Russia-Ukraine Crisis: What it means for India and investors

US President Joe Biden has called Putin’s move “an unprovoked and unjustified attack by Russian military forces” and said the “world will hold Russia accountable.” The US & its allies over the past few days had responded to the imminent invasion of Ukraine by imposing sanctions on Russia, with severe ones incoming.

Global markets reacted in kind to the ‘demilitarisation and denazification’ of Ukraine by Russia, with major indices across the world trading in a deep sea of red, while gold hit the highest since early 2021. And just as the world started recovering from the damage caused by the Covid-19 pandemic, worries have set in yet again, globally, about a disruption in the face of already rising cost pressures and rolling back of pandemic-era measures by the central banks.

Energy impact


Crude oil prices are now hovering at around a 7-year high, with Brent oil prices surging above $100 a barrel for the first time since 2014. It may be noted that Russia is a key supplier of energy globally. Europe relies on Russia for about a quarter of its oil supplies and a third of its gas.

Bloomberg

JPMorgan Chase & Co earlier this week had said that the oil prices are likely to average $110 a barrel in the second quarter amid Russia-Ukraine tensions. The bank had further said that the crude market is likely to see sustained higher prices in the next quarter, before retreating to an average of $90 at the end of the year.

Data from US Energy Information Administration shows that China is the largest single customer for Russia’s oil exports. While Asia and Oceania as a whole accounted for 42% of Russia’s total crude oil and condensate exports, China emerged as the largest importing country of Russia’s crude oil and condensate, at 31% in 2020.

“There will be oil coming to the market but currently due to geopolitical risks and also the potential worry about the supply and leading to buying to fill the storage, will keep the prices at high levels for now,” Kang Wu, Head of Global Macro, Demand and Asia Analytics at S&P Global Platts had said on Wednesday.

“Without Russian oil interruptions, by the second half of the year, we are looking at something around $80 of oil price. Overall, we are not in the $100-$150 range for the year but more like $75-$85 range if the fundamentals dictate,” he further added.

Agencies

Russia’s crude oil & condensate exports by destination, 2020 (Source: US Energy Information Administration)

Impact back home


Back home, Finance Minister Nirmala Sitharaman in a post Budget interaction had said that the Russia-Ukraine tension and a surge in crude oil prices pose risk to the financial stability of the country and the government is closely monitoring the situation.

“Even today in the FSDC (meeting) when we were looking at the challenges posed for financial stability, crude was one of the things. International worrisome situations, where we actually voiced that we want diplomatic solutions for the situation developing in Ukraine, all these are headwinds,” she had told reporters.

India accounts for a negligible (less than 1%) share of Russia’s crude oil exports, which is partly because most Indian refineries cannot process the heavy crudes that Russia exports & the transportation costs from Russia to India.

Brokerage firm ICICI Securities in its note argues that the impact of a Russian invasion of Ukraine and the aftermath will be two-fold. “Higher crude oil prices will keep CPI inflation higher for longer, obliging the RBI to raise rates more than the two hikes we expected in August-December 2022 unless the government sharply cuts excise duties on petrol and diesel to contain fuel inflation.”

Further, the author also argues that on the trade front, given that the European Union is the biggest market for India’s exports, the supply disruptions to the EU are also likely to generate greater demand for steel, engineering goods, etc., of which India is an alternate supplier.

“The factors that caused India’s exports to outperform the world in CY21 will continue to hold in CY22, allowing exports to remain robust. India buys very little oil and gas from Russia, so the near-term disruptions to the Indian economy will be minimal (apart from the higher oil-import bill),” the author notes.

The west has so far rebuffed the Russian invasion by the imposition of sanctions. The brokerage has further said that countries defying sanctions would face reprisals from the western banking system which could prove disruptive to China’s ability to participate in the global trading system unhindered.

“This would offer a potentially positive opportunity for India as an alternative supplier of manufactured exports, although the primary initial benefits would flow to ASEAN, Taiwan, Korea, and Japan,” it said.

What should investors do?


The Indian stock market has taken a heavy beating over the last few weeks owing to a potential tightening of policy measures in addition to the Russia-Ukraine crisis.

OMCs have not hiked fuel prices since November last year when the government brought some respite to consumers by reducing excise on diesel by Rs 10 and on petrol by Rs 5. But analysts feel a rise in fuel prices may be due. And in the current scenario, it would force global central banks, including the Reserve Bank of India, to relook their policy stance.

Hiren Ved, CEO, Director & CIO, Alchemy Capital Management says that in the past, usually at the end of a war-like event, the market typically tends to bounce back. “Unless you are a trader and you know you have to sell, I think it is crazy for investors to react in this kind of market and sell anything indiscriminately. There is no point in selling into fear,” he said.

“So unless it is absolutely necessary, it is counterproductive to sell into a panic like this; whether you want to buy or not is entirely up to the investor’s risk appetite but if you want to buy the fear you should stick to large caps you know high-quality names and then let the dust settle down and then you could then venture more into the market but that is what I would do not panic not sell,” he added.