Russia-Ukraine tensions raise inflation concerns for Pakistan

In a major event, Russian President Vladimir Putin on Monday officially recognised the two breakaway regions - the self-proclaimed Donetsk People's Republic and the Lugansk People's Republic - as independent, defying Western warnings that such a step would be illegal and wreck peace negotiations.

Putin, in a lengthy televised address, said eastern Ukraine was ancient Russian lands and that he was confident that the Russian people would support his decision.

The development with all its political implications also took a toll on the economic front, as oil prices jumped more than $2 to a fresh seven-year high on Tuesday.

Brent crude futures rose $2.10, or 2.2%, to $97.49 a barrel, adding to a 2% gain on Monday. Earlier on Tuesday, it hit $97.66, its highest since Sept. 2014. US West Texas Intermediate (WTI) crude futures jumped $3.25, or 3.6%, to $94.32 a barrel.

Assessing the impact of the latest escalation in Russia-Ukraine tensions, Abdullah Umer of Ismail Iqbal Securities Limited stated that this recent escalation would bring another wave of price rally in energy & steel markets in the short run".

Umer said indirectly, a hike in the oil price rally is bad news for the oil-importing South Asian economy, which would see an upsurge in its import bill and a widening of the current account deficit.

“Alongside the rise in import bill, pressure would increase on the Pakistani rupee, which would deteriorate the external sector,” said Umer.

He added that apart from rising oil rates, the price of LNG and coal would move upwards as well.

“If Europe announces that it would not purchase gas from Russia, the largest gas provider, Europe would switch to LNG to meet its energy needs, driving up LNG rates,” he said.

This would also impact Pakistan, as the country needs LNG to generate electricity, and the expected rise would see rise in local electricity rates bringing in inflationary pressure.

“Apart from indirect implications, Pakistan's wheat imports from Ukraine would be directly impacted amid volatility in the region,” he said.

Last year, Pakistan imported 1.39 million tons of wheat from Ukraine, which is a major supplier of wheat, barley and other food crops.

“Wheat prices may increase, raising concerns of food price inflation in the country,” he said.

"We believe that this conflict would continue in the short run until due process of Eastern Ukraine cities independence gets completed. Likelihood of large-scale military confrontation between Russia & Ukraine is still low.”