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Ukraine Crisis: An overview
The world-shocking Russian military invasion on Ukraine (February 24) reached a critical juncture on Saturday (February 26), with Russian tanks closing in on the besieged capital Kyiv, even as the death toll rises and thousands of local civilians evacuate.
Since Ukraine’s pro-Russian president, Viktor Yanukovych, was overthrown in 2014 after months of protests to overthrow his government, President Putin has regularly accused the country of being taken over by extremists. However, Ukraine has not shifted to the right; rather, it has shifted to the west, which Putin hopes to reverse. When Moscow pressured Ukraine’s president not to sign a 2013 association treaty with the EU, protests erupted. In 2014, Russia retaliated by taking Crimea’s southern area and sparking a rebellion in the east, backing separatists fighting Ukrainian forces in an eight-year war that has claimed 14,000 lives. Ukraine has stated its desire to join the European Union and the NATO military alliance, but the Kremlin would not allow it. Russia began amassing large numbers of troops near Ukraine’s borders in late 2021. President Putin has denied plans for an invasion, but he has since abrogated the 2015 Minsk peace agreement for the east and recognised rebel-controlled territories as independent. He accused NATO of endangering “our historic future as a nation” as he sent in the troops. The proclaimed goal of Russia is for Ukraine to be liberated from persecution and “cleansed of Nazis.” Mr Putin has spoken of bringing to justice “those who committed multiple horrific crimes against people” under this false narrative of a fascist-run Ukraine since 2014. He has denied attempting to conquer Ukraine and has refuted a UK charge that he was planning to install a pro-Kremlin puppet before the war, but he has also stated that there will be no invasion. According to one unconfirmed intelligence report, he wants to divide the country in half. The writer celebrated a new world order in which Russia was recovering its pre-1991 Soviet unity, gathering the so-called world of Russians, Belarusians, and Little Russians (Ukrainians), in an editorial published on February 26 and then deleted by state news outlet Ria-Novosti. President Putin penned a long post last year portraying Russians and Ukrainians as “one people,” and he has referred to the Soviet Union’s demise in December 1991 as the “disintegration of historical Russia.” In Belarus, a puppet has worked out thanks to long-time authoritarian leader Alexander Lukashenko, but Ukraine is a different story. Although Russia’s Baltic neighbours face no immediate threat, NATO has reinforced their defences just in case.
Ukrainians are living in fear as shells and bombs rain down on their towns, forcing more than two million people to flee to neighbouring nations. Poland, Hungary, Romania, Moldova, and Slovakia are grappling with a massive influx of refugees, with the EU warning that at least another five million could be displaced. It is, however, a pivotal moment that has the potential to shatter Europe’s post-World War II security structure. Days after threatening the West with “consequences the likes of which you have never seen” if it stands in his way, Russia’s Putin has put his nuclear forces on high alert.
The world has been astonished by Russian President Vladimir Putin’s ruthless use of military force to alter the political geography of central Europe, and the consequences of this action are complex and multi-layered. The immediate impact is on Ukraine’s urban population of 41 million people, and television images of Russian munitions destroying military assets resemble the lethal convulsions seen in Iraq, Syria, and Afghanistan over the last two decades. The civilian casualties are heart-breaking and reminiscent of Europe’s deadly history, which until February 24 believed that such military action was a common element of a horrific past now consigned to history. Despite some ferocious opposition, the anguish and tragedy currently unfolding is a forerunner to the fall of Kyiv, Ukraine’s capital. It also appears inevitable that President Putin would impose a political framework aimed at keeping a demilitarised Ukraine neutral, NATO membership out of the question, and Kyiv dependent to Moscow. A Ukraine model based on the Finland agreement may arise, but the majority of Ukrainians will be dissatisfied and tortured. A violent and bloody civil war is a distinct possibility if they opt to fight Russian aggression. But, for the time being, Ukraine is on its own, and no other country is likely to send troops to help Kyiv. This is the doubtful reality of early twentieth century geopolitics, and a post-Ukraine global framework is forming, with multiple contradictions between aspiration and reality, mediated by the compulsions of political pragmatism – all of this in flux, against the backdrop of a Covid-scarred global economy with its tangled web of dependencies.
The Russian military’s invasion and eventual fall of Kyiv will be a watershed moment in global geopolitics, and the world is now fumbling for the contours of the post-Ukraine world order. A Sino-Russian axis opposing the US and its allies is on the cards, however given their reliance on Russian gas, various European countries have differing views on how to deal with Moscow over its invasion of Ukraine. India is in a similar situation, having developed a special relationship with Moscow over many years. The US had co-opted China as a junior partner to restrain the former USSR during the second phase of the Cold War, while Moscow had invested in Delhi through a ‘friendship’ pact. The latter connection grew into a major military inventory relationship, with India’s most important outcome being the establishment of Bangladesh. The United States’ pivot to Russia over Ukraine will have a number of consequences for India. Its vote against India in the UN Security Council may create immediate regret in Washington, but the implications of the incursion on the Indo-Pacific as a strategic zone for the US would be far more significant. Given President Joe Biden’s political importance for Ukraine, the priority of China as an ongoing problem for the US and its allies may be lowered. As a result, the US focus and related effort will be on energising an ambivalent NATO to cope with Russia and the accelerated Sino-Russian dyad, as it is highly improbable that he will go before the American voter as the President who lost both Afghanistan and Ukraine.
