Deciphering the impact of Russia-Ukraine crisis on Australian economy

Highlights

• At a time when geopolitical tensions are increasing worldwide, world leaders have already started preparing for the war-like scenario.
• Geopolitical tensions could directly hit oil and energy prices, which can hurt Australian consumers.
• Introducing sanctions on Russia to control the situation can be more harmful to nations than envisioned.

Geopolitical tensions are increasing worldwide, with fears of Russia invading Ukraine looming in the backdrop. Realising that more than two nations might get involved in this battle, world leaders stand at the centre of one of the worst modern-day crises. At a time when the situation has turned largely uncertain, these leaders have already started preparing for the worst-case scenario, i.e., a war-like state.

War is not beneficial from an economic perspective as it can cause major disruptions in the demand-supply dynamics. Most importantly, history has taught us that wars can weigh heavily on existing resources, causing severe scarcity of even essential products.

As the US’ suspicions grow around a possible invasion by Russia in Ukraine, the world may be looking at prices rising at unprecedented levels. Meanwhile, a war-like scenario can cause global turmoil in the crude industry, with Russia being a major oil supplier.

Thus, a direct consequence of depleting oil supplies from Russia can send oil prices soaring, eventually prompting a rise in prices of all other commodities. And it is important to note that most countries are already facing high inflation, including Australia.

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In this article, we will decode the impact of the Russia-Ukraine crisis on the Australian economy:

Potential aggravation of existing oil shocks

Oil supply has already been a subject of great discussion since OPEC+ decided to restrict the supply to a pre-determined level. Given the huge spike in oil prices during the pandemic, various countries urged the OPEC+ to increase oil supply, but to no avail. These countries have been worried about supply-side constraints that have worsened in 2021 due to shipment delays and the absence of workers from their jobs.

These supply disruptions pushed oil prices to painfully high levels, allowing them to reach a seven-year high in January this year. This was in stark contrast to the situation in an early pandemic state when oil prices crashed significantly. The demand-side shock arising out of the pandemic led to oil prices crashing below zero for the first time in history in 2020. However, the situation quickly turned, with fuel prices now burning a hole in the consumers’ pockets.

The situation in Russia and Ukraine can escalate the existing shortage of supply, creating panic among already battered nations. Meanwhile, the effects are unlikely to be limited to just the crude industry, as oil supply shocks directly affect the overall inflation level. Thus, if oil prices rise further, consumers across the globe, including Australia, can face even higher inflation than what is currently prevailing.

Deciphering the impact of Russia-Ukraine crisis on Australian economy

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Sanctions may worsen the situation

Another suspected outcome of such geopolitical tensions is that heavy sanctions may be placed against Russia to avoid a war. However, experts predict that this move could be more harmful than beneficial as its results may be felt globally. If nations were to stop importing energy resources from Russia, the financial markets would be handicapped due to soaring oil prices.

This brings out two possibilities that can arise as an outcome. Firstly, Russia could see another market in China, which may help the nation through big purchases. Essentially, this would mean that nations that have imposed sanctions would suffer the consequence of soaring oil prices while others can enjoy relatively lower price levels. Secondly, some market experts predict that Saudi Arabia is likely to fill in the gaps created by a potential halt in Russian oil exports.

Saudi Arabia is expected to utilise its spare capacity to help those nations that do not completely agree with Russia’s policies. Both outcomes are just predictions and may not help sustain lower price levels, at least in the short run. Therefore, a war, followed by sanctions on Russia, would mean heightened prices in most countries in the shorter term.

Additionally, oil is not the only sector directly affected by these geopolitical tensions. Australia relies heavily on Russia for its fertiliser imports, which are crucial for the smooth flow of the agricultural sector. Similarly, the manufacturing sector also faces a risk of supply-side delays as Russia contributes immensely to the global supply of essential metals.

Experts believe that sanctions might be a more harmful prospect than envisioned due to a heavy reliance of the global economy on Russian exports. The political turmoil has reached such an immense stage where policymakers seem to be left with little room for negotiation. If the situation does not die down on its own, then in all likelihood, energy and consumer prices are expected to take a severe hit.

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