Economic Highlights

New Delhi, 22 March 2014

Crimean Crisis

 OIL, FOOD PRICES MAY RISE

By Shivaji Sarkar

The Crimean war of 1850 changed the political course in Europe. This time, the crisis may alter the course of global politico-economy even if does not escalate into a war. Despite it being a small entity, Crimea signifies the beginning of a tussle between the US-led NATO and Russia.

A sanction on Russia by the G7 is certainly not good news for India. Russia remains the largest defence supplier and a growing trade partner. Even vis-a-vis China and the US it has been helpful to India. So would India sail with Russia or not remains the difficult question.

A poll-bound India is yet to look for solutions. The political parties are too busy formulating the election strategies. But global situations do not wait for outcome of a developing economy, more so when it has a weak oscillating foreign policy. India is swinging between the US and Russia. In its heart, an Indian government would like to strike a balance but it knows that Russia had been a trusted ally.

Russian President Vladimir Putin may be happy after his telephonic talks with Prime Minister Manmohan Singh but he also knows India can only make some noises in the backdrop of the recent diplomatic spat with the US. But India could play some role in the G-20 if the G8 decides to expel Russia. The US is calling the G7 -- US, Britain, Germany, France, Italy Canada and Japan - to meet on the sidelines of the Nuclear Summit in the Netherlands. Russia will be among the 53 countries expected to participate at the Hague nuclear meet.

The crisis has other affects as well. That too is not good news for India. A further rise in oil and possibly grain prices due to it could endanger recent improvements in inflation and current account gaps in countries such as India. Such a price rise may take place if Russia decides to cancel the 2010 agreement with Ukraine. Under its terms, Russia allowed a $100 discount to Ukraine for keeping its fleet in Crimea. It could also change the demand patterns in the emerging markets affecting Indian exports.

The battle either for control of Crimea or Ukraine is not a territorial issue for the US but of its growing clout in the Russian Federation. Georgia is already a NATO ally – a plausible threat for Russia in the Black Sea region. As Ukraine leans to join the European Union and gradually NATO, Russian threat perceptions increase.

Does it affect India? The changing western influence in a region, where Russia is the only friendly country, certainly is a concern both in terms of security and economy. India has close ties with many Russian corporate including Gazprom, the biggest oil and gas firm. It has also set up an office for exploring oil blocks in Delhi. The ONGC also has agreement with Gazprom for oil exploration in Russia. These cross investments are part of India’s strategic energy security arrangement.

The Russia-Ukraine gas disputes have grown beyond simple business disputes into transnational political issues—involving political leaders from several countries—that threaten natural gas supplies in numerous European countries dependent on natural gas imports from Russian suppliers, which are transported through Ukraine. Russia provides approximately a quarter of the natural gas consumed in the European Union.

Though India is nowhere in the picture, it may be suffering for more than one reason. It would not only push up fuel prices across the globe, but also food grain prices in the EU and the international market. It can affect India in two ways – grains and other farm commodities from India could rush to the international market fuelling domestic prices – not good news for the new government that is likely to be voted to power on the issue of galloping inflation during the past over four years.

The pharmaceutical companies would need to worry. Trade body FICCI says if the situation continues then it could have a bearing on the country's exchange rate which would make the landed cost of Indian pharmaceuticals higher in Ukraine, which is India's second largest trading partner in the CIS after Russia.

In 2012-13, India's total trade with Ukraine was $ 3.18 billion of which, our exports were US $519 million and imports were $ 2.65 billion. Exports of pharmaceuticals from India in 2012-13 were $154 billion, which is about 30 per cent of the total exports to Ukraine.

Crimea has traditionally accounted for just about 5-6 per cent of the sales of the leading Indian pharmaceutical companies, and is not a large market. However, there have been reasons for concern over a likely impact on the pharmaceutical companies, largely due to a recent devaluation of the local currency (Hryvnia). It makes Indian goods expensive.

However, there is a positive. The turmoil has moved investors to the Indian market. The Mumbai stock sensex is zooming to 22000. But it should be seen only as a temporary phenomenon. In a turbulent EU and Russian market, India is seen as safer bet. But the foreign institutional investors switch their funds fast and India should be prepared for it.

The country’s poor growth has reduced actual FDI inflows to India, in the period April-January 2013-14 from $ 18.7 billion; representing negative growth of around (-)2 per cent from $ 19.1 billion for the corresponding period last year.

Russia may not be as strong as it was 25 years back. Still it holds clout with its Commonwealth of Independent States (CIS) on one of the largest territorial chunks and is kicking to regain its glory. The US may think in terms of imposing sanctions. But it also knows that Russia is neither Syria – where Russia effectively vetoed US moves nor an Iran, which despite sanctions get Russian and even some Indian support. So the relationship between the West and Russia may become more acrimonious but a sanction may be a difficult option for a desperate US, riddled with a sluggish economy.

A regional conflict still has chances of engaging the globe. It is to be seen how volatile it would be. India has to move cautiously and after the new government takes over also has to engage actively to secure the best in a turbulent world. ---INFA

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