Despite the recovery of economic activities due to the reopening of the global economy and improvement in labour market conditions after the COVID-19 pandemic, the Russia-Ukraine conflict has sent economic shockwaves across the globe. Given that the two at-war nations are major exporters of metals, foodgrains, fertilisers, and fossil fuels, the price of commodities has increased exponentially as a result of the conflict between them. Global economic conditions, especially those in the Southeast Asian region, have been severely impacted by disruptions in the supply of key commodities. The World Bank estimates that in 2022, the conflict will lead to an increase in global oil and food prices of 50 per cent and 20 per cent respectively. As a whole, the Association of Southeast Asian Nations (ASEAN) experienced an increase in inflation from 3.1 per cent in 2021 to 4.7 per cent in 2022.
The Russia-Ukraine crisis had effects on the Southeast Asian economy. First, the short-term energy prices increased and became unstable. Prices were already anticipated to stay high in 2022, partly because of the recovery in the global economy. For instance, because of interregional competition for cargoes between Asia and Europe, low storage levels in Europe, a lack of piped exports from Russia to Europe, and severe weather during the winter buying season of 2021-22, liquefied natural gas (LNG) prices were already subject to rising pressure. Asian LNG prices peaked in October 2021 at $56 per million British thermal units (mmbtu), which was a record high. The Russian invasion is still pushing LNG prices upward.
The second aspect of the crisis is that the Southeast Asian countries’ efforts to recover from the COVID-19 pandemic will continue to be severely hampered by the volatility of commodities prices. In particular, expensive imports are pushing up consumer electricity costs and fuelling concerns about potential fuel shortages in the area. As a result of exorbitant LNG prices, proposed and existing gas assets in Southeast Asia may go underutilised and risk becoming stranded assets. For instance, oil prices in the Philippines have been rising for several weeks, and the government has issued a warning that local commodities’ costs would continue to rise due to the volatility of world commodity prices. Due to imports with higher prices that are denominated in other currencies, the peso has lost value in comparison to the US dollar.
The third implication of the conflict is that fossil fuel companies are likely to argue that the world needs more fossil fuel infrastructure, not less. Following the invasion, JERA, a Japanese company, announced a partnership with ExxonMobil to construct a new LNG import facility in Vietnam and the Australian government declared that it would target new LNG importers in Asia.
Impact of the war on SEA countries
Everywhere in the world, from fuel to food, the war has increased the cost of goods and commodities. Russia’s announcement of a military mobilisation has had an effect on the world energy markets, driving up prices and posing a prospect of further squeezing fuel supplies. Since Russian gas supplies are curtailed for many nations, Europe is rushing towards acquiring more LNG. According to the US Energy Information Administration, the price of LNG exported from the US has climbed by close to 70 per cent since the beginning of the year 2022, reflecting the impact of increased demand.
The Philippine government took note of the 22 per cent increase in gasoline prices to PhP 77.71 per litre in May 2022 from PhP 63.58 per litre in January 2022 and the 49 per cent increase in diesel pump prices to PhP 75.92 per litre in May 2022 from PhP 50.95 per litre in January. These implications on the Philippines’ economy were due to the ongoing war situation between Russia and Ukraine. A serious dearth of public transportation was experienced during this time due to a large number of public utility vehicle drivers choosing not to travel their regular routes and provincial buses and taxis only operating at 20-30 per cent capacity. The effects of the continuous elevated global oil and coal prices on domestic oil and petroleum products were experienced.
According to the Energy Market Authority, Singapore, the country relies on natural gas to generate 95 per cent of its electricity. The majority of Singapore’s natural gas supply has historically been piped in from Malaysia and Indonesia. However, since Singapore’s LNG terminal started operating in 2013, LNG started to play a significant part in power generation. With the growing prices of LNG globally, the prices of electricity are being affected in Singapore. However, different power producers can have various LNG or gas purchasing plans, which could subject them to further spot exposure. Beyond electricity prices, the industrial sector will also be hit by rising LNG prices, as will any company that uses gas or LNG.
The Economic Outlook 2023 has stated that given the low economic and financial ties between Malaysia and the two nations at war, the direct impact of the conflict on Malaysia is minimal. According to the report, commerce between Malaysia and Russia during the first half of 2022 was worth RM 8.8 billion (0.4 per cent) and RM 1.5 billion with Ukraine (0.1 per cent). However, Malaysia has been negatively impacted by the protracted conflict, particularly due to the rise in food and fuel prices. Due to slower-thananticipated global economic growth, this conflict had increased supply chain problems in the country. Conflict between Russia and Ukraine has sent shockwaves that can be felt in Thailand as well. Farmers are now paying more for fertiliser, fuel is more expensive, and commodities are also seeing price rises.
