The economic impact of the Russia-Ukraine crisis

The Ukraine-Russia war has already dealt a severe blow to financial markets, global supply chains and the global economy. Bangladesh’s economy was recovering rapidly from the pandemic, but is now feeling the heat of the war. The price of food grain, crude oil and minerals has already gone up in the global market. Exports to all the destinations have become uncertain.

The impact on the Bangladesh economy can be through disruptions in bilateral trade with Russia, rise in import payments, fall in export receipts, pressure on the exchange rate, etc. The import bill will go up and the sizeable foreign exchange reserve may not remain at a satisfactory level. Russia is the major supplier of fertilizer to Bangladesh and Rooppur nuclear power plant is under construction with financial and technical support of Russia.

Economists and businesses have feared that Russia’s invasion of Ukraine would hurt Bangladesh’s trade and business, inflow of foreign direct investment and loans and grants as the crisis takes a heavy toll on global economy.

Bangladesh is rather reserved about free trade area (FTA) agreements in this globalized world, but policy makers agreed (half-heartedly) to sign FTA agreement with the Euro-Asian Economic Union. The forum includes Russia, Belarus, Kazakhstan, Armenia and Kyrgyzstan. This unexplored market is very important for Bangladesh’s export.

As far as statistics is concerned, Russia has long been relatively a minor player in the global economy, accounting for just 1.7 per cent of the world’s total output despite its enormous energy exports. But Russia is a commodities powerhouse, with it being a key supplier of energy, metals and agricultural products. Russia is the world's largest supplier of wheat and, together with Ukraine accounts for nearly 30 per cent of total global exports. Other commodities tied to Russia and Ukraine, such as gold, aluminium, corn, and nickel, have been trading at multiyear highs since the eruption of the conflict. The negative impact of the war is not confined to Russia-Ukraine, rather it is already hurting all the nations across the world.

The impact is not just because of disruptions caused by the war but also the multifarious economic sanctions against Russia imposed by the US, the EU, the UK, Japan, and several other countries. Global banks are bracing for the effects of sanctions designed to restrict Russia's access to foreign capital and limit Russia's ability to process payments in dollars, euros, pounds, and yens which are crucial for trade.

The crisis is weighing heavily on the markets because of Russia's central role as a global energy producer. Russia is the third-largest producer of oil, providing roughly one of every 10 barrels the global economy consumes. Surging energy costs will ripple quickly through the global economy, rising inflation further. Since December, oil prices have risen by more than 40 per cent. Releases from the global oil reserve may only temporarily alleviate the shortage.

The West will also likely cut off exports of high-tech products, including advanced microchips and any devices that contain them. This will not only impact Russian consumers, but the loss of Russian markets will reduce aggregate global demand for such products, ultimately affecting nations that produce them if they depend on sales to Russia.

Ukraine alone makes up almost half of exports of sunflower oil. If harvesting and processing is hindered in a war-torn Ukraine, or exports are blocked, importers will struggle to replace supplies.

The global metal market experiences shortage of supply and price is increasing in London Metal Exchange. Ukraine is the major supplier of scraps to Bangladesh and now supply has been stopped causing an increase in price of rods in Bangladesh.

Russia is the top gas exporting country in the world while the country is the 3rd largest fuel-oil producing country and the war resulted in increase of the price of oil and gas that might increase the global inflation. Natural gas, oil and energy prices will likely go significantly higher, which would increase the manufacturing costs and commodity prices all over the world. The price of oil and gas would rise on the global market that would put pressure on Bangladesh’s balance of payment.

The price hike of gas would increase the production cost of fertilizers and ultimately the prices of agricultural products would go up, especially Urea price will increase causing difficulty for Bangladesh. Despite Western sanctions, the cabinet has approved a proposal to purchase 30,000 tons of potassium chloride fertilizer valued at $17.4 million (1.5 billion taka) from Russia’s Foreign Economic Corp.

Dhaka stocks nosedived after a plunge in the previous session as investors were unnerved by the Russia-Ukraine conflict and some market-related issues.

The war may have adverse impact on global economy and our export and remittance may slow down and the rate of foreign currency go up resulting increased import cost and pressure on foreign currency reserve.

Bangladesh mainly exports apparel items, jute, frozen foods, tea, leather, home textiles and ceramic products to Russia and Ukraine. Imports include cereals, minerals, chemical products, plastic products, metal, machinery, and mechanical equipment. According to the official data, Bangladesh’s export in the financial year 2020-21 was $665.31 million to Russia while the import was $466 million. Bangladesh’s main export item to the Russia is readymade garments. Apparel exporters continue to export goods to Russia and receive new work orders, despite the US and their allies’ decision to ban seven Russian banks from the SWIFT system against the backdrop of the Ukraine-Russia war.

Some of Russian buyers have requested Bangladeshi exporters to ship goods directly to the St. Petersburg port, and avoid crossing the Black Sea and Sea of Azov – which have become risky because of the ongoing conflict. Due to poor logistics at Chattogram port, no vessel can directly call on our port and we rely on Singapore, Port Klang and Colombo for international trade.

Apparel makers have been exporting to Russia through the Port of Singapore and the Port of Colombo. But Singapore too has imposed sanctions against Russia for inbound and outbound cargo of Russia. Besides, the Danish shipping giant Maersk, Switzerland-based MSC and France’s CMA CGM all announced on March 1 that they have suspended bookings for goods transportation to and from Russia, which will disrupt exports of Bangladesh. And disruptions in the supply chain have significant impact on our international trade.

Currently, Bangladesh does not carry out direct banking transactions with Russia. Instead, it uses third party banking systems such as the United Arab Emirate (UAE) and Hong Kong – who have direct banking relationships with Russia. Bangladesh may consider currency swap with Russia. Bangladesh Bank already sent a letter to the Finance Ministry to allow us to do a currency swap with the country to avoid SWIFT-related restrictions. China launched the CIPS – its own international payment system – in 2015 as an alternative to SWIFT and 23 Russian banks are currently connected to it.

There is no immediate resolution of the Ukraine-Russia conflict on the horizon even if Russia wins the ground battle. The war is likely to continue in one form or the other. We are likely to be in this environment of a multipronged and multifaceted sanctions regime for months if not longer.

The sanction and retaliation from either party are definitely going to have significant impacts. Bangladesh will have to observe carefully the nature of the sanctions imposed by the United States and the European Union on Russia. Any wrong move in dealing with Russia can put Bangladesh under the radar.

Bangladesh is also taking the middle stance on Ukraine, urging “cessation of hostilities” by all sides without ascribing any blame. Bangladesh abstained from voting on a UN General Assembly resolution, which condemned Russia’s for the war. In a first reaction, Lithuania withdrew from its commitment to donate 444,000 doses Pfizer vaccine to Bangladesh due to Bangladesh’s stance in the UNGA.

The writer is a legal economist. He can be contacted at [email protected]