Impact of Russia-Ukraine War on Global, Nepali Economy Business 360

Impact of Russia-Ukraine War on Global, Nepali Economy

When Russia invaded Ukraine, it was believed that it would be short term and not as intense but the war has prolonged for almost two months with no end in sight and has created a humanitarian crisis. The immediate effects were seen on global prices of fuel and commodities, and soon it started to destabilise economies around the world that were already fragile contending with the impacts of the Covid 19 pandemic.

Though Nepal does not have much direct trade with either Russia or Ukraine, we have significant dependence on India and for a vast majority of imports. India has significant trade volume with Russia and the ongoing war’s economic implications are being felt by our southern neighbour which means the repercussions are being felt in Nepal. Inflation, shortage of oil, lowered remittance and investment are just some areas impacted.

In this edition of Business 360, we spoke to a few experts on how they perceive the Russia-Ukraine war’s impact on the global and national economy.


Rajib Upadhya

Author and Development Thinker

The war in eastern Europe has caused the price of commodities such as oil and gas, base metals and food grains to soar, thus further fuelling inflation already at historical highs in many parts of the world scarred by the pandemic as well as supply chain and trade route disruptions. Between them Russia and Ukraine account for 30% of the world’s wheat exports, 20% of the world’s natural gas production and 10% of the world’s oil. Meanwhile, the unprecedented economic sanctions against Russia and severe dislocations in the international payments system have hurt business and investor confidence. The Organisation for Economic Cooperation and Development (OECD) says the war will shave as much as 1.5% off of global growth projections for 2022.

While Nepal’s direct exposure to the Russian and Ukrainian economies is by and large limited, the secondary impacts of the conflict are nonetheless quite significant. Like in all oil-importing countries our current account too now faces acute pressures as a result of a soaring oil bill. Unlike the richer countries, our economy can ill afford to foot subsidies or force utility price caps. Our dry-season electricity deficit is met through imports from India which in turn generates most of its electricity from thermal coal, much of which is sourced from Russia. Owing to the turmoil caused by Western sanctions, we are experiencing a sudden spike in the cost of our electricity imports. But this should ease as India and Russia implement an alternative Rupee-Rouble payment system.

As for food prices, like the rest of Asia we are more reliant on locally and regionally produced rice and as such we should not face vulnerabilities to the same extent as population groups in large parts of Africa and the Middle East that depend heavily on Russian and Ukrainian wheat imports. Yet, the inevitable rise in transportation costs and costlier chemical fertilisers (of which Russia is the primary global supplier) could still spill over to jack up our food prices.

On external financing, political risk premiums could further shrink the already low foreign appetite for investments in Nepal while foreign aid could be redirected to address the humanitarian crisis in Ukraine and its neighbourhood, finance an inescapable increase in NATO military spending, or otherwise withheld to shore up the economic fallout in the aid-giving countries themselves. Should the war prolong, we could also see a dent in remittance inflows, a mainstay of our economy, if as predicted, costs of living rise in the Middle East where most of our foreign workers are based. This, in turn, could further tighten banking liquidity and slow our imports, already reeling from global inflation and supply interruptions, and erode the government’s revenue collections and public spending.


Prof Dr Bishwambher Pyakuryal

Senior Economist and Former Ambassador to Sri Lanka and Maldives

Last year, Russia sent 208,000 tourists and Ukraine sent 22,000 to the Maldives, while Nepal received just 10,000 indicating that Nepal does not have a significant commercial relationship with the countries. Sunflower oil from Ukraine has no substantial influence, but India does a lot of business with these nations and imports a lot of energy like petroleum gas, petroleum liquid, and vegetable oil. And we rely on India to import such things. India accounts for over 60% of our total commerce. As a result, whatever economic challenges India has, Nepal is sure to confront the same problems. As a result, the war has an indirect influence on our country via India.

Higher commodity and energy prices have been affecting the revenue of most governments throughout the world. Russia accounts for 20% of world wheat production, whereas Ukraine accounts for 9%. They account for 29% of world wheat output when combined. Following the conflict, there is less corporate confidence and more investor assurance. As a result, developing markets are seeking new destinations for capital outflows.

