Russian-Ukrainian conflict: economic implications for Sri Lanka
The ongoing military conflict in Europe could not have come at a worse time for Sri Lanka given its own high inflation, rising energy costs and scarcity of foreign currency. Against this background, this article examines the economic impact of the European conflict on Sri Lanka, the sectors that will be hard hit, and ways to mitigate the negative impact.
Global economic impact
The Russian Federation and Ukraine – known as the breadbasket of Europe – are major exporters of grain, fertilizers, critical minerals, and iron and steel. Meanwhile, Western powers are busy negotiating to tighten sanctions against Russia.
As the fate of Ukraine hangs in the balance, the consensus among analysts is that the Ukrainians were mounting fierce and unexpected resistance, thus increasing the costs for Russia. The US, EU and their allies are contributing to the military conflict by providing financial and military aid to Ukraine while imposing sanctions on Russia to make dollar transactions difficult. Thus, the severity of the global economic impact will be determined by the scale and duration of the conflict and the effectiveness of Western sanctions.
Western countries will strive to minimize the ripple effects of sanctions on their economies. Like Germany, major European economies are heavily dependent on Russian energy, making it necessary to exempt the energy sector from sanctions.
Cutting Russia off from SWIFT and imposing sanctions on the Russian Central Bank can deal a severe blow to the Russian economy in the long run. The ruble’s collapse may be a harbinger of Russia’s economic collapse. A possible economic fallout will reduce Russian demand for foreign products, and if Russia cuts off natural gas to the European market, the likely result will be a recession.
Implications for Sri Lanka
Overall, Russia and Ukraine account for 2% of Sri Lanka’s imports and 2.2% of exports in 2020. However, both countries are vital import sources for wheat and export destinations for Sri Lankan black tea (see graphs). Russia and Ukraine buy about 18% of fermented black tea (>3kg) exported by Sri Lanka. Similarly, 45% of Sri Lanka’s wheat imports come from Russia and Ukraine.
More than half of the soybeans, oil and sunflower seeds and peas imported by Sri Lanka come from Ukraine. In addition, Russia and Ukraine are important sources of imports of asbestos, semi-finished iron and steel products, copper (cathodes) and potassium chloride for fertilizers.
Unless the Ukrainian crisis is resolved immediately, fuel and commodity prices could rise further. Inflationary pressure in Western markets, particularly in Europe due to high energy prices and supply chain bottlenecks, could reduce consumer purchasing power, lowering demand for goods exported by Sri Lanka.
Europe is a major export destination for ready-to-wear, tea and spices, and seafood. There is also a growing trend of increased military spending in the long term, which could reduce the “peace dividend” for European households.
For example, the German Chancellor pledged 2% of GDP for defense spending, addressing an extraordinary session of the Bundestag. Replacing consumerism with militarism will negatively affect countries like Sri Lanka that depend on the European export market. A protracted crisis could hamper Sri Lanka’s ability to purchase raw materials such as fertilizer. Sri Lanka’s exposure to the situation is mainly through links to European commodity and export markets rather than direct exposure to the two countries involved in the conflict.
Sri Lanka should focus on safeguarding access to vital raw materials and food. Globally, in response to the crisis, countries are stockpiling grain and exploring other ways of doing business with Russia by buying raw materials. Sri Lanka has limited options to mitigate the impact on already deteriorating food security conditions and access to raw materials.
As wheat and rice are substitutes, high wheat prices can increase the demand for rice. Thus, it is necessary to eliminate shortages of inputs such as fertilizers to ensure that domestic production is adequate. Due to the current currency crisis, Sri Lanka’s ability to deal effectively with such shocks is limited. Thus, the urgent priority is to resolve the current currency crisis to regain the ability to trade quickly.
Achieving debt sustainability and securing dollar inflows from multilateral institutes could be the options available to Sri Lanka.
Then, entering into futures contracts for raw materials and fuel and negotiating with friendly countries for food on predetermined prices are possibilities.
The author is a researcher at IPS and is interested in macroeconomic policy, international trade, labor and health economics.