In the post-Ukraine setting, India will have to assess its own security and geopolitical problems, as well as manage its relations with an assertive China, which may seek to mediate the India-Russia relationship and Moscow’s standing as a military inventory supplier.
Impact of Ukraine Crisis on India
Markets have been jolted by the Russia-Ukraine conflict, which has heightened uncertainty at a time when the global economy appeared to be on the mend. With the unwind of QE, the markets expected the Federal Reserve to raise rates many times. With this war, this optimism has been shattered. India’s direct impact will be restricted to the extent of trade between the two countries. Russia’s part of India’s total commerce is only about 1%, so it wouldn’t make much of a difference. In fact, a big portion of the imports are tied to defence, and the government can work out methods to keep the accords going. The indirect impact—through the markets—is, nevertheless, a major source of concern.
Inflation is the initial point of interaction. Since the rhetorical attack began in early February, commodity prices have begun to rise. The impact of the battle on crude oil is probably the most evident, but it has also pushed up prices of metals, gas, and edible oils at a time when it was believed that prices would stabilise this year following a bull run in 2021. Since late December, manufacturers in India have been progressively raising prices and passing on higher input costs. With this new wave of price hikes, the pressure will escalate all over the place. Since November, the Indian government has refrained from raising fuel prices, citing the upcoming state elections as a reason.
The rupee is the second source of concern. Currency markets around the world have been extremely volatile since the start of the war. Currency depreciation has resulted from a mixture of war and sanctions, and the rupee has not been spared. This comes at a time when the current account balance has shifted to the negative, and a higher CAD is projected as oil prices rise.
Third, because of the increased demand for dollars, bond yields have become more volatile. Yields have been decreasing on predictions that the Fed will not raise rates in these circumstances. However, signs that this will persist as inflationary fears grow even more pronounced are driving rates up. As a result, daily bond yield volatility has kept investors guessing. However, in India, the path is clear: upwards. Following the credit policy, it was expected that the RBI would refrain from raising interest rates this year. The 10-year bond reverted to 6.7 percent because of this.
Markets have been worried as state elections near their conclusion and the global price of crude moves closer to $120. Add in the possibility that the government would just postpone the LIC IPO, and it’s clear that financing the deficit will be difficult. The 10-year bond now carries a yield of 6.85 percent. These yo-yo oscillations are likely to continue until more clarity on the severity of the Ukraine crisis emerges.
Fourth, those doing business with Russia are concerned about the payment issue. Exporters are in a bind as a result of Russia’s exclusion from SWIFT. To make matters worse, shipping companies are hesitant to transport products to Russia. As counterparties to these transactions, all entities in other countries are affected in an attempt to harm Russia. India can agree to a rupee-rouble arrangement at the government level but receiving roubles for exports may not be as appealing to private companies.
Impact on various other sectors of Indian Economy:
- Steel and aluminium prices, which have recently risen from already high levels (Russia provides nearly 6% of world primary aluminium output), will continue to rise. While this would benefit domestic primary steelmakers and aluminium smelters by increasing realisations, it would have a negative impact on the construction, real estate, and automobile industries.
- The higher prices can be passed on to urea producers who utilise it as a feedstock. However, if the war continues, domestic urea availability could become a problem for the agricultural industry, as about 8% of the requirement is imported from Russia and Ukraine.
- For diamond polishers, persistent trade interruption can raise the cost of rough diamonds, putting a strain on their profit margins. Alrosa, Russia’s largest diamond miner, produces approximately 30% of the world’s rough diamonds, which saw a 21 percent increase in price in 2021.
- Sanctions tied to trade and banking might affect industries that get critical raw materials like crude sunflower oil and rough diamonds, according to CRISIL. Sunflower oil accounts for over 10% of India’s edible oil consumption, with 90% of it coming from Russia and Ukraine. An extended battle might disrupt supplies to domestic oil mills, which normally keep some inventories on hand and have few options for changing their sourcing on short notice.
- The persistent semiconductor shortfall is unlikely to provide relief to the automotive industry. This is due to the fact that Russia and Ukraine supply over 75% of the neon gas used in semiconductor manufacturing operations such as etching circuit patterns into silicon wafers to create chips.
- A prolonged conflict, as well as sanctions against Russia, would stifle semiconductor output even more. According to the rating agency, import dependence on palladium and platinum, which are used in catalytic converters, and nickel, which is used as a cathode in lithium-ion batteries, is not so significant and so may not have a major impact on the vehicle sector.
- Consumers could also expect a significant increase in the price of animal protein, such as poultry, dairy products, and seafood. Amul, the world’s largest dairy company, hiked retail milk prices by 4% in all Indian markets on March 1st. “Due to growing energy, packaging, logistics, and cattle feeding expenses, this price increase is necessary. As a result, the overall cost of operation and milk production has increased “Amul stated in a press release. Mother Dairy has also announced a price increase of Rs 2 effective March 6th.