The United States has halted worldwide money transfers to Russia via SWIFT. As a result, even if Russia sells goods to a third nation, the payment cannot be made in US dollars. And if it imports, the Russian currency is significantly less valuable. The Russian invasion of Ukraine has caused the world to boycott Russia in a large global market. The two sides of the same coin are economic advantage and political disagreement and interest. So, when it comes to global commerce, both geopolitical and geoeconomic considerations are to blame for Russia’s invasion of Ukraine. Russian President Vladimir Putin has threatened the globe that if Russia’s political policies are not respected, the price of a barrel of oil might rise to $300. According to research conducted by the Reserve Bank of India, a $10 per barrel increase in petroleum prices will result in a 25-basis point increase in worldwide inflation, indicating that the price increase in petroleum products and inflation have a significant and positive association.

“The large fish swallows the tiny fish.” This is one of the reasons why Nepal is worried about the war. Russia has a huge impact on our neighbouring countries India and China. So, even though the war has no direct impact on Nepal, the indirect consequences can still be severe.

According to the Chief of the International Monetary Fund, there is a worldwide downturn in the economy, and certain nations will fall into recession, putting man and machine out of work. As a result, there will be a high demand for consumer products and large machines. Even if these products are not available, humans must consume 2,200 calories to exist. Consumption items must be imported for this purpose, but if there are supply side limits, such as an increase in the price of petroleum products, the cost of transportation will obviously rise. As a result, many of the commodities we purchase from India will have an exorbitant market price. Nepal’s market is disorderly as a result of the country’s insecure government and administrative structure, and the country’s inadequate governance system has resulted in irregularity to safeguard people’s interests.

Nepal’s inflation rate is at 7%. The Reserve Bank of India has predicted that Indian inflation will rise in the coming months. As India’s inflation grows, our reliance on trade with India rises as well, resulting in a large trade gap between India and Nepal. Our exports are little less than $1 trillion, based on our imports of $11 trillion. Now, if inflation in India rises, Nepal would face its own set of issues. Nepal is a developing country, and even within the country, farmers have difficulty delivering their products to the market. Double-digit inflation is possible in both Nepal and India due to high inflation rates. In the previous 10 years, 1.18% of workers in the manufacturing industry have found work, which is less than 400,000 persons. Every year, 500,000-600,000 individuals are added to Nepal’s labour market. Many individuals are unemployed, according to statistics. As a result, a variety of internal and foreign variables are causing our country’s inflation to rise.

There are 22 ongoing national pride projects that have aided Nepal’s economy for decades, although there has been little progress owing to inflation, unemployment, poor agricultural outcomes, a shortage of foreign exchange reserves and the pandemic. However, the government spends the money on those initiatives every year for the pride of our country.


Ujjwal Shrestha

Executive Director, Panchakanya Group

I think it shows that the world is very small. We can see that the prices of oil and essential items have been impacted and it’s not only a case of concern for our country as the war has impacted each and every aspect globally. It is alarming as we don’t know about the possible outcome in the coming months.

Nobody expected a war to break out that too immediately after the Covid 19 pandemic. It definitely could have been avoided but as the situation has already unfolded the world is trying to survive. We can see the losses and gains and when we analyse the situation we can witness that India and China are making the best of the opportunity. In the context of Nepal, we are very dependent on everything as we have very limited resources and we have not tried to explore our potential in resources too. We are dependent on every essential and non-essential item and this has led to massive imports in our country.

We never expected the war to continue for so long. Every business and corporate house expected that there would be a peace treaty and the war would not hamper businesses that had just come back on track post pandemic. The war has started showing its true impact now even more. Globally, the pandemic hit every country in a harsh manner. There is a saying that every crisis makes and brings opportunities but every other development sector was affected quite drastically. The post pandemic recovery had just started but now as the war has come into the picture, inflation has started soaring.

In terms of economy and finance, we have been stating our concerns about budgeting plans to the Ministry of Finance. We have been specifically telling the government to revise its plans and budgeting. Our development is already behind; our capital expenditure is at about only 15-20%, and we are facing a liquidity crisis. And the war coming into the picture has catalysed the situation, making it worse. In terms of imports, prices have witnessed an increment of 20-30% in all essential and non-essential items. In a nutshell, prices of all aspects to run an industry have increased, and there is no money in the market.

