Impact of Russia’s evasion on global trade

The United States has historically used economic sanctions as a weapon in the international war, owing to the dominance of US dollars. However, the overuse of sanctions is also threatening to destabilize the global economy. The continuous use of sanctions is pushing more countries to end their reliance on the financing of the west, which will eventually dilute the impact of such sanctions. The economic sanctions will also have a direct impact on individuals who do business with Russia and who have assets in those banks. While the United States is a net exporter of oil and can afford to ban Russian oil imports, the same is not the case with Europe. The European Union depends on Russia for 40% of its total gas consumption, and thus, makes it is hard to impose sanctions on Russia. One-third of Germany’s oil and gas supply origins from Russia and with the ban on certification of Nord Pipeline 2.0, it has already taken one for the team. Meanwhile, Russia has also threatened sanctions of its own that may involve shutting down exports of oil and gas supplies to Europe which would be disastrous. 

Use of Cryptocurrencies to bypass sanctions

Russia can use cryptocurrency to mitigate the impact of sanctions. Many believe that banks have already put money into cryptocurrencies to evade the impact of sanctions. The core of economic sanctions is to block access to the US dollars which is the world’s preferred reserve currency and the most widely used for cross-border payments. However, the rise of cryptocurrencies threatens their dominance and lessens the impact of these sanctions. For sanctions to be effective, the banks and other financial institutions have to track the flow of money, so entities that have been sanctioned, can be blocked from transacting. However, cryptocurrencies are beyond the radar of the banking system currently, and therefore, it allows doing business independently to sanctioned entities as well. The key for Russia is to avoid sanctions is to not conduct trade using the US dollar and cryptocurrencies provide that cushion. Russia is already developing its own central bank digital currency (CBDC) – Digital Ruble.

Prices of crude oil and fuels

India heavily imports crude oil, with around 85 per cent of its fuel demand through imports. Russia is one of the largest exporters of oil (about 5 million barrels per day). However, India doesn’t buy even 1% of these exports, as India does not have the infrastructure to import, as well as the high transportation costs. Hence, the sanctions on Russia do not have a direct impact on the Indian oil imports. Crude oil prices have already touched a 7-year high with Brent oil prices crossing the USD 100 a barrel mark for the first time since 2014 (when Russia had invaded Ukraine) and going as high as USD 133 per barrel, with forecasts of remaining at higher levels, until the shortfall in the global supply of oil is recalibrated. India will have to closely monitor the global energy market and may have to release some crude of its Strategic Petroleum Reserves (SPR) if needed to boost supply and ensure price stability. The Government has set SPRs at three locations with a capacity of 5.33 million metric tonnes at Visakhapatnam (1.33 MMT), Mangalore (1.50 MMT) and Padur (2.5 MMT) which meet India’s demand for 9.5 days. SPR facilities at Chandikhol (4 MMT) in Odisha and Padur (2.5 MMT) in Tamil Nadu are under construction, to take care of another 12 days of India’s needs. Costlier crude will also inflate the current account deficit, push up inflation, increase the cost of inputs for various industries and make transportation expensive.

Meanwhile, for Russia, the problems are quite the opposite. Around 70% of Russia’s oil is waiting for buyers, as the western countries have shunned Russia’s oil exports. BP, Shell and Equinor have suspended their Russian operations entirely. Sweden’s Nynas has vowed to end the import of Russian raw materials altogether. Switzerland’s Trafigura is reviewing options while Finland’s energy group Neste is replacing Russian crude with other alternatives. China and India might slowly start buying Russia’s crude if issues around shipping, insurance, and payments are resolved. However, this is subject to the sanctions that the United States and others, if the industry is protected or not, from the same.

Affected sectors and companies in India

Supply chain disruptions and higher costs of steel, aluminium, copper, lead, and crude is expected to raise the cost of automobiles. Besides, auto players manufacturing in Europe such as Tata Motors and Mahindra will be impacted as Europe is dependent heavily on Russia for its energy needs. Mahindra CIE, Bharat Forge and Motherson Sumi are some companies that will face the consequences of the economic turmoil. In the Pharma sector, Dr Reddy sources its raw materials from Russia and will be deeply hurt by the sanctions. India also exports pharmaceuticals to Ukraine and thus, all pharma companies will be affected by the same. An increase in crude oil prices will also be detrimental to oil marketing companies such as Indian Oil Corporation, Bharat Petroleum Corporation and Hindustan Petroleum as they will not be able to pass on the price increases to their customers. However, upstream companies such as ONGC, GAIL, and Oil India could benefit from the same. Paint companies such as Asian Paints, Berger Paints, and Kansai Nerolac, could be impacted if crude oil prices continue to rise since oil derivatives such as monomer and titanium dioxide, will also rise. Technology companies such as Mastek who generates 67% revenue from the European and the UK markets, and other companies such as Tata Elxsi, Tata Consultancy Services, Firstsource, and Tech Mahindra, on similar lines, have vast exposure in Europe and will be affected by the Russian-Ukraine conflict. Meanwhile, the European Union is also the biggest market for India’s exports and supply disruptions are generating greater demand for steel and engineering goods. Russia is the second-largest producer of aluminium and the disruption in the supply chain will prove advantageous to Indian aluminium companies.

Prices of Cooking Oils

India is the world’s largest buyer of sunflower oil and imports 60% of its consumption and is also the top purchaser of palm and soybean oils. Ukraine and Russia together account for 80% of the world’s sunflower oil shipments. Amid war between Russia and Ukraine, shipments of more than 3,50,000 tonnes of cooking oil to India are at risk as logistics and loadings remain stuck at various ports. Meanwhile, Indian traders have an estimated import contract of 5,50,000 tonnes of sunflower oil from Ukraine and Russia for deliveries in February and March. As long as the supply is disrupted, the prices of cooking oil will continue to rise and can cripple household budgets. Thus, all variants of vegetable oils, used for everything from preparing cookies to frying potato chips to making shampoo, are already rising and expected to rise further, as there is a shortage of supply.

Demand for Indian Wheat

Export demand for Indian wheat, corn and spices has significantly increased after Russia attacked Ukraine. This is because the international trade of agricultural commodities has shifted to India as the supply from Russia and Ukraine has halted. The prices of wheat have increased from INR 2,200 per quintal to INR 2,350-2,400 per quintal. Wheat traders want the Food Corporation of India (FCI) who keeps large stocks of wheat, to release more wheat into the market and keep domestic prices under control. The food processing industry is worried, as cooking oil prices have already shot up, transportation costs too owing to fuel, and if the cost of wheat and corn goes up, it would be difficult for them to provide end product at the same price, and price rise would lead to lower sales. Prices of spices have also increased due to shortages and strong global demand, as Ukraine is a major exporter of coriander seeds. Export demand for cotton, cotton yarn, textile fabrics, and readymade garments has made the spinning mills consume more cotton and thus, increasing the demand and prices thereon.

Equity markets

Global equity markets reacted sharply to the ‘demilitarisation and denazification of Ukraine’ (as being called on Russian news channels), as all indices were trading in red during the week and it has been a hell of a ride for traders. The market capitalization of companies listed Bombay Stock Exchange (BSE) eroded by USD 103 billion within an hour, while Gold, the haven surged by 2%. Historically, after every major erosion of wealth, the markets have usually bounced back with more gains than the loss within a year. Thus, for investors looking to invest in equity markets, it is a good opportunity to invest and take the back seat. However, it is important to invest in companies not majorly affected by the ongoing economic warfare.