• Friday, December 01, 2023
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What Russia – Ukraine war means for consumers, capital market

What Russia – Ukraine war means for consumers, capital market

The war between Russia and Ukraine has intensified despite global condemnation and sanctions on the Russian economy. As both countries play strategic roles in global trade, especially Russia, the international sanctions will significantly impact global commodity prices, according to Ayodeji Ebo, head, retail investment, Chapel Hill Denham.

High Petroleum Product Prices

Russia is the second-largest producer of crude oil in the world and accounts for eight percent of global oil supply. This explains why global crude oil prices climbed to over $119 per barrel, a 10-year high, last week.

Expectedly, this will directly impact the prices of petroleum products such as petrol, diesel, kerosene, gas, among others. Energy cost accounts for over 35.0 percent of production cost. The full or partial cost increase will be passed to the consumers, and this may lead to a higher inflation rate.

Rise in Wheat Prices

Wheat is typically milled into flour which is then used to make a wide range of foods, including bread, noodles, pasta, biscuit, pastries, cake, and so on.

Ukraine and Russia both account for approximately 30.0 percent of global wheat supplies. Domestically, wheat flour increased by 28.6 percent YoY in January 2022 as well as the price of bread (500g), which rose by 27.8 percent YoY in January 2022.

The recent rise in wheat prices, which will impact flour prices, will lead to a further increase in the prices of consumer products (bread, noodles, among others).

Read also: Russia – Ukraine Conflict: UK sanctions 386 Russian lawmakers

Potential Major Review of Electricity Tariff

Gas is a major input in the computation of the electricity tariff. Natural gas prices rose YoY by 94.6 percent, from $2.67 per cubic foot on March 8, 2021, to $5.01 on March 5, 2022.

This means that Nigerians will pay more for electricity if the high gas prices remain for a prolonged time.

Higher Government Borrowings

The spike in global oil prices will increase fuel subsidy payments. This will lead to more borrowings and reduce the government’s ability to fund capital expenditure. Higher government borrowings may translate into higher interest rates in the second half of the year.

Capital Importation

Russia accounts for a meager 0.4 percent of total capital importation to Nigeria in 2019 and has not recorded any capital inflow to Nigeria since 2020.

Also, on a global scale, capital importation has dropped significantly to Nigeria from $23.9bn in 2019 to $9.7bn in 2020 and $4.5bn as of September 2021.

“We do not foresee any major impact on Nigeria in the short to medium term,” Ebo said.

Fixed Income Market

“We do not foresee any major sell-off by foreign investors in the short term due to less participation in the last two years,” he said.

Direction of yields will still be premised on liquidity level and government borrowings in the interim. Rise in Eurobond yields in recent times. Nigeria will pay more for any new borrowing in the international capital market.

Stock Market

Domestic investors accounted for 77.1 percent and 66.4 percent of total activity in 2021 and 2020 in the Nigerian stock market. The major downside remains the upcoming 2023 election.

Overall, the effect of the Russia – Ukraine war will be devastating for Nigeria and the globe as a whole if not resolved in the near term due to the significant role both countries play in global trade.