Russia launched a full-scale military invasion into Ukraine in February 2022, sending a clear message to the world about Russia’s opposition against further NATO expansion toward Russia and against Ukraine’s intentions of joining NATO in the future. The war is taking a devastating human toll and will likely have lasting effects on global trade, particularly the energy markets. This will not bode well for Pakistan which is already suffering from high inflation and low economic growth, and political instability, particularly the looming vote of no-confidence against the Prime Minister.
Historically, Pakistan has maintained bilateral economic ties with Russia and Ukraine. In the last 24 years, Pakistan’s exports to Russia have increased at an annualized rate of 13.6% from USD 13.1M in 1996 to USD 279M in 2020, while Russia’s exports to Pakistan have increased at an annualized rate of 10.2% from USD 67.6M in 1996 to USD 699M in 2020. On the other hand, in the last 24 years, Pakistan’s exports to Ukraine increased at an annualized rate of 15.5% from USD 18.1M in 1996 to USD 573M in 2020, while Ukraine’s exports to Pakistan have increased at an annualized rate of 14.8% from USD 2.98M to USD 82.1M in 2020. In 2021, Pakistan’s trade value with Russia was USD 711M including USD 537M in Russian imports. With Ukraine, the trade value reached USD 800M including USD 739M in imports. To date, Pakistan enjoys friendly, albeit modest, trade relations with Ukraine, a large component of which is the agriculture sector, particularly wheat. In recent years, Pakistan and Russia have agreed to promote bilateral cooperation in all sectors including trade, defense, economy, and energy. However, the conflict has the potential to disrupt Pakistan’s new strategic pivot of geoeconomics.
The United States, the European Union, and other countries have introduced or expanded sanctions on members of the Russian regime. More specifically, the United States has banned the imports of Russian oil and natural gas while the United Kingdom will phase out Russian oil by the end of this year. Moreover, the European Union which gets 25% of its oil and 45% of its gas from Russia intends to switch to alternative energy supplies, making it independent from Russian energy within this decade. Germany has halted the opening of the Nord Stream 2 gas pipeline from Russia. Russia has responded to sanctions by banning exports of various products and it has also warned that it could shut off gas supplies in response to the oil sanctions.
This disruption of energy supplies from the world’s largest supplier Russia is resulting in a hike in energy prices throughout the world. This is a significant setback for an oil-importing country like Pakistan, particularly considering the fact that oil accounts for a sizable share of its imports. This has the potential to deplete our national reserves, thereby shrinking the country’s purchasing power even more. The conflict will directly impact Pakistan’s wheat imports from Ukraine, which accounted for 39% of the total imported wheat in the preceding fiscal year. The potential snowball effect of this conflict is massive, with a surge in electricity rates, raising of interest rates by central banks, wage-increase demand to meet increased living costs, increase of prices by businesses to compensate higher wages, and workforce cuts leading to unemployment.
However, notwithstanding the situation in Afghanistan, the Russia-Ukraine crisis may have the effect of increasing Pakistan’s geopolitical relevance to both Russia and China, particularly in the context of trade. In light of the current conflict and ensuing sanctions, Russia needs to find new markets for its energy products and expand its customer base. Pakistan is facing a severe gas shortage and has already established itself as a viable energy consumer. In fact, Pakistan recently signed a trade deal with Russia according to which Pakistan will import two million tonnes of wheat and natural gas from Russia despite the Western sanctions.
While Pakistan can be a potential customer of oil, it remains to be seen how Russia can get around the sanctions to accomplish this goal. Another issue is that of logistics and lack of infrastructure, making it difficult for Russia to move energy easily to countries outside Europe. To this end, perhaps the construction of a USD 2.5B 1,100-kilometre natural gas pipeline in Pakistan, known as the Pakistan Stream Gas Pipeline Project, from Port Qasim in Karachi, in Sindh, to Kasur in Punjab, would be beneficial in the future. However, the impact of seemingly friendly ties between Russia and Pakistan on Pakistan’s assistance from the International Monetary Fund remains to be seen.
Apart from developing regional connectivity, there are certain internal policies and measures that Pakistan can implement to curb inflation and mitigate the economic blow that the crisis may have on the country and its citizens. These include promoting work from home, digitalizing schooling, reducing operational timings of commercial shops, malls, parks, and other non-essential travel, encouraging the use of public transport, a temporary ban on luxury and higher duty items, exploring alternate energy sources (both foreign and local), arranging for an inventory of the goods that were imported from both countries, particularly agricultural goods that were from Ukraine.
With ongoing geopolitical tensions rising amidst the Russia-Ukraine situation, there is no doubt that the economic repercussions will impact Pakistan. With the country’s economy already vulnerable to the pandemic, Pakistan could face a worsening of current account and fiscal balances and stagnation of economic development. Therefore, the country needs to carefully assess its strategic position in the global and regional context and make informed but timely decisions that are essential for its survival.
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