PESHAWAR – The potential for a Russia-Ukraine war is already buffeting Pakistan as local prices of energy, food, commodities, steel and semiconductor chips soar.
The conflict may also delay the repair and modernization of T-80UD tanks under a US$86 million contract Islamabad made with Ukrainian state arms conglomerate Ukroboronprom last year. Pakistan purchased 320 Ukrainian T-80UD tanks in a deal worth $650 million in 1996.
Pakistan also imports the bulk of its wheat from Ukraine, with 39% of its total imports coming from Kiev last year. The country also imports barley, buckwheat, canary seed, oats, grain and corn from Ukraine.
The crisis in a faraway region may also help distort the country’s current account balance, which is already in a bad way, according to a report by Ismail Iqbal Securities (IIS) released on February 14.
Given the looming war-like situation, the IIS report titled Russia-Ukraine looming war threat: Implications for Pakistan said the wider indirect implications include a likely inflationary spiral in Pakistan.
The report foresees a transient surge in crude oil, liquefied natural gas (LNG) and coal prices and predicts a serious threat to the country’s steel sector, which may see the prices of raw material and finished goods escalating, with the country’s current account balance going further downhill.
The report also foresees a “major risk” to the automobile sector in the wake of chip shortages. The IIS expects the raw materials and finished goods in the steel industry to see a high spike in prices.
“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 37% of its foreign corn starch from Ukraine. As for exports, Ukraine has a share of 28% in the foreign sales of Pakistani polyester staple fibers.
The report says 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 60% 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.
Economic analysts say Pakistan’s worries about a Ukraine-Russia war are both political and economic.
Politically, they said, the country needs to not pick sides and not give up its neutrality. This aspect, they believe, is necessary as Pakistan’s ties with Russia have been improving. Prime Minister Imran Khan will embark on his first two-day visit to Moscow by the end of this month.
Economically, Pakistan must be ready for prolonged higher oil prices of $100 a barrel as it has already touched the “nervous nineties.” A $10-20 rise in oil prices for a couple of quarters can burn $1-2 billion off national reserves, with a big loss to the purchasing power of the country.
Analysts claim policymakers in Islamabad were panicked because rising oil prices would play havoc with Pakistan’s growth prospects. The country, they said, would need to raise the interest rate to near 12% if imports were not curtailed and exports did not grow.
This month, Pakistan increased petroleum prices by 10% as Brent oil prices touched a seven-year high of $95 per barrel due to Ukraine border tensions.
The country suffered another blow when Pakistan’s long-term liquefied natural gas (LNG) suppliers, Eni SpA and Gunvor Group Ltd, intimated their inability to deliver shipments in March due to the global gas crisis, which has resulted in LNG spot prices surging to a level that is too much for cash-strapped Pakistan.
Pakistan had to ultimately buy gas from the spot market after the cancellation of the order and has reportedly issued a tender for two cargoes to be delivered next month.
Majyd Aziz, a former president of Karachi Chamber of Commerce & Industry (KCCI) and Employers Federation of Pakistan (EFP), told Asia Times that Islamabad seemed quite concerned about the deterioration of the situation on the Russia-Ukraine front.
“Moeed Yusuf, National Security Advisor, during a brief chat at Karachi Airport last night, has cautioned that if war begins, the prices of gas, wheat and oil will zoom up because both countries are major producers of gas and wheat,” Majyd said.
He added that Pakistan exports will tumble after industries face a gas shortfall.
“The signs are already there. A couple of suppliers of regasified liquefied natural gas (RLNG) have defaulted on March shipments and the government is now buying gas from the spot market at amazingly high prices,” he said, adding that Europe will be badly affected, as they depend on Russian gas.
“I do not think the situation will culminate in a war because Germany wants the Nord Stream 2 gas pipeline and will not listen to the US warning and instead would like to benefit from the cheaper and reliable gas supply from Russia,” he said.
The Russian-Ukranian stalemate has also worried the Pakistan defense establishment, which fears a repetition of the 2014 crisis when Ukraine faced difficulties in the shipment of engines used in Pakistan’s Al-Khalid (MBT-2000) tanks.
The tanks were jointly developed by China and Pakistan in the 1990s and are a major component of Pakistan’s land-based conventional forces. According to media reports, the Pakistani army is particularly concerned about its Ukrainian tank engines.
Amid the 2014 Ukraine-Russia crisis, Kiev had to assure Pakistan through its ambassador that it would meet its contractual obligation to supply the engine within a stipulated timeframe.
Defense cooperation between Pakistan and Ukraine saw a palpable surge following Pakistan Army chief General Qamar Javed Bajwa’s visit to Ukraine in May last year. Then he expressed interest in different sets of military weapons, including T-84 OPLOT Main Battle Tanks and the Skif anti-tank system.
The growing military ties between Pakistan and Ukraine resulted in trials of the Ukrainian T-84 tanks in Pakistan last year. Military sources say a new order for the supply of 6TD1 and 6TD2 engines was also in the process before the tensions with Russia increased.