There has been a spike in the price of commodities, people are finding it difficult to get loans, and being able to afford daily necessities has started causing problems. Moreover, our infrastructure development is also weak and this has hampered businesses even more. Talking from the point of a manufacturer of infrastructure and construction goods, we have been vastly affected as there are restrictions from the government, and individuals too are getting more cautious of starting new constructions. The country is going backwards even more due to the war and its impact.

The major impact has been on the price of petroleum products which has seen a significant rise. The price has risen tremendously compared to last year. When the cost of logistics starts increasing the price of commodities too starts increasing. Hence, there is huge inflation in the market. This inflation will hamper the consumers the most as Nepal is a country dependent on imports. I think inflation will increase to two-digit levels in the coming months if the government doesn’t focus on maintaining the financial situation of the country.


Dr Nirmal Kumar Raut

Associate Professor, Central Department of Economics, Tribhuvan University

The current war is bound to bring shock in the global economy. One of the theories of neoliberalism says ‘leave the market as it is and let it flow on its own course and everything will be corrected by itself’. The war induced shock will deteriorate the market as we can witness the crisis that it has been causing such as the rise in price of crude oil and other essential items. It has hampered the supply chain all over the world, thus causing a disequilibrium.

Supply and demand are global phenomena where all the economies are dependent on one another. The major effect of the war is that the supply of commodities, energy, and goods has been distorted. As a result, market prices of practically all goods have hiked up which has caused a huge inflation in the market.

Social liberalism is important. The intervention of the government is equally crucial to address the current scenario for the sake of the country’s economy.

We also need to understand that the major region that will be affected by the war is Europe. It has a huge trade volume with Russia and it is also estimated that by the end of 2022 the gross domestic product of Russia will be -7.5%. The depression of the Russian economy will have a huge impact in Europe and that in reciprocal will affect the whole economy of the world.
While talking about Nepal individually, the current war seems insignificant to us as we have only 1% of trade volume with Ukraine and Russia. If we observe the statistics of Nepal’s trade with Ukraine and Russia, we can see that between the years 2010-2020, less than $1 billion has been exported and around $1-2 billion worth of goods and services has been imported where the majority of trade is with Ukraine. If we view it in terms of size, we have been trading with Ukraine in larger amounts. But, while comparing the trade with the US, China, India, the amount seems to be insignificant.

Regardless, when we dive deeper into this topic, we can see the smallest of loopholes which is very important for us to understand. For instance, the merchandise goods; we are importing crude sunflower oil, mustard, soya bean from Ukraine and as the war is prolonging, the prices have been rising in our market. Even in the global trade volume, it doesn’t hold any importance but internally it has started causing problems.

As Russia is one of the largest production houses of natural gas and oil, we can see the direct effect of the war on the economy. As for Nepal, we buy oil and other essentials from India and India has a huge trade with Russia. India imports oil for the thermal power for electricity. In the dry season, Nepal has to buy electricity from India and that too at an expensive amount.

There will be a systemic effect on the Nepali economy as Nepal is hugely dependent on India and as the oil prices hike up, price of every other good will start to rise.


Chandan Sapkota

Economist


Global scenario

The economic fallout of Russia’s invasion of Ukraine has been severe. It has precipitated a global economic crisis on top of the crisis triggered by the Covid 19 pandemic. The war has upended expectations of a rapid economic recovery, which was supported by fiscal and monetary support measures by most governments and central banks. The war has disrupted global financial and commodity markets, and pushed energy and food prices high. It has also heightened uncertainty over the course of global economic recovery, trade flows, and globalisation.
The most visible effect currently seen is on the sharp rise in food and energy prices, which is exerting unprecedented inflationary pressure. Because most economies are net energy and food importers, there is a clear pattern of a massive increase in import bill. Note that Russia and Ukraine export substantial share of global agricultural, especially wheat, output. They also produce several base metals such as aluminium, titanium, palladium, and nickel that are essential for the automotive industry. It is widening trade and current account deficits and depleting foreign exchange reserves.

