Economic Implications of re

Impact of Covid-19 pandemic and Russia Ukraine War

Group 1 Business Environment

1. IMPACT OF RUSSIAN UKRAINE
WAR ON INDIAN ECONOMY AND
IMPACT ON BUSINESSES GLOBALLY

1.1 Exports from Russia and Ukraine

The ongoing war between Russia and Ukraine have further weakened the business system, already
having implications and recovering from existing pandemic (corona virus), globally.

Talking precisely about oil and natural gas, the IMF (International Monetary Fund) had earlier pointed
out that that both Russia and Ukraine are major commodity producers, and disruptions there have
resulted in soaring global prices. In 2021 United States imported $B 1,99,000 worth of crude oil from
Russia. This is roughly around 4% of the production from Russia that year, in crude oil.

The same year Russia exported 8.9 TcF (Trillion cubic feet) liquefied and piped natural gas which
constitutes around 36% of the total natural gas it produced. Before the war in Ukraine, Russia
exported about 170 billion cubic metres of natural gas to the European market every year. The EU
(European Union) imported 45% of its natural gas from Russia. Russia accounts for 10% of the global
production of natural gas.

Russia is a world leader for exporting wheat and ranks among the most lucrative for global sales
of crude oil, refined petroleum oils and coal.
The latest available country-specific data shows that 63.3% of products exported from Russia were
bought by importers in: China (13.8% of Russia’s global total), Netherlands (8.6%), Germany (6%),
Turkey (5.4%), Belarus (4.6%), United Kingdom (4.5%), Italy (3.9%), Kazakhstan (3.8%), United
States (3.6%), South Korea (3.44%), Poland (3.4%) and Japan (2.2%).
From a continental perspective, roughly half (50.8%) of Russia’s exports by value were delivered to
fellow European countries while 39.8% were sold to importers in Asia. Russia shipped another 3%
worth of goods to North America.
The top 10 exports from Russia are as follows:

1. Mineral fuels including oil: US$211.5 billion (43% of total exports)

2. Gems, precious metals: $31.6 billion (6.4%)
3. Iron, steel: $28.9 billion (5.9%)
4. Fertilizers: $12.5 billion (2.5%)
5. Wood: $11.7 billion (2.4%)
6. Machinery including computers: $10.7 billion (2.2%)
7. Cereals: $9.1 billion (1.9%)
8. Aluminum: $8.8 billion (1.8%)
9. Ores, slag, ash: $7.4 billion (1.5%)
10. Plastics, plastic articles: $6.2 billion (1.3%)
Now talking about Ukraine, we see that Ukraine is also one of the big exporters of the world and
similar to Russia a good exporter of wheat. The other areas of rich exports include seed oil, corn, iron
ore and given as follows:

In 2020, Ukraine exported a total of $52.7B, making it the number 46 exporter in the world. During
the last five reported years the exports of Ukraine have changed by $10.7B from $42B in 2015 to
$52.7B in 2020.

The most recent exports are led by

1. Seed Oils ($5.32B)

2. Corn ($4.89B)
3. Wheat ($4.61B)
4. Iron Ore ($4.27B)
5. Semi-Finished Iron ($3.03B).

The most common destination for the exports of Ukraine

are China ($7.26B), Poland ($3.26B), Russia ($2.97B), Turkey ($2.5B), and Egypt ($2.39B).

In short recall,

Russia is the world’s 3rd oil producer, the 2nd natural gas producer and among the top 5 producers of
steel, nickel and aluminium. It is also the largest wheat exporter in the world (almost 20% of global
trade). On its side, Ukraine is a key producer of corn (6th largest), wheat (7th), sunflowers (1st), and
is amongst the top ten producers for sugar beet, barley, soya and rapeseed.

