Ukraine lessons

Just when tensions over Iraq are easing and threats of all-out Western invasion of Syria have receded, a fresh geopolitical risk for the global economy has arisen — in the form of Russian troop deployment in Ukraine’s Crimean peninsula. Its effects have been felt in stocks tumbling worldwide on Monday and gold prices crossing $1,350-an-ounce levels for the first time in over four months, with investors flocking to ‘safe-haven’ assets. But the crisis in Ukraine has the potential to cause more than temporary market jitters. The country is the world’s third largest exporter of corn and fifth biggest of wheat, with estimated quantities of 18 million and 10 million tonnes respectively in 2013-14. Not surprisingly, Chicago corn and wheat futures rose by 4-5 per cent on Monday, amid fears of disruption to shipments from the Black Sea region.

But of even greater concern is the possible impact on oil and gas prices. Russia supplies roughly 30 per cent of Europe’s natural gas, half of which goes through pipelines via Ukraine. The worst-case scenario is that the current development leads to the US and the European Union imposing sanctions on Russia. The latter could well respond by cutting gas supplies to Europe. Coupled with trade/financial sanctions making it difficult for Russia to export oil — the country is the world’s largest producer — the result could well be a fresh spike in international prices. This scenario is rather far-fetched though, given the costs involved. Export of gas to Europe fetches Russia about $100 million a day; half of its budget revenues come from oil and gas. Nor is it easy for Europe to find alternatives to Russian gas: Norway or Qatar can’t really fill the void. For the US, trade with Russia may be inconsequential. But for Europe, which is recovering from a deep recession, spiralling energy prices could be the worst thing to happen now. That’s not good for the world at a time when there is growing evidence of a Chinese economic slowdown.

It is in everybody’s interest for both sides to stay calm and it is welcome that Russia has ordered forces near the border to return to their bases. Moscow may have legitimate concerns about the security of the Russian-speaking majority in the east of Ukraine, but has no justification to despatch some 16,000 troops to Crimea in the name of establishing peace and order. The sudden flare-up in Ukraine is a reminder that external shocks affecting the Indian economy can come from completely unpredictable geopolitical factors. The important thing is to recognise that this may happen and not to lose focus on macroeconomic stability, which will provide relative insulation against capital outflows triggered by such shocks.