The Russia-Ukraine crisis continues to escalate with investors all over the world remaining cautious amid concerns of war. Russian President Vladimir Putin on Thursday announced a military operation in Ukraine, claiming it’s intended to protect civilians.
In a televised address, Putin said the action comes in response to threats coming from Ukraine. He added that Russia doesn’t have a goal to occupy Ukraine. Putin said the responsibility for the bloodshed lies with the Ukrainian “regime.”
Putin warned other countries that any attempt to interfere with the Russian action would lead to “consequences they have never seen.” He accused the U.S. and its allies of ignoring Russia’s demand to prevent Ukraine from joining NATO and offer Moscow security guarantees.
All global markets have also witnessed a major decline since the crisis started. Just in today's deal, the Sensex lost as much as 3 percent. Meanwhile, South Korea benchmark KOSPI and Hong Kong's Hang Seng has lost around 3 percent each and Japan's Nikkei shed 2 percent. China's Shanghai Composite is also down around a percent in today's deals.
So why is Russia looking to invade Ukraine?
As per a report by domestic brokerage house ICICI Securities Russia views a pre-emptive conquest of Ukraine as the only way to prevent Ukraine from eventually joining NATO, thereby bringing US nuclear weapons to Russia’s borders.
Russia experienced major invasions of its territory by Napoleon in the 19th and Hitler in the 20th century – both repulsed because of the large land buffer between Europe and the Russian heartland, which would vanish if nuclear weapons were stationed in Ukraine. Putin cites US assurances from 1990 that “not an inch of eastward expansion” of NATO would occur, assurances that have been repeatedly violated, especially since 1999, ICICI Securities explains.
While it now looks like a war is imminent, let's understand the key risks an invasion by Russia will lead to. As per a report by ICICI Securities higher oil prices and European recession will be the major headwinds of a war.
Higher crude oil prices
As per the domestic brokerage house, oil prices are likely to remain elevated (well above $90/bbl) for most of 2022, once the US imposes additional sanctions on Russia (including its ability to export oil and gas) following a possible Russian invasion of Ukraine.
Impact on European Union
The brokerage further reiterated that Germany is in a relationship of mutual dependence with Russia for the past half-century, as Russia-supplied natural gas runs a large proportion of its electricity. Meanwhile, France, Austria, Netherlands and Italy also depend on Russian gas and oil to only a slightly lesser degree.
"Sanctions on Russia would cripple the EU economy (causing an EU recession) for at least half a year, although the US and OPEC countries could eventually replace most of the oil & gas lost to the EU from sanctions on Russia. Given the hugely-negative impact on their economies, the EU members of NATO are likely less enthusiastic about sanctions on Russia but aren’t saying so publicly. Apart from France, the rest of NATO depends on the US for security, and so cannot publicly oppose US actions against Russia," it clarified.
Impact on India
The impact on India of a war between Russia and Ukraine will be two-fold. Firstly, it will raise inflation due to surging oil prices, leading to an accelerated rate hike by the Reserve Bank of India and secondly, it would impact the trade between India and the European Union.
The brokerage noted that higher crude oil prices will keep CPI inflation
higher for longer, obliging the RBI to raise rates more than the two hikes already expected between August and December 2022, unless the government sharply cuts excise duties on petrol and diesel to contain fuel inflation.
It further added that given that the EU is the biggest market for India’s exports, supply disruptions to the EU are also likely to generate
greater demand for steel, engineering goods, etc., of which India is an alternate supplier, so the factors that caused India’s exports to outperform the world in 2021 will continue to hold in 2022, allowing exports to remain robust.
Meanwhile, India buys very little oil and gas from Russia, so the near-term disruptions to the Indian economy will be minimal.