Food Shortage –

 According to World Bank, Russia and Ukraine account for about 40 percent of wheat
imports in Europe and about 75 percent or more in Central Asia and the South Caucasus.
In short Russia and Ukraine together export more than a quarter of the world's wheat.
 According to UN report, the conflict will likely impact food security in Africa. Both
through availability and pricing in some food crops, particularly wheat and sunflower, as
well as socio-economic recovery and growth, triggered by rising uncertainties in global
financial markets and supply chain systems.

Figure 1. Wheat imports from Russia and Ukraine are very important in some countries
Share of wheat imports from Russia and Ukraine in total wheat imports in 2019, in per cent (OECD)

Energy Export:

Figure 2. A reduction in imported energy would hit output across Europe

Percentage change in gross output from a 20 per cent reduction from imported energy inputs

Note: Based on a reduction of 20% of direct and indirect imported energy inputs from fossil fuels,
refined fuel products and electricity and gas supply. The calculations use input-output tables for 2018.
EU22 denotes the 22 European Union member staes who are also members of the OECD.
Source: OECD IOTs 2021 database; OECD calculations.

1.2 The impact on the global economy

The Russia-Ukraine conflict has triggered turmoil in the financial markets, and drastically increased
uncertainty about the recovery of the global economy.

o On the day the invasion began, financial markets around the world fell sharply, and the prices
of oil, natural gas, metals and food commodities surged.
o Higher commodity prices intensify the threat of long-lasting high inflation which increases
the risks of stagflation and social unrest.
o Certain sectors such as automotive, transport or chemicals are more likely to suffer.
o Coface (an online news, trade and publications agency), forecasts a deep recession of 7.5%
for the Russian economy in 2022 and downgraded Russia’s risk assessment to D (very high).
o European economies are most at risk: at the time of writing, Coface estimates at least 1.5
percentage point of additional inflation in 2022, while GDP growth could be lowered by 1
percentage point. Together with a complete cut of Russian natural gas supply, this could cost
at least 4 points of GDP, thereby leading EU GDP growth close to zero – more probably in
negative territory – in 2022.
o The automotive sector will be impacted due to shortage and high commodity and raw material
prices: metals, semiconductors, cobalt, lithium, magnesium which is majorly imported from
Ukraine.
o Airlines will be costly due to increase in fuel prices.
o Rail freight will be disrupted as the European countries are forbidden to do business from
Russian companies which will impact the Euro-Asian businesses.
o Deep recession is expected and foretold for the Russian economy in 2022.
o Because of dependency of European countries on Russian oil and natural gas the countries
majorly at risk are European. Transportation will be costlier and hence inflation.
o Rest of the world will feel rise in commodity prices which will further fuel the already
existing inflation.
o In Asia-Pacific regions the effects will be felt immediately and are being felt in disguise of
higher commodity prices, specifically higher energy prices. The countries in effect will be felt
majorly in China, India, Japan, South Korea and more.
o The American continents are not so much linked with Russia and Ukraine for their businesses
so no direct impact will be felt. Although, indirect rise in prices will be felt specifically in fuel
commodities due to disruptions in European economies.
o Increase in NATO defence budget – Germany (more than 2 percent of GDP and invest the
equivalent of $113 billion in weaponry, almost 45% increase), Romania, Poland buying tanks,
anti-missile system, F-35, etc
o Shortage of Semi-conductors – Around half of the global semiconductor-grade neon and
palladium supply comes from Ukraine and Russia, and the current crisis has hurt their supply
and pricing
o 45% shrinkage of Ukraine’s Economy – According to a press release by The World Bank
Russian Invasion may shrink Ukraine Economy by 45 percent this year.
o Russia’s Economy – Russia’s economy has already plunged into a deep recession with
output projected to contract by 11.2% in 2022
o Exports of other countries – Russia is also a major export destination for many countries,
while remittances from Russia are close to 30 percent of GDP in some Central Asian
economies (Kyrgyz Republic, Tajikistan). (Source: World Bank)
o According to IMF, For China, immediate effects should be smaller because fiscal stimulus
will support this year’s 5.5 percent growth goal and Russia buys a relatively small amount of
its exports. Still, commodity prices and weakening demand in big export markets add to
challenges.
o Refugee inflow in Europe: The spending challenge is difficult to predict due to uncertainty
about the number of refugees, the length of time they will stay, and the amount of spending
per refugee. The cost for processing and accommodating asylum seekers for the first year in
2015-16 was estimated to be around EUR 10 000 per application by the OECD, and up to
EUR 12 500 per refugee in national studies for Germany –though to varying extent across
countries, depending on the level of support. At this level, the inflow of 3 million refugees
seen so far could result in a direct first year cost of at least 0.25% of EU GDP, and much
more in the major host economies. So far, refugees have primarily gone to a small number of
countries, with Hungary, Moldova, Poland, Romania and Slovakia taking in large shares.
Figure 3. Inflows of refugees from the war are rising rapidly