- The ongoing conflicts between Russia and Ukraine are expected to have an influence on domestic wheat and sunflower oil prices. Both countries produce considerable amounts of wheat. India is self-sufficient in wheat but import some high-quality grain. Furthermore, the drop in Russian and Ukrainian wheat prices on the international market will provide an amazing opportunity for Indian exporters, raising domestic prices significantly. Sunflower oil prices have surged by around 5% to 10% in the global market. For consumers who have been paying historically high prices for nearly two years, the Russia-Ukraine conflict has dashed any thoughts of relief from high cooking oil prices. This surge in price of basic amenities like cooking oil would be a heavy dent on pockets of lower and middle class people of the country.
- According to a Reuters storey, the Indian Drug Manufacturers’ Association (IDMA) has stated that the disagreement will raise the price of raw materials generated from benzene or other petroleum products, forcing pharma exporters to seek buyers abroad. However, executives at Indian pharmaceutical giants Torrent Pharmaceuticals and Zydus Lifesciences said the Ukraine war had little or no influence on sales. Pharmaceuticals accounted for 30% of India’s overall exports to Ukraine between April and December last year, totalling $173.3 million, according to the research. Russia, on the other hand, spent $386 million on pharmaceuticals during the same time.
- Due to feed scarcity, chicken prices have surged exponentially and likely to further surge by 40-50% during late March. Tea exports, which are referred to as chai in both Russian and Ukrainian, may also meet difficulties. Russia is one of India’s largest tea importers, accounting for 18% of the country’s tea exports. Since Iran shipments are facing issue due to payment problems, it has resulted in shorter export volumes making Russia a key nation for Indian tea export.
- The war like situation between Russia and Ukraine are projected to put pressure on India’s agriculture industry resulting in raised costs and limited availability of potash, a vital component used in fertiliser industry. Belarus and Russia are currently the world’s leading suppliers of potash. India is a large importer of potash, which is utilised in fertiliser industry. Russia, Ukraine, and Belarus account for ten percent to twelve percent of India’s total fertiliser imports. With already-high prices, the government’s subsidy expenditure, which would be necessary to maintain an acceptable retail price for farmers, will skyrocket.
While there is no immediate threat to the Indian economy driven mostly by domestic demand, all of these market reverberations will have a secondary influence on the economy. Demand and consumption will undoubtedly be hampered by higher prices. High inflation will also put pressure on the MPC to reconsider its policy position, as it cannot be dismissed as temporary. Inflation will rise as interest rates rise, and the currency will remain volatile.
The global economy is about to be sent on yet another uncertain route by an armed battle on Europe’s border, after being pummelling by the epidemic, supply chain chokeholds, and price jumps.
Even before the Kremlin ordered Russian troops into Ukraine’s separatist zone, tensions were high. President Biden’s threat of punitive measures in return, as well as the possibility of Russian reprisal, had already drove down stock returns and pushed up petrol costs.
An open attack by Russian forces may result in dizzying price increases in oil and food, fuel inflation fears, and frighten investors, putting global investment and economy at risk.
Whatever the effects, they will be significantly less serious than the coronavirus’s early economic shutdowns in 2020. With a population of 146 million people and a massive nuclear arsenal, Russia is a transcontinental behemoth as well as a major source of the oil, gas, and raw materials that keep the world’s factories operating. Russia is a modest player in the global economy, compared to China, which is a manufacturing powerhouse with sophisticated supply lines.
Everyone is now waiting to see where Russian President Vladimir Putin will put an end to the offensive. Is it going to end with these two enclaves, Donetsk and Luhansk, that the Russia-aligned separatists’ control? The land claimed by these two breakaway republics as their region is larger than the west perceives it to be. Is Putin going to consider the region as a whole, or will operations expand much beyond that? Extending this operation into western Ukraine, where the people would fiercely resist Russia, makes no sense. We must wait and see what happens in eastern Ukraine, which could provide Russia with a straight land route to Crimea. The consequences of increased sanctions will be determined by what Putin does. Then we’ll have to wait and watch how the West reacts, as well as the implications for global trade, investment, energy supply, and, most importantly, India.
On a political level, if relations between Russia and the United States, as well as Russia and the West, deteriorate, India’s relations with Russia become more problematic. Then there’s the strain from India’s relations with Russia, as well as the pressure from India’s relations with the United States. We’ve had this before, starting in 2014, and we’ve been able to maintain our two relationships separate. As a result, it will be a continuous political struggle.
According to conventional thought, China will lead the global GDP ladder in the coming decade, with the United States a close second and India a distant third. This gives India a ‘swing’ position in the developing geopolitical arithmetic, and both Washington and Beijing will be adjusting their long-term strategies in response. However, India’s reputation as a liberal democracy devoted to the normative concept would be crucial, even if Delhi was forced to remain silent over Russia’s invasion of Ukraine.
Author: Ravina Raj, NMIMS Hyderabad
Editor: Kanishka Vaish, Senior Editor, LexLife India
Lexlife India 