Pacific Money | Economy | Southeast Asia

How the Russian Invasion of Ukraine Might Impact ASEAN Economies

While the economic fallout from the war and ensuing sanctions is hard to predict, it is likely to be significant.

How the Russian Invasion of Ukraine Might Impact ASEAN Economies

Gas prices are shown Monday, March 7, 2022, in Tumwater, Washington. The cost of gasoline is pushing even farther above $4 a gallon, the highest price that American motorists have faced since July 2008, as calls grow to ban imports of Russian oil.

Credit: AP Photo/Ted S. Warre

With economic sanctions being levied against Russia in response to its invasion of Ukraine, we can expect some economic fallout to hit ASEAN economies in the weeks and months to come. There is a lot of uncertainty when it comes to things like this, but we do have some clues as to what that impact might look like.

Countries in the region have various levels and types of exposure to the Russian economy, but broadly speaking we can expect higher food and energy prices, and some manufacturing supply chain shocks that will impact countries across the region in different ways. Another tricky question is what to do about numerous joint ventures between Russian energy giants and major state-owned companies in countries like Indonesia, Malaysia, and Vietnam.

First let’s look at energy prices. Russia is a major energy exporter but ASEAN’s direct exposure in this regard is fairly limited. Based on trade data from the Atlas of Economic Complexity (which is where all data for this article is sourced), Singapore imported $38.8 billion of refined petroleum oil in 2019, but only 5.7 percent of it came from Russia. Thailand is in a similar situation, importing $16.6 billion worth of crude in 2019, but only 3.3 percent of it from Russia.

Vietnam, which secured 15 percent of its coal imports from Russia, may be more exposed, although presumably Australia and Indonesia can step up exports to fill the shortfall. Either way, energy prices have already been under upward price pressure for months and this invasion is merely going to drive them even higher across the board, whether countries import their oil directly from Russia or not.

We should also expect to see higher food prices, which were likewise being pushed up around the globe by inflationary pressure before the invasion. And here ASEAN countries have more direct exposure. In 2019 Indonesia imported $2.05 billion worth of wheat, more than a quarter of it from Russia and Ukraine. The Philippines imported $1.45 billion worth of wheat, nearly 16 percent of which came from Russia and Ukraine. Many countries in the region are in similar positions, though on smaller scales.

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While there are often specific state agencies tasked with stockpiling staple goods such as wheat to buffer against supply shocks like this, it’s anyone’s guess how long they can tamp down the price pressure and at what cost to public finances. Another issue is that Russia and Belarus supply Indonesia with nearly half of its potassic fertilizer. With those imports choked off it could very well show up in higher food prices.

Manufacturing is also likely to take a hit. Russia and Ukraine are major providers of semi-finished iron and steel, an important input in the manufacture of cars, machinery and electronics. In 2019, Thailand sourced 21.4 percent of its semifinished steel from Russia and Ukraine, Indonesia 25 percent, and the Philippines almost half. Perhaps in some places domestic production can increase to pick up the slack, or producers like Japan can increase output. But scrambling supply chains like this will probably have some adverse effect on manufacturing.

Having said that, supply chains are supposed to be resilient. With Russian exports frozen out of markets, other producers will increase output, although there will be higher prices in the short-term as markets adjust. In a lot of ASEAN countries, price pressures on staple goods can, at least in theory, be moderated to some extent through state interventions, subsidies, and other mechanisms. An altogether different, and perhaps more politically fraught question, is what state-owned companies that have invested billions of dollars in joint ventures with Russian energy companies are going to do.

There is mounting pressure to exit business partnerships with Russian companies. Shell announced last week it would pull out of a project with Russia’s Gazprom, even at the cost of taking a $3 billion write-down. But companies in ASEAN may not be so eager to take the write-downs. Malaysia’s state-owned oil and gas company, Petronas, along with Gazprom and South Korean and Turkish partners, owns a 15 percent stake in Iraq’s Badra oil field. Petronas has already said they won’t be pulling out of the joint venture at this time.

Vietsovpetro, a joint venture between Russia’s Zarubezhneft and Vietnam’s state-owned Vietpetro, is one of the largest energy companies in Vietnam, a country with long-standing economic ties to Russia. In Indonesia, state oil and gas company Pertamina is developing a major domestic refinery in which Russia’s Rosneft owns a 45 percent stake. The project has an estimated value of $13.8 billion and will give a crucial boost to domestic refinery capacity when completed.

In short, most countries in the region don’t have too much direct exposure to Russian energy, but many are likely to experience supply shocks on key manufacturing and agriculture imports, while the war drives up prices more generally across the board. Others are tied up in joint ventures with Russian companies that would be difficult, if not impossible, to pull out of. Not that expectations were high to begin with, but this may shed some light on why ASEAN has been rather restrained in its position on the Russian invasion. Any way you look at it, the picture is a messy one and we can only hope it will be over as soon as possible.