KARACHI: The looming military crisis on the seemingly distant border of Russia and Ukraine may result in the deterioration of Pakistan’s current account balance, a research report by Ismail Iqbal Securities said on Monday.
The crisis is likely to cause another rally in the prices of energy, food commodities and semiconductor chips. Pakistan will take a direct hit as the bulk of its wheat imports are from Ukraine. Islamabad received 39 per cent of its total imported wheat from Kyiv in the last fiscal year.
“Any disruption in wheat imports will result in higher food prices in addition to higher energy prices,” the brokerage said.
Russia has amassed over 100,000 troops along the 2,300-kilometre Ukraine border to pressure Ukraine and the European Union through joint military drills with Belarus. In response, the North Atlantic Treaty Organisation (Nato), a Western military alliance, has put 4,000 troops on standby in Eastern Europe.
Brent has already touched a seven-year high of $95 per barrel owing to the escalation. Power producers have started stockpiling coal given the likelihood of gas disruptions to the European Union. This has resulted in a rally in coal prices, with Richards Bay hovering at $196 per tonne, up 43pc from the start of this year.
As for energy prices within Pakistan, the brokerage foresees a short-term rally in crude oil, liquefied natural gas (LNG) and coal prices, which will further exacerbate the country’s current account balance. In addition, it foresees a “major risk” to the automobile sector in the wake of any chip shortages.
Similarly, it expects the steel industry to witness high prices of raw materials and finished goods. “In the short run, the price rally in finished steel products such as cold rolled coil, rebars and tabular steel might result in inventory gains. However, demand destruction is likely to occur in the medium term due to already higher prices,” it added.
In addition to wheat imports, Pakistan also buys 37pc of its foreign corn starch from Ukraine. As for exports, Ukraine has a share of 28pc in the foreign sales of Pakistani polyester staple fibres.
The brokerage expects that Russian exports will continue even amid an escalating crisis while Ukrainian exports will likely face disruptions. Russia is the second-largest producer of crude oil and natural gas with more than 60pc of its energy exports going to European countries in 2019.
“We don’t foresee any major long-term risk to Russian exports... Ukraine is no longer a major transit country for Russia’s gas exports,” it said.
Published in Dawn, February 15th, 2022