In February 2022, Russia launched a full-scale military strike against Ukraine. War is claiming enormous sacrifices in human life and is likely to have a long-term impact on world trade, especially in energy and commodity markets. Rising tensions between Russia and Ukraine are having serious economic consequences, which have already manifested themselves in Pakistan. Local prices for gasoline, food, raw materials, steel and semiconductor chips are showing significant increases.
Pakistan-Russia
Historically, Pakistan has sustained bilateral economic ties with Russia and Ukraine. In 2020, Pakistan exported $279 million to Russia. In 2021, Pakistan exported $175.2 million (UN COMTRADE, 2022).
The main products that Pakistan exported to Russia are Citrus (57M dollar), Non-Knit Women’s Suits (23.5M dollar), and Knit Sweaters (21.5M dollar). During the last 24 years the exports of Pakistan to Russia have increased at an annualized rate of 13.6%, from 13.1M dollar in 1996 to 279M dollar in 2020. [1] In 2020, Russia exported $699M to Pakistan . The main products that Russia exported to Pakistan were Wheat ($394M), Dried Legumes($156M), and Coal Briquettes ($48.2M). Pakistan will import 2M metric tons of wheat and natural gas from Russia despite the International sanctions. Pakistan and Russia signed agreements to impost natural gas because Pakistan’ own gas reserves are depleting [2].
During the last 24 years the exports of Russia to Pakistan have increased at an annualized rate of 10.2%, from $67.6M in 1996 to $699M in 2020. In 2018, Russia exported services to Pakistan worth $20.5M, with Other business services ($11.6M), Transportation ($6.3M), and Computer and information services ($1.6M) being the largest in terms of value [3]. according to the United Nations COMTRADE database on international trade the Pakistan exports to Russia was $175.2M during 2021. [4]
Pakistan is warming to closer ties with Russia, thus all political measures to stimulate the peace process must be made. Pakistan’s economy must be prepared for a persistent increase in oil prices above $100 per barrel. if imports are not curtailed and exports do not grow, we may need to raise the interest rate to near 12% or pressure on the rupee could push it to near Rs200 a dollar.
Russia is a global player in major commodities which include oil, gas, aluminum, steel, wheat and copper. Beginning with oil, Russia is a major player in global crude oil export, it accounts for 12% of global market shares. Due to recent escalations, oil prices have crossed 100 dollars per barrel. This will directly have a negative impact on Pakistan from an economic perspective. This will have led to an increased price of oil in Pakistan as well. The brewing Russia-Ukraine crisis-if escalates further-has the capacity to take oil prices above $100 to 120 a barrel and derail Pakistan for a hard landing of the economy. [5]
Pakistan-Ukraine
In 2020, Ukraine exported 573M dollar to Pakistan. During the last 24 years the exports of Ukraine to Pakistan have increased at an annualized rate of 15.5%, form 18.1M dollar in 1996 to 573M dollar in 2020.
In 2020, Pakistan exported $82.1M to Ukraine . The main products that Pakistan exported to Ukraine were Light Synthetic Cotton Fabrics ($28.2M), Citrus ($7.17M), and Rice($6.66M). During the last 24 years the exports of Ukraine to Pakistan have increased at an annualized rate of 15.5%, from $18.1M in 1996 to $573M in 2020. In 2020, Pakistan exported 82.1M dollar to Ukraine. The main products exported from Pakistan to Ukraine were light synthetic cotton fabrics ($28.2M), Citrus ($7.17M), and Rice ($6.66M) [6]. In 2021, the trade value with Russia was $711M-including $537M in imports from Russia. Similarly, bilateral trade between Pakistan and Ukraine was valued at $800M in 2021, with Pakistan receiving $739M in imports. [7]
Pakistan imports from Ukraine of wheat and meslin was 477.78M US dollar during 2021, according to the United Nation COMTRADE database on international trade.
