Russia-Ukraine crisis: Asian economies face 'disastrous' rise in fuel and commodity prices, with Japan and South Korea likely to bear brunt

The Russia-Ukraine crisis could prove "disastrous" for Asian economies, with surging prices of fuel and commodities likely to add to coronavirus-induced economic woes, economists have warned.

Although Western countries stopped short of enacting sanctions on direct supplies of goods from Russia as they levied "modest first-tranche" restrictions on Russian elites and financial systems, the crisis has sent jitters through markets and triggered price surges in key Russian exports such as oil, gas and metal raw materials that are expected to exacerbate rising inflation and production crunches in Asia.

Still recovering from pandemic-driven supply chain disruptions that have sent the cost of supplies rocketing over the past two years, major Asian economies that import from Russia - such as Japan and South Korea - would face not only further price increases but potentially shortages too if Russia were to counter the sanctions by cutting supplies.

Do you have questions about the biggest topics and trends from around the world? Get the answers with SCMP Knowledge, our new platform of curated content with explainers, FAQs, analyses and infographics brought to you by our award-winning team.

"The immediate consequence of a Russian invasion of Ukraine would be economic volatility that would upset the growth outlook for Asia," the Economist Intelligence Unit's regional director Tom Rafferty said.

"Market concerns tied to Ukraine have been a factor in keeping global energy prices high, and an outbreak of hostilities could cause a price surge that would stimulate additional inflation and harm consumer spending.

"While Asian countries would not be directly involved in any conflict, the geopolitical and economic implications for the region would still be significant."

Analysts pointed out that Asia had played an increasingly important role in Russian exports in recent years.

While about half of Russia's exports went to Europe in 2020, more than 40 per cent went to Asian countries - particularly China, Kazakhstan, South Korea, and Japan - analyst Chris Devonshire-Ellis, of Dezan Shira & Associates, said in a note last year.

After Putin's recognition of two independent areas in Ukraine and Germany's subsequent blocking of the Russia-Europe natural gas pipeline Nord Stream 2 this week, oil prices soared to a seven-year high to reach US$99 a barrel on Tuesday. Gas prices also rose.

Japanese and South Korean manufacturers should brace for rising input costs as both nations were heavily reliant on Russian crude oil and gas for production, warned economist Pushpin Singh, of the Centre for Economics and Business Research.

He said this would subdue economic activity in these two countries further in the medium term. Both were already suffering from slowing consumer consumption.

"For Japan and Korea - two export-oriented, manufacturing-heavy economies - such a spike in energy and commodity prices aggravates already long-standing issues that have plagued the two economies for much of 2021 and into 2022," Singh said.

"Both economies are already facing high producer-price inflation, with peaks in excess of nine per cent and Russia's actions are bound to place even further upwards pressure on the headline rate."

On Wednesday, Japanese Prime Minister Fumio Kishida said Japan would impose economic sanctions against Russia and the two separatist regions it had recognised. The government would suspend the issuance of visas for officials and also ban exports and imports from the two separatist regions Moscow had recognised, Kyodo reported. It would also stop the issuance and trading of new Russian sovereign bonds in Japan.

Following the sanctions, economists predict Japan's inflation will rise to 2 per cent in April from about 0.5 per cent currently but say the Bank of Japan will not be changing its monetary policies in a hurry especially when the economic impact of the sanctions will probably be small, according to Capital Economics economist Tom Learmouth.

Singh said, however, that for either Tokyo or Seoul, joining in sanctions would be risky as Moscow could respond by cutting off exports, although he felt this scenario was unlikely.

"Nonetheless, with Russian exports contributing a significant share of Japanese and Korean energy imports, any cuts to Russian exports could prove disastrous for both economies," he said.

Both countries would be looking at shoring up their supply chains - especially in the semiconductor and automotive industries - through stockpiling and alternative supplies, Rafferty said. However, he added that as oil and gas contracts tended to be long-term switching to other suppliers could be difficult.

South Korean Trade Minister Yeo Han-koo said last week he was already on the alert for further inflation and disruptions to supply chains, adding that nearly all of South Korea's energy needs relied on imports.

In addition to Japan and South Korea, China and India are also importers of Russian oil and gas.

Moody's Senior APAC Economist Katrina Ell said rising prices could "really hurt Asia's largest economies from a production point of view and from a consumption point of view".

High energy prices could flow into farming costs and raise food prices, especially in emerging Asian economies where food made up a large part of consumption baskets, Ell said.

Supply chain disruptions would increase given the likely re-routing of oil and gas supplies and central banks too would have their hands full as they would have to act sooner to curb inflation by increasing interest rates, which could in turn prematurely cool economic growth momentum, Ell added.

And any intervention by governments to curb high energy prices would have a limited effect that "wouldn't completely cushion the blow", Ell said.

Lawrence Wong, the finance minister of Singapore, which has a free-trade agreement with the Russia-led Eurasian Economic Union and imports and invests in Russian goods, told CNBC the city state would not hesitate to use "the full measure of our fiscal firepower to keep the economy going" should the impact from the Russia-Ukraine crisis flow into Asian economies.

On Wednesday new data showed Singapore's January consumer price gauge rose by its fastest pace in nearly a decade although the rise was expected.

In addition to inflation and slower growth, sanctions on Russia would complicate existing and planned investments in Russia by Asian countries, as well as lending by Asian banks, Rafferty at the EIU said.

This article originally appeared on the South China Morning Post (SCMP).

Copyright (c) 2022. South China Morning Post Publishers Ltd. All rights reserved.