How the war in Ukraine can impact us

Ukraine of the future is an untouched, untapped, natural resource hotspot

How the war in Ukraine can impact us

Ukraine is one of the largest exporters of wheat and corn. Grain exports are the mainstay of its economy. Much of the country’s corn and wheat are destined for Africa and West Asia, which are heavily reliant on imports for food items.

It is also known as a food granary for Europe. Over 50 percent of Ukraine’s annual corn and wheat shipments head to Africa or the Middle East. Global food security is the biggest concern if Ukraine’s exports are disturbed. The US and Europe are looking at food and energy security by trying to ensure Ukraine’s tilt towards the West.

Pakistan has been growing enough wheat generally to cater to its domestic needs. Some mismanagement and exports in the hope of a bumper harvest two years ago led to acute wheat shortages. This forced the government to import wheat from abroad.

The government allowed private companies to import 2.5 metric tonnes of wheat to stabilise the prices and build stocks. The country also purchased significant volumes of wheat during the first half of this season. Ukraine was its main supplier, exporting 1.2 MT of wheat to Pakistan in July-November of 2020.

Ukraine covered about 60 percent of the overall import potential. Russia supplied 0.92 MT of wheat during the same period. Together, wheat imports from Ukraine and Russia exceeded 2.1 MT in 2020-21. If the war continues and affects international trade Pakistan will have to look elsewhere for its wheat needs. But the prospects of a good wheat crop are bright after timely rains in the country. We might not need to import wheat this year. If Russia annexes Ukraine, its wheat would be available to Pakistan. However, if Ukraine retains its independence there is no surety that this trade will continue.

Ukraine’s importance to global economy cannot be overestimated. It is a resource-rich country. Besides wheat, Pakistan’s major steel imports also came from Ukraine. Ukraine supplied large quantities of steel to India when the world was struggling to match demand after Covid lockdowns. Coal is another commodity Pakistani industries are importing from Ukraine. Pakistan is a small player in this scenario. The implications of the conflict in Ukraine would have grave implications for the global economy.

Russia is a superpower and Ukraine was part of the Soviet Union before it disintegrated into several republics. Russia was the largest state after this disintegration and the most powerful militarily as well. Ukraine was the second largest state. It has a 2,295.04 kilometre-border with Russia and separates it from mainland Europe. The Ukraine-Russia land border is 1,974.04 kilometres and sea border is 321 kilometres.

Ukraine has the second-biggest known gas reserves in Europe, apart from Russia’s gas reserves in Asia, although largely unexploited. In terms of natural gas, the country has around 1.09 trillion cubic metres. This is second only to Norway’s known resources of 1.53 trillion cubic metres. Still, Ukraine currently depends on gas imports from Russia.

Just how big a blow the conflict ends up delivering to the global economy will depend on its length and scope, the severity of Western sanctions and the possible retaliation by Russia.

Russia supplies 40 to 50 percent of Europe’s gas consumption via the Nord Stream 1 pipeline as well as the Ukrainian network, which earns Ukraine a $7 billion transit fee.

Apart from the natural gas, Ukraine abounds with minerals including iron, coal, titanium and some non-metallic industrial raw materials. It exports iron ore ($3.36 billion), corn ($4.77 billion), semi-finished iron ($2.55 billion) and seed oils ($3.75 billion) which are exported largely to China ($3.94 billion), Germany ($3.08 billion) and Italy ($2.57 billion), Poland ($2.75 billion) and to Russia ($4.69 billion).

It is worth noting that when Ukraine was part of the Soviet Union its vast natural resources remained unexploited. In the meantime, the Russians consumed a lot of their fossil fuel reserves. The Russians now realise that fossil fuel supplies are not infinite. This means that Russia must scout additional sources to tap into.

The country must look no further than Ukraine. To Russia, as well as the West, Ukraine of the future is an untapped, natural resource hotspot. Ukraine is paying the price for its strategic location as well as untapped natural resources.

Some estimates indicate that up to 20 percent of the proven world reserves of titanium ores are situated in Ukraine. In the event of economic sanctions, the supply chain for titanium could be affected. Among other things this will hamper the ability to produce aircraft.

According to Bloomberg, Russia’s invasion of Ukraine carries huge risks for a world economy that’s yet to fully recover from the pandemic. The conflict already looks like the most serious war in Europe since 1945. Russian forces have carried out airstrikes, captured army bases and advanced toward Kyiv as civilians flee. Western officials have said the capital may fall any time as its air defences have been eliminated.

The assault followed weeks of tensions that sent tremors through the world economy by ratcheting up energy prices. That accelerated on Thursday. Oil briefly climbed past $100 a barrel for the first time since 2014, while European natural gas jumped as much as 62 percent.

As Ukraine fights for survival, Western governments are taking steps to punish Russia. They’re aware that by doing so, they could heighten the conflict’s impact on their own economies. US President Joe Biden — who on Thursday announced new sanctions that target Russia’s banks and its ability to trade in dollars — has warned that there’ll also be a price to pay at home, where expensive gasoline is already eroding his support among voters.

The pandemic has left the global economy with two key vulnerabilities — high inflation and jittery financial markets. Aftershocks from the invasion could easily worsen both. There’s a threat to growth, too. Households spending an ever-larger chunk of their incomes on fuel and heating will have less cash for other goods and services. Plunging markets will add another drag, hitting wealth and confidence, and making it harder for firms to tap funds for investment.

For central banks, the twin challenge of managing prices and keeping their economies growing will get even harder. The Federal Reserve and European Central Bank have been gearing up to tighten monetary policy. The Russia crisis may force a rethink.

Just how big a blow the conflict ends up delivering to the global economy will depend on its length and scope, the severity of Western sanctions and the possible retaliation by Russia. There’s the potential for other twists too, from an exodus of Ukrainian refugees to a wave of Russian cyber-attacks.

Pakistan is dependent on the import of fossil fuels that includes petroleum products, liquified natural gas and coal. The global oil prices have touched $107 per barrel. Except for Qatar, all LNG suppliers we have contracts with, have backed out of their commitments. We will be forced to buy the most expensive gas and crude oil. The prime minister has meanwhile frozen the domestic prices of petroleum products. The economy appears unlikely to bear the increasing burden of higher global commodity prices. Price of petroleum products are bound to go up soon.

The writer is a senior   economic reporter at The News Lahore

How the war in Ukraine can impact us