Ukraine is a significant agricultural product producer. Food security in Thailand has been significantly impacted by a large number of displaced Ukrainians, Russian destruction to major ports and railway connections, and damage to agricultural infrastructure. The sanctions against Russia resulted in rising inflation and supply chain disruptions in many countries of the Southeast Asian region, including Thailand. Indonesia obtains the majority of its imported wheat from Ukraine. It brought around 2.96 million tonnes of wheat from Ukraine in 2020. Although wheat isn’t a common ingredient in Indonesian cuisine, Indomie noodles, one of the nation’s most beloved regional specialities, are made from it. Given that more than 15 billion packets of Indomie are produced annually, the war’s sharply decreased activity in Ukrainian ports has had a significant impact on the world’s supply of wheat, which has affected the accessibility of noodles in nations on the other side of the world, including Indonesia.
More sunflower oil is exported from Ukraine than from any other nation in the world. Russia ranks as the second-largest supplier of sunflower oil in the world, providing around 23 per cent of all supplies. Due to the conflict between these two major suppliers, which severely interrupted their export operations, demand for palm oil, an alternative cooking oil, increased. The most common cooking oil in Indonesia is palm oil. The cost of palm oil has skyrocketed in Indonesia as a result of rising worldwide demand. To secure domestic consumption, the Indonesian government even restricted the export of palm oil between April 2022 and May 2022. The long-term inflation has been brought on by disrupted global supply chains and increased commodity costs, on top of the inflation brought on by the pandemic. The annual inflation rate reached 3.55 per cent in May 2022, the highest level since December 2017, according to Statistics Indonesia.
Key lessons learnt: Renewable energy sector
The war has imparted numerous lessons. The world’s markets for fossil fuels are characterised by energy instability and insecurity. Numerous things, such as pandemics, export infrastructure failures, and even ships being stopped in busy shipping lanes, can have an impact on commodity prices. Such unanticipated events have the potential to lead to national energy shortages and have an impact on prices for billions of customers in importing nations. Therefore, the continued buildout of LNG and other fossil fuel import infrastructure in Southeast Asia will only reinforce vulnerabilities related to energy security and economic growth. Although fossil fuels are often seen as reliable, secure fuels for power generation, the opposite is true: the supply of imported fuels is constantly at the mercy of unpredictable disruptions.
Another lesson is that low-cost, domestic renewables represent a crucial hedge against the volatility of globally traded fossil fuels because renewables like wind and solar do not require fuel inputs. Instead, renewable energy costs are typically quoted in one, all-in-lifecycle price, allowing energy sector planners to assess future power prices more accurately for end-users and the economy. Unlike the constantly fluctuating cost of fossil fuels, renewables have demonstrated consistently lower costs over time. It is difficult to predict fossil fuel prices months in advance, but renewables provide long-term economic and financial stability. Instead of increasing exposure to geopolitically unstable fossil fuel markets, it would be wise for Asian countries to maximise energy security and self-sufficiency by minimising dependence on imported fossil fuels.
As the global economic crisis deepens, the outlook for Southeast Asia has also changed drastically. It is unlikely that the economic effects of the Russia-Ukraine war will abruptly vanish; instead, they will only diminish over time. The implications were visible in different economic spheres, with the energy sector being hit the worst.There are no direct economic ties between Russia and the Southeast Asian region, particularly ASEAN countries. Nevertheless, there has been an increase in commodity prices, particularly the price of oil, which has contributed to producer and consumer price inflation in the region. The direct effect of the Russia Ukraine war on the major Southeast Asian economies is an increase in commodity prices, particularly those of oil, nickel, wheat, and maize. As net importers of these goods, Singapore, Vietnam, and Thailand need to be particularly concerned about this trend. Due to the rise in commodity prices, both producer and consumer price inflation have been steadily rising in Thailand. Oil has been in low supply in Vietnam, and reports of hoarding gasoline are now emerging, which is driving up prices even further.
The effects of increased oil prices have been visible in the transportation, housing, electricity, gas, and other sectors in many countries in the region. However, other economies in Southeast Asia, such as Indonesia, Malaysia, and the Philippines, have not been immediately impacted. These economies will be able to reduce the impact of rising oil prices on inflation due to their low energy usage. In contrast, Singapore and Thailand experience price increases at home due to their economies’ comparatively high energy and fuel use. The persistent increase in commodity prices has brought up concerns about stagflation. Additionally, in the wake of the war, attempts to reduce poverty that were halted by the epidemic will resume, and income disparity will rise even more. The governments of Asian and Southeast Asian countries, particularly those that are net oil importers, should look out for alternative oil suppliers, such as Saudi Arabia and Venezuela, to secure their energy needs in order to deal with the ongoing situation resulting from disruptions in the oil supply due to the Russia-Ukraine crisis