Note: For Panel A, asylum applicants are those who have submitted an application for
international protection. The solid red bar is the estimated number of Ukrainian refugees between
24 February and 15 March 2022. Figures as of 15/03/22 for Panel B. Where possible, statistics
reflect further movements of refugees, to avoid double counting, such as in the Republic of
Moldova and Romania. The accumulated data in this table is higher than the total number of
refugees fleeing Ukraine presented above since it also takes into account people crossing the
border between Romania and Moldova. Source: Eurostat; UNHCR; and OECD calculation

Figure 4
https://blogs.imf.org/2022/03/15/how-war-in-ukraine-is-reverberating-across-worlds-regions/
1.3 The impact on the Indian economy
o Rising prices of food/ edible ingredients lead Indians to spend more on food which causes to
spend less on other essential commodities like healthcare and education.
o India is majorly and agriculture dependent economy which does not raise concerns for
availability of food but the affordability is a thing of concern for quite good amount of
population. The disturbed supply chain also causes a great impact on this.
o Wheat and sunflower oil are majorly exported by Russia and Ukraine combined which causes
rise in Indian wheat and oils eventually.
o As on march 27, 2022 the department of consumer affairs provided the data of increment in
prices of following items in percentage:
 Sunflower oil (19.9%)
 Palm oil (11.3%)
 Soya oil (9%)
 Vanaspati oil (8.6%)
 Groundnut oil (4.6%)
 Wheat (2.2%)
 Atta (1.7%)
o Petrol and diesel prices have risen drastically in last 2 months and presently being sold at a
price above ₹100 each. The rise in transportation fuel directly impacts the price of each and
every commodity that needs transportation causing inflation.
o Ministry of commerce and Industry and NASDAQ shows that petroleum and food items
together are responsible for 1/3 (34.8%) of the wholesale inflation.
o Impact on Rural Economy: Russia Ukraine war has created a silver lining for Indian
agriculture by disrupting global Agri commodity chain due to supply disruptions and that
augur well for the rural economy but care need to be taken to ensure food security in our
country.
o Impact on Business Ecosystem: Global rating agency Moody’s on Monday said the high
commodity prices and supply chain disruptions due to further escalation in the Russia-
Ukraine crisis could expose about 42 per cent of rated Indian companies to significant risks.
They are mainly in the oil and gas and automotive sectors.
2. SECTORAL IMPACTS OF COVID‐19
ON INDIAN ECONOMY
2.1. Primary sector

2.1.1. Agriculture and allied activities To contain the spread of COVID‐19, just like how other
countries did, India imposed a complete lockdown in march which coincided with the peak of
harvesting season of Rabi crops in India mainly in the north‐west which posed significant losses to the
farmers. Although there were relaxations to the agriculture sector during lockdown but transport
constraints, mobility restrictions and lack of labor due to reverse ‐migration of labor to their native
places were the major problems faced by the farmers. Farmers in Maharashtra called it a worse
situation than that occurred during the demonetization in 2016 (Saha & Bhattacharya, 2020).

