Inflationary impact on Pakistan: Russia-Ukraine tension analysed

The ongoing Russia-Ukraine escalation does not bode well for economies like Pakistan as it could aggravate the inflationary pressure on the South Asian economy, said a report by a brokerage house on Monday.

On Sunday, the United States said Russia could invade Ukraine at any time and might create a surprise pretext for an attack, as it reaffirmed a pledge to defend “every inch” of NATO territory.

Russia has more than 100,000 troops massed near Ukraine, which is not part of the Atlantic military alliance, and Washington – while keeping open the diplomatic channels that have so far failed to ease the crisis – has repeatedly said an invasion is imminent.

Moscow denies any such plans and has accused the West of “hysteria”.

The escalation has already taken a toll on oil prices that inched to over seven-year highs, on fears that a possible invasion of Ukraine by Russia could trigger sanctions from US and Europe and disrupt energy exports from the world’s top producer.

On Monday, Brent crude futures were at $95.73 a barrel, up $1.29, or 1.4%. US West Texas Intermediate (WTI) crude rose $1.49, or 1.6%, to $94.59 a barrel, hovering near a session-high of $94.92.

The development is a major negative for oil-importing countries like Pakistan, as the commodity forms a major chunk of its international purchases. Inflation in Pakistan has already hit a two-year-high, putting pressure on the government that has had to fight battles on major fronts.

Given the situation, Ismail Iqbal Securities, in its report titled, ‘Russia-Ukraine looming war threat: Implications for Pakistan’, said the looming war-like situation has wider indirect implications for Pakistan due to the likelihood of another rally in energy prices, food commodities and semiconductor chips prices.

“In energy commodities, we foresee a short-term price rally to be witnessed in crude oil, LNG and coal prices which is likely to deteriorate Pakistan’s current account situation further,” said the report.

On the other hand, a direct impact can be witnessed in the import of wheat into Pakistan from Ukraine, it added.

“In FY21, Pakistan imported 39% of its total wheat imports from Ukraine. Any disruption in wheat imports would result in higher food prices in addition to higher energy prices,” it added.

Talking about other sectors of the economy, the report highlighted that the automobile sector also faces a risk in the wake of any chip shortages to occur.

“On the other hand, steel industry is expected to witness high raw material prices & finished goods prices. In the short run, price rally in finished steel products such as CRC, rebars & tabular steel might result into inventory gains, however, in the medium-term demand destruction is likely to occur due to already higher prices,” it added.