The macro impact of war tensions is on the agricultural industry; Russia is the biggest exporter of wheat. If this conflict is going to disruptions it pays to look what Russia is exporting and where those exports are going [8]. Russia and Ukraine combined account for 11 billion exports to the world. If the prices of the wheat increase due to ongoing tensions, then Pakistan will have no choice but to increase its imports to meet the market value. Pakistan’s wheat import will be directly affected by the crisis since it arrives from Ukraine and accounted for 39 percent of the country’s total imported wheat demand in the previous fiscal year. However, the indirect cost of the crisis in terms of global energy and commodities supply chains is expected to offset Pakistan’s direct trade losses with Russia and Ukraine. The war in Ukraine will push the prices higher and opportunists might sell off the food security to fill their coffers. If the Russia-Ukraine issue worsens, oil prices could rise to 100-120 per barrel US dollar, putting Pakistan’s economy on a collision course with the rest of the world.
In addition, if Western countries impose sanctions on Russian oil shipments, oil prices are likely to rise further. As a result, the conflict is likely to exacerbate the situation and contribute to higher inflation in Pakistan. Under such a scenario, the Pakistani rupee would potentially depreciate rapidly, forcing the State Bank of Pakistan (SBP) to tighten its monetary policy. These conditions will have a negative impact on the living standards of Pakistani citizens. Pakistan must play its cards carefully and maintain its neutrality, instead of indulging in Russia and the West. Pakistan cannot become part of any political bloc and cannot set aside any state for the benefit of others.
With ongoing geopolitical tensions rising amidst the Russia-Ukraine situation, there is no doubt that the economic repercussions will impact Pakistan. With the country’s economy already vulnerable to the pandemic, Pakistan could face a worsening of current account and fiscal balances and stagnation of economic development. A few measures Pakistan can take to prepare itself for the worst-case scenario. Utilize local coal for electricity production instead of imported furnace oil and LNG, do not overly subsidies petrol and diesel as it paradoxically increases demand amid rising prices, temporary place three to six-month ban on luxury imports/higher duties on outflow of funds abroad for holidays, arrange for oil credit facility to tide over the tough period of high oil prices and appeal to the masses to reduce non-essential travel. Therefore, the country needs to carefully assess its strategic position in the global and regional context and make informed but timely decisions that are essential for its survival.
In developing geopolitics, Pakistan needs to improve its relations with Asian countries and maintain mutually beneficial relations with all major powers, including the United States, Europe, China and Russia. Pakistan’s economy is predominantly agricultural in nature and under the current scenario, in order to avoid economic disasters, Pakistan needs to be self-sufficient and focus on its agricultural sector.
Reference
[1] Pakistan and Russia page of the Trade, complexity and ranking website accessible at https://oec.world/en/profile/bilateral-country/pak/partner/rus#historical-data
[2] Pakistan Today newspaper. Accessible at https://www.pakistantoday.com.pk/2022/03/02/pakistan-to-import-wheat-natural-gas-from-russia/
[3] Trading Economics page of Pakistan exports to Russia, accessible at https://tradingeconomics.com/pakistan/exports/russia
[4] The express “Tribune” newspaper April 25, 2022 accessible at https://tribune.com.pk/story/2341183/russia-ukraine-conflict-may-jolt-pakistans-economy
[5] Pakistan and Ukraine page of the Trade, complexity and ranking website accessible at https://oec.world/en/profile/bilateral-country/ukr/partner/pak
[6] Kamal, Abdul, ‘A crisis in the making.’ The News, 22 March 2022, accessible at https://www.thenews.com.pk/print/943504-a-crisis-in-the
[7] The Tribune newspaper page, website accessible at https://www.tribuneindia.com/news/world/pakistan-government-urged-to-ban-wheat-export-amid-ukraine-russia-crisis-376398#
[8] Ahmad, S. (2022). Russia Ukraine Conflict-How War Affects the Stock Market. Available at SSRN 4058001. https://ssrn.com/abstract=4058001 or http://dx.doi.org/10.2139/ssrn.4058001
1 – PhD Scholar, School of International Trade and Economics, University of International Business and Economics Beijing, China.
2 – Visiting Lecturer, Institute of Development Studies, The University of Agriculture Peshawar, Pakistan
Email:- ShakilAhmadeco@gmail.com