Region braces as oil prices go ‘berserk’ with Ukraine war

Analysts warn those in countries such as India and Thailand face bearing the brunt of impact

Energy-importing Asian economies outside China should brace for steep rises in crude oil bills and energy costs as prices go “berserk” over the Russia-Ukraine conflict, according to analysts from investment bank Natixis.

Much of the impact could be borne by households and companies in countries like India and Thailand, Natixis said.

While direct trade with Russia was limited for most Asian economies, it was the wider repercussions of high oil prices that would indirectly hurt Asian economies, said Trinh Nguyen, Natixis emerging Asia economist.

“The markets focused on oil because the oil [price] has gone basically berserk,” Nguyen said.

“What is really important is not direct imports and exports but the whole of the Russia and Ukraine play on the commodity market.”

Oil prices have been rising since the coronavirus pandemic started as supply chain disruptions slow supply and delivery and force up freight costs.

But oil prices continued to rise after the Russia-Ukraine conflict erupted and hit their highest since 2008 on Monday at about US$123 a barrel, adding further pain to Asian economies still trying to recover from the pandemic and trying to control inflation.

The sanctions on Russia, especially the exclusion of Russian banks from the global payments system Swift, have forced Russian oil out of the global market as traders cannot or will not buy from Russian sellers, even though sanctions on buying oil from Russia have not been imposed.

“Who can afford to pay more without a huge impact? Who can afford subsidies or offset some of these price increases and who cannot, and who can import without a balance of payment crisis?” Nguyen asked.

Asia, like most of the rest of the world, is already struggling from rising inflation because of the disruptions in supply chains and shortage of raw materials and goods caused by the pandemic.

Now the Russia-Ukraine crisis is about to propel prices even higher.

Oil prices increased over February with pump prices for Vietnam, Thailand, Singapore, the Philippines, South Korea, Japan and India all rising between five and 10 US cents a litre.

Indian consumers in particular could suffer from the price increase especially since the Indian government budget had little in the way of subsidies, Nguyen said.

Nguyen expected the Indian government to wait until provincial elections were over before announcing price rises in oil and oil products for consumers.

“Even Thailand subsidies are not enough, so we are going to see higher inflation and that is going to curb some purchasing power,” she said.

Alongside Thailand, South Korea and Vietnam are also exposed to higher prices as they are two of the biggest customers of Russian energy in Asia.

“This is negative for emerging Asian markets except for three exporting countries … households are just going to pay more,” Nguyen said, referring to Australia, Malaysia and Indonesia, which are net energy exporters.

China remains an outlier in the energy price crisis.

Despite being a key Russian energy importer, the second-largest economy in the world is large enough to absorb higher prices in the longer term. It also had a regulated power industry in which consumer prices were state-controlled, Natixis greater China economist Jianwei Xu said.