This post has been authored by Indu Dahiya, the Research Analyst Intern at Arthashastra Intelligence

The world has become very much interdependent, thanks to globalisation and cross-border trade that major events in one country impact not just the concerned country, but many others. With Russia invading Ukraine, World trade is going to get a major hit since both countries contribute a good proportion in trade around the globe. India has major trading as well as political relations with both Russia and Ukraine and thus we can also expect some distress.

World trade

Energy supply and price shocks

Countries have started imposing sanctions on Russia as a punishment for its manoeuvres. These sanctions will freeze approximately $1 trillion worth of Russian banking assets from flowing through the markets of its partners\’ financial systems. They will also limit tech exports to Russia and thus squeeze its tech industry. Even Russia’s central bank and two of its largest banks are blocked from operating in many countries. After the sanctions were imposed, the stock market plunged and oil prices jumped to more than $105 per barrel, the highest since 2014. These energy price shocks and financial markets shocks will be seen around the globe. Russia is the third-largest producer of petroleum products and natural gas. Europe gets nearly 40% of its natural gas and 25% of its oil from Russia. This war can thus inflate prices in many countries and with the already prevailing inflation due to the coronavirus, this can hit countries hard. Some experts say it’s a major turning point in the world’s energy independence from Russia.

Food supply shocks

Trade of wheat and corn, two staple food grains will also be disrupted. Russia and Ukraine contribute 20 per cent and 10 per cent respectively in the export of wheat to the world. Ukraine is responsible for 16 per cent of world corn exports. This again will be difficult since the last two years brought a surge in global hunger. Countries are thus looking for alternatives.

India

Depreciation in currency

India imports most of its crude oil. Due to the increase in prices of oil, the value (if not quantity) of imports will increase. Thus, the current account deficit of the country will increase. This in turn will impact investments because investors will withdraw their investments from India because of the poor current account balance. This will increase the supply of the Indian rupee in the world capital market, which in turn will depreciate the currency.

Sunflower oil

India is the top global edible oil importer. Ukraine and Russia account for providing 90 per cent of India’s sunflower oil. This crisis could create sunflower oil scarcity in the country and will increase prices of sunflower oil that too after a year of the surge in edible oil prices. Users are ready to replace it with soybean oil, but Soy oil supplies are also limited as drought has hit soybean crops in South America.

Pharma

India is the third-largest exporter of pharmaceuticals to Ukraine. Indian pharmaceutical majors like Dr. Reddy’s Laboratories and Sun Pharma have a strong presence in both countries. India exported over USD 181 million worth of pharmaceutical goods to Ukraine in FY 21. This crisis will impact exports and will further hit the current account balance.

This crisis is also said to increase real estate prices because the hit in oil prices will increase prices of raw materials like cement. In addition to that MSMEs will also be impacted due to supply chain and thus input disruptions. But it can allow India to export more wheat since the world will surely scarcity of wheat.