The financial disruption due to the sanction on transaction and trade with Russia and the potential increase in interest rates in the advanced economies, particularly the United States of America, have not only increased cost of borrowing but also created uncertainty over access to international capital for some countries. Moreover, the supplies disruptions and volatile global freight routes are adding more pressure on inflation and uncertainty over the trajectory of economic recovery.

These have worsened debt position, and fiscal and debt sustainability. Higher investor uncertainty and reduced business confidence will affect investment flows.


National scenario

As the pandemic receded, Nepal was already burdened by weak growth prospect, rising inflation, widening current account deficit, depleting foreign exchange reserves, and wide fiscal balance. This was partly because of the very accommodative fiscal and monetary policies, and the delay in withdrawing them as recovery took hold. Consequently, expenditure ballooned amidst plateauing of revenue, import surged in response to pent-up demand aided by loose fiscal and monetary policies, and banking credit growth outstripped deposit growth. Worse, credit intended for some sectors poured into real estate and housing markets pushing prices by multiple fold in a matter of months. The war has exacerbated these trends and precipitated a crisis that has no easy fixes.

First, external sector distress is quite visible now. Since import of petroleum fuel constitutes about 15% of total imports, the import bill is rising sharply. The import bill of petroleum products in the first eight months of this fiscal year 2021/22 is already higher than the total import of petroleum products for the whole of 2019/20. Note that rise in petroleum fuel prices passes through to other goods as well because it is used in production process and transportation of the goods. Hence, import bill of other goods such as vehicles, machinery and agricultural items is also increasing. Import bill of wheat, rice, crude soya bean oil and edible oil has also increased. Despite gradual recovery in exports, the large import bill has increased import bill by 34.5% in the first eight months of this fiscal. This combined with the deceleration of remittance inflows amidst modest services recovery led by tourism sector widened current account deficit by around 200% in the first eight months of this fiscal. Consequently, Balance of Payments remains in negative territory with a depletion of foreign exchange reserves which are sufficient to cover 6.7 months of import of goods and services. It was 11.3 months in mid-March 2021. The rapid rise in energy and food prices poses a significant risk to external sector stability. Restricting non-essential imports is a band-aid solution to the structural issue.

Second, inflationary pressures are building up fast. Inflation stood at 7.1% in mid-July 2022 compared to 3% in the same period in 2021. The current inflation rate is the highest since mid-October 2016. Food and beverage prices have increased by 7.5% and non-food and services prices by 6.8%. These are affected by the increase in both petroleum prices and transportation costs, both of which are administered either by the government or a government agency. Ghee and oil, milk product and eggs, vegetables, and pulses and legumes have seen the largest increase in prices. Transportation cost increased by an average of 16.3%. Given the uncertainty caused by the war, prices of goods and services are expected to rise in the near-term. The lowest income and poorest households are hit the hardest by increase in fuel and food prices because it constitutes about 65% of their consumption expenditure. For the richest households in the consumption quintile, it is just 34.6%.

Third, fiscal stress is also exacerbating. The temporary restriction to limit import of non-essential goods by the central bank will hit revenue mobilisation as almost 45% of it is import-based. The rising inflation will put pressure on the government to increase wages and allowances of public sector employees, and to spend more on inputs used in development work. Furthermore, large losses raked in by public enterprises such as Nepal Oil Corporation, Nepal Airlines, and Nepal Electricity Authority will also eventually have to be shouldered by the government, thus increasing fiscal risk and liabilities. This will worsen with depreciation of Nepali rupee against the US dollar.

Fourth, economic recovery will take a hit and will be below expectation. The limitation on import of industrial raw materials and intermediate goods will impact industrial output and industrial capacity utilisation which was already running low due to the impact of the pandemic. Similarly, deceleration of remittances will impact aggregate demand. The tightening of liquidity after months of aggressive credit expansion will also impact economic activities.

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Business 360 is a magazine that delivers on quality business news content, profiles of entrepreneurs and leaders, features on issues that matter, articles that assess and analyze policy and delivery mechanisms in the world of trade and commerce

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