Russia-Ukraine War To Strain Multiple Sectors of Indian Economy – CRISIL

Russia’s invasion of Ukraine, and the flurry of punitive sanctions imposed on the former by the US and European nations, has the potential to impact India Inc in two ways. One, the resultant spike in commodity prices, if not passed on, can increase input costs and squeeze the margins of downstream sectors. 

Two, trade and banking sanctions can cull India’s export-import activity in the affected region until workarounds are found. 

A report by CRISIL pointed out how, on the other hand, a few sectors such as steel and aluminium may benefit from rising prices. Net-net, the impact of the ongoing war will vary by sectors. But a clearer picture, including of credit quality of affected companies, will emerge only in due course after the geopolitical situation improves. 

The price of Brent crude has sky-rocketed above US$130/barrel from US$97/barrel before the Russian invasion began. Without a commensurate increase in retail fuel prices, oil marketing companies are already making losses. The impact of this is also being felt by sectors such as chemicals and paints which use crude oil-linked derivatives as their primary feedstock. These sectors may see some margin squeeze that could extend well into the first quarter of next fiscal, as inventories bought previously at lower prices run out.

Other commodities will also see further cost inflation. Steel and aluminium (Russia contributes almost 6% of global primary aluminium production) prices, which had shot up in recent times from their already-high levels, will have an upward bias. While this would benefit domestic primary steel makers and aluminium smelters because their realisations will rise, it would cascade negatively for the construction, real estate, and automobile sectors

Spot prices of natural gas, which are also linked to crude, could continue to climb. But this won’t impact the downstream sectors as much. Urea-makers, who use it as feedstock, can pass on the higher prices. But if the war prolongs, domestic availability of urea could become a bother for the farm sector because almost 8% of the requirement is imported from Russia and Ukraine. 

The credit rating agency highlighted that city gas operators have favourable cost economics versus competing fuels, which could permit them to pass on the gas price inflation downstream — at least to an extent. 

 Trade and banking-linked sanctions can also impact sectors sourcing key raw materials such as crude sunflower oil and rough diamonds, CRISIL said. Nearly 10% of India’s edible oil consumption is sunflower based, of which 90% is imported from Russia and Ukraine. 

 An extended war could disrupt supplies to domestic oil mills, which typically carry an inventory of 30-45 days and have limited options to change their sourcing at short notice. 

 For diamond polishers, continued disruption of trade can make roughs costlier, leading to a squeeze on their margins. Alrosa, Russia’s largest diamond miner, accounts for nearly 30% of the global production of roughs, the prices of which had surged 21% in 2021.  

The automobile sector is unlikely to get a respite from the ongoing semiconductor shortage. This is because Russia and Ukraine produce almost 75% of the neon gas which is used for several processes in the manufacturing of semiconductors like etching circuit designs into silicon wafers to create chips.

A protracted strife, and sanctions on Russia, would further curtail semiconductor production. 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 relatively low and, hence, may have only a minimal impact on the automobile sector, according to the rating agency. 

The pharmaceuticals sector may see only a marginal impact as its exports to Russia and Ukraine are currently exempt from sanctions, and the exposure of Indian drug-makers to these geographies is low at almost 3% of their total exports, CRISIL said.

To be sure, the government and the affected companies are expected to take mitigating steps and CRISIL is closely monitoring the developments and will assess their impact on credit quality case by case.

Consumers will also have to brace for unprecedented rise in prices of animal protein including poultry, dairy products and seafood. Dairy industry leader Amul has increased retail milk prices by 4% starting 1st March in all-India markets. “This price rise is being done due to rising costs of energy, packaging, logistics, and cattle feeding costs. Thus the overall cost of operation and  production of milk has increased,” said Amul in a release.

Milk brand Mother Dairy too announced a price hike of Rs 2 from 6th March.

Continuing hostilities between Russia and Ukraine are set to impact the domestic selling prices of wheat and sunflower oil. Both countries produce massive quantities of wheat, while Ukraine is one of the world’s largest sunflower seeds exporters. Though India is self-sufficient in wheat, it does import some quantities of high-grade grain, analysts said. Moreover, the reduction in Russian and Ukrainian wheat in the international market will give an attractive opportunity for Indian exporters, thereby slightly pushing up domestic prices.

The prices of sunflower oil in the international market have increased by about 5% to 10% in 8-10 days. The Russia-Ukraine conflict has dimmed any hopes of respite from high cooking oil prices for the consumers who have been paying historically high prices for close to two years.

Chicken prices have jumped 25% since January and industry veterans expect a further increase of 10% to 50% in different parts of the country in March due to acute shortage of feed.

Exports of tea—incidentally called chai in both Russian and Ukrainian—may also face a challenge. Russia is one of the biggest importers of Indian tea with a share of 18% in Indian tea exports. The Russian market is crucial for Indian tea exports, given the fact that Iran shipments continue to be plagued by payment issues which have resulted in drastic fall in export volumes.

India’s agriculture sector is expected to face the heat from hostilities between Russia and Ukraine which are expected to push up prices and availability of—Potash—a key component used in the manufacturing of fertilisers.

At present, Belarus and Russia are key suppliers of potash in the global market. On the other hand, India is a major importer of potash, which is used in the manufacture of fertilisers. At an overall level, Russia, Ukraine and Belarus contribute 10%-12% of India’s total fertiliser imports. With already elevated prices, the subsidy bill, that the government will have to foot to maintain a reasonable retail price for farmers, will also witness a sharp increase.

In case Russia and Ukraine do not arrive at a resolution soon, there is a possibility of the conflict spilling beyond the region. And that would be bad news for businesses. But whether or not the conflict prolongs or ceases quickly, it might lead to galloping inflation which will impact a number of sectors.

Vipul Sheladiya

Sheladiya & Jyani

Chartered Accountants

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