On the investment side, the Russian stock market index fell 20 percent in one day, causing the Russian stock exchange to be closed temporarily. Russian banks have been excluded from the SWIFT international payment system
By
MIRZA ADITYASWARA
·7 minutes read
AP/Alexei Alexandrov/AZ
People wave Russian national flags celebrating the recognizing the independence in the center of Donetsk, the territory controlled by pro-Russian militants, eastern Ukraine, late Monday, Feb. 21, 2022. In a fast-moving political theater, Russian President Vladimir Putin has moved quickly to recognize the independence of separatist regions in eastern Ukraine in a show of defiance against the West amid fears of Russian invasion in Ukraine.
Russia’s war on Ukraine has caused uncertainty in the global economy. Russia has received a series of economic sanctions from Western countries following its attack on Ukraine, which began on 24 Feb.
The Russian ruble fell 60 percent to 130 rubles per US dollar last week from 84 rubles per dollar before the attack. The collapse of the ruble pushed down the yield on Russian government bonds (10 years) from 12 percent to 19 percent in March 2022. In comparison, the yield on Indonesian government bonds (10 years) is now 6.9 percent. In order to maintain the value of the ruble, the Central Bank of Russia drastically raised interest rates from 9.5 percent to 20 percent. For comparison, Bank Indonesia's interest rate is 3.5 percent.
Russian banks have been excluded from the SWIFT international payment system. Corporate and personal assets of officials have also been frozen by Western countries.
On the investment side, the Russian stock market index fell 20 percent in one day, causing the Russian stock exchange to be closed temporarily. Russian banks have been excluded from the SWIFT international payment system. Corporate and personal assets of officials have also been frozen by Western countries. Three major rating agencies – Standard & Poor's, Moody's and Fitch Ratings – have drastically downgraded Russia's debt rating to non-investment grade amid growing concerns on the ability of the Russian government and corporations to pay their debts.
So, what is the impact on the world economy? First, the impact on commodities. Previously, commodity prices in the market had begun to increase amid the recovery of the global economy from the Covid-19 pandemic. The commodity prices further increased following the imposition of sanctions on Russia.
Based on data from World Top Exports, Russia contributes substantially to the global exports of several commodities. These include the export of sunflower oil (18.3 percent), wheat (17.7 percent), natural gas (17 percent), nickel (15 percent) and crude oil (11 percent).
The price of sunflower oil, in which more than a half of the global supply came from Russia and Ukraine, increased sharply following the Russian invasion. The price of other vegetable oils also increased such as crude palm oil (CPO). The CPO prices increased to a record high of 7,074 ringgit ($1680.49) per ton recently, a 60 percent increase from early 2022 or about a 15 percent increase from 5,982 ringgit before the invasion.
As Russia also supplies 40 percent of the gas needs in Europe, the invasion has also caused an increase in the price of natural gas by about 10 percent, from $4.56 to $5.01 per million metric British thermal units (MMBTU). The price of coal, which had previously increased amid the global economic recovery, jumped by more than 100 percent from $193 per ton to a record high of $446 per ton in March 2022. The coal supply from Australia, the world’s major coal producer, is also on the decline due to floods.
The price of nickel, which had previously increased due to the increase in the demand for the production of electric vehicle batteries, has continued to soar since the invasion, from $24,695 to $100,000 per ton, forcing the London Metal Exchange (LME) to temporarily close the trading on March 8 due to fears of default from traders.
Russia and Ukraine are also, respectively, the No. 1 and No. 5 exporters of wheat. Wheat prices have increased nearly 40 percent since the invasion, reaching $12.8 per bushel.
AFP/DANIEL LEAL
People take shelter in a metro station in Kyiv in the morning of February 24, 2022. Air raid sirens rang out in downtown Kyiv today as cities across Ukraine were hit with what Ukrainian officials said were Russian missile strikes and artillery. - Russian President Vladimir Putin announced a military operation in Ukraine on Thursday with explosions heard soon after across the country and its foreign minister warning a "full-scale invasion" was underway.
