to the imposition of bans on Russian major banks.
• The government is likely to push harder for self-reliance, Atmanirbhar Bharat, in energy (crude oil) and defence manufacturing, but the options are limited.

Impact on the Technology, Media & Telecommunications sector

Threat from Cyberattacks:

• Cybercrime has increased in Ukraine, which has suffered a series of digital assaults through multiple cyberattacks affecting government services and national banks.
• Cyber challenges will intensify, but differ by industry profile
• Disruptive data wiper attack, which started in Ukraine, may spread globally, causing billions of dollars of damage to computer systems across Europe, Asia, and the Americas.
• Meanwhile, cybercriminals and nation state-backed hackers continue to take advantage of security issues. The offensive cyber activity is likely to create financial and credibility losses.

Impact on the semiconductor industry:

• In the short run, the semiconductor industry in India has not seen any major impact due to the ongoing military actions between Russia and Ukraine. India doesn't have big semiconductor reliability on Ukraine or Russia.
• However, in the long-run, industry experts view that a short supply of critical raw materials from this region, such as neon, could impact semiconductor supply.
• Sunrise sectors: India as an investment destination for electronics and semiconductor intermediate products

Impact on the GIC sector

• Companies could prefer to shift/open GICs in India over Eastern European markets like Poland, which border Ukraine

Impact on the Energy, Resources & Industrials sector

• India imports nearly 85 percent of its crude oil requirement and about 50 percent of its natural gas needs. Rising global price of oil and liquified natural gas (LNG) will likely impact the ERI sector’s margins.
• Crude oil prices, for instance, are expected to remain more than US$100 per barrel in the coming days.
• Government-owned oil and gas entities that have investments in Russia’s oil and gas projects are likely to get impacted if the crisis intensifies.
• Rising prices of commodities
  - Russia is the world’s largest supplier of palladium--a metal that is used in catalytic converters--is extensively used in India to manufacture mobile phones and automotive exhaust systems. The price of this metal has increased significantly in recent weeks amidst rising fears of sanctions being imposed on Russia.- Other affected commodities are natural gas, titanium (used in the aerospace sector), nickel (mainly used to make stainless steel) and wheat.- Curtailing Russian exports would assist Indian steelmakers to capture the export market share.