Before this pandemic, the rural economy of India was witnessing a decline in incomes of mainly
casual workers 8 along with declining rural wages (real). Some rays of hope were seen in January
2020 when food prices started rising but all hopes collapsed with this new crisis. (Mukhopadhyay,
2020)

Agriculture and allied activities are not a homogenous group of activities, in fact, an umbrella of
different activities having their different dynamics each. So, the impact of COVID ‐19 on this sector
varies according to the set of activities, that is, on crops, livestock, fisheries, and so forth. Horticulture
and Foodgrains production is part of crops and is impacted differently. Horticulture is likely to face
the brunt more because of the nature of perishability whereas food grains are non ‐perishable and apart
from problems in harvesting and labor shortage, this is not impacted much. Rabi harvesting has gone
well and MSP hike has also been announced for the Kharif crops which assures farmers a 50–83%
return on their production cost. With declining demand and reduction in exports of fruits and
vegetables, horticulture is hit hard. Similarly, floriculture has been affected because of less demands
due to shut down of religious places, postponement of marriages, and so forth. In livestock (milk,
meat, eggs), milk is the major contributor that has been impacted and fortunately, had stability during
the lockdown.

Fishing and aquaculture are expected to have a high negative impact, food grains and livestock low,
and horticulture medium, relatively. Agriculture seems to be a bright spot in India amid the COVID‐
19 crisis and CRISIL expects agriculture to grow at a rate of 2.5% in FY2021. (CRISIL, 2020).

2.2. Secondary sector

2.2.1. Manufacturing sector The manufacturing sector is the major contributor of GDP and
employment in the secondary sector and has been recognized as an engine for vibrant growth and
creator of the nation's wealth (Rele, 2020). The manufacturing sector is important in the way that it
has strong linkages with other sectors, both forward and backward linkages so any impact in this
sector will affect other sectors as well. Overall, the manufacturing sector is going to be affected badly
by demand–supply disruptions and global value supply chain.
The 50% contributor to the manufacturing sector, the automotive sector was suffering before COVID‐
19 too due to low consumer demand, inadequate credit facilities, and more problems due to the NBFC
crisis. There is a lot of pressure due to demand–supply disruptions on the health of the auto sector in
India due to COVID‐19. As per the latest assessment related to the impact of COVID ‐19 done by
SIAM, the auto sector is expected to have a decline between 22% and 35% in various industry
segments conditioned with GDP growth of 0–1% for FY21. said Rajan Wadhera, President, SIAM. 9

From decades, China has been the epicenter of manufacturing accounting for one ‐third of total
manufacturing over the world. But after the outbreak of COVID‐19, many countries are planning to
shift focus from China and looking for countries like China where cheap labor is available. So, it is a
golden opportunity for India to make “Made in India” global. There is huge potential in India, if
proper measures will be taken to boost the manufacturing sector, India will emerge as a new
manufacturing hub surpassing China.

The micro, small and medium enterprises (MSMEs) as a whole form a significant share of
manufacturing in India and play a crucial role in providing employment opportunities and also in the
country's exports. As indicated by recent reports MSMEs contribute 30% in India's GDP and 50% in
the employment of industrial workers. But this sector has issues like the non ‐availability of adequate,
timely, and affordable institutional credit. Although all the businesses and sectors are affected due to
the pandemic, this sector is badly hit due to reduced cash flows, supply chain disruptions, shortage of
migrant workers due to reverse migration, less demand, and so forth. Like China, India is also
expected to have major destructions in this sector with more challenges to small firms as compared
with upstream firms (Dev & Sengupta, 2020).

It is not easy to re‐start MSMEs once they are shut down (Chidambaram, 2020). India's Sherpa to the
G20 also said that small industries are most vulnerable and it is difficult for them to survive without
financial assistance because of their incapability to deal with such sudden disruptions. 10