In such a situation, investors secure the value of their assets in safe havens, so the price of gold has increased by almost 12 percent in a month to $2,150 per troy ounce in March 2022.
Based on data from Euro-stat in February 2022, the inflation rate in the Eurozone was higher than market expectations, hitting a record high of 5.8 percent in February, up from 5.1 percent in January.
After the imposition of financial sanctions in the form of restrictions on access to international bank payments (SWIFT), the shares of major European banks fell because they had transactions with Russian banks. Deutsche Bank's share price has dropped by about 20 percent and SocGen Bank’s share price has fallen by nearly 30 percent.
Impact on Indonesia
Rising prices of mining commodities and food raw materials will push inflationary pressure in ASEAN countries. Based on Maybank research, the weight of energy in the Consumer Price Index (CPI) accounts for between 10 percent to 18 percent in the region, with the highest weights in Indonesia (17.5 percent), the Philippines (14.8 percent), Malaysia (13.7 percent) and Thailand (12 percent). The weight of food in the CPI in Thailand is 38.1 percent, the Philippines is 34.8 percent and Indonesia is 28.7 percent.
The share price of coal producers also increased by 40 percent, with PTBA up 25 percent.
Share prices of commodity-producing companies also surged. The share prices of publicly listed CPO producers mostly rose: AALI (rising 12 percent), LSIP (rising 10 percent). The share price of coal producers also increased by 40 percent, with PTBA up 25 percent.
Amid rising concerns about the decline in the crude oil supply, the price of the Brent crude oil increased from $96 to $130 per barrel. The increase in oil prices also resulted in an increase in prices of non-subsidized fuel in Indonesia, followed by an increase in the price of non-subsidized LPG due to the increase in the Aramco Contract Price (CPA) by 21 percent.
The surge in oil prices also resulted in an increase in Pertamina's cash requirements for oil imports. The government's spending for fuel subsidies is expected to rise. However, on the other hand, there will be an increase in revenues from the CPO, coal and other mining sectors. The government has imposed a domestic market obligation (DMO) on CPO producers in order to meet the domestic demand. Under the latest DMO regulation, CPO producers are required to sell at least 30 percent of their products in the domestic market at below the market price. The policy hurts non-exporting companies because they do not export, but have to sell CPO well below the market price. It also hurts oil palm farmers.
AFP/WILLIAM WEST
This photo illustration taken in Melbourne on February 25, 2022 shows front pages of newspapers reporting on the Russian invasion of Ukraine.
In economic theory, price distortions will cause an imbalance in the supply and demand curves. This price distortion is causing the volume of cooking oil to decrease in the domestic market. Panic buying has occurred in the market, resulting in scarcity in the cooking oil supply.
Rising wheat prices will also increase the prices of wheat-based food products, such as bread, instant noodles and cereals. Indonesia relies on 22 percent of wheat imports from Ukraine and 4 percent from Russia to meet the local needs.
With regard to domestic interest rates, Bank Indonesia will definitely be watching the rise in domestic inflation, especially since the United States central bank will likely raise interest rates soon. The negative impact of rising commodity prices is an increase in inflation, while the positive impact is an increase in Indonesian exports, state revenues and foreign exchange reserves.
According to JPMorgan’s estimate, if CPO and coal prices remain high, the surplus in Indonesia's balance of payments will increase from $3.2 billion to $33 billion. The goods and services balance (current account/CA), which was initially estimated to suffer a deficit of $5 billion, will enjoy a large surplus of $64.2 billion or from -0.4 percent of gross domestic product (GDP) to 5 percent of GDP.
Kompas/ IWAN SETIYAWAN
Mirza Adityaswara.
MIRZA ADITYASWARA, president director of the Indonesian Banking Development Institute (LPPI)
(This article was translated by Hendarsyah Tarmizi)
