The Russian invasion of Ukraine in February was the largest conventional military attack seen since World War II and can cause a global economic catastrophe. Pakistan has taken a neutral stance, born of its fast-evolving strategic partnership with Russia. This new found alliance being spearheaded by Prime Minister Imran Khan, harks back to some historic disappointments (financial, political, strategic and defence related in nature) with the West in general and the US in particular, and spans over several fronts: diplomacy, defence, nuclear energy, and technology transfer per se—making Russia a pivotal part of Pakistan’s nation-building process, mainly during a period where it faces many challenges from all facets involving key global linkages and a dwindling currency. Yet, this is unlikely to shield Pakistan from the ravages of a war of such scale. Especially since, in the global geopolitical context, both Pakistan and Russia today find themselves ever more closely linked to two other powers, China and the US (albeit, along with the European Union). The Russia-Ukraine crisis has stoked uncertainty in global trade and will impact oil and other commodities, according to Sunil Sinha, research director, and principal economist at Global Ratings. Pakistan may not have a significant merchandise trade with Russia, nevertheless, it stands to lose economically due to supply disruptions caused by Western sanctions. “Despite Pakistan’s limited direct exposure, the combination of supply disruptions and the ongoing terms of trade shock will likely weigh on growth, result in a sharper rise in inflation, and (lead to) a wider current account deficit,” said the chief economist at the World Bank when compiling its institutional report. Here are the ways Pakistan could suffer due to a Russia-Ukraine war even without being part of it:
A ban on Russia’s crude exports: In reaction to the US’ ban on all oil and gas imports from Russia, Brent crude prices surged to nearly $130 per barrel last week, up 43 percent from the beginning of February. This is a major setback for global economic growth as Russia is one of the largest exporters of crude oil globally. Pakistan’s trade, however, comprises only negligible or nil oil imports from Russia, but there could be a spill-over impact in the form of high inflation and sluggish growth. On March 13, Morgan Stanley lowered Pakistan’s GDP forecast for the fiscal year 2023 by 50 basis points to as low as nearly 3 percent, citing risks to macro stability due to high crude oil prices. “Even as we expect the cyclical recovery trend to continue, we expect it to be softer than we previously projected,” it said in a report. “We believe that the ongoing geopolitical tensions exacerbate external risks and impart a stagflationary impulse to the economy.” It was noted that more risks could arise if global growth conditions weaken further, which would hamper Pakistan’s export and capital expenditure cycle. Already logistics and shipping is posing to be a great hurdle! Inflationary concerns: Pakistan depends on imports to meet up to almost 85 percent of its crude oil needs or perhaps even more. The surge in international oil prices to a 14-year high will now result in broader price pressures. Analysts conclude that the impact on Pakistan’s economy will be felt mostly through higher cost-push inflation weighing in on all economic agents—households, businesses, and government. Every 10 percent rise in crude oil prices leads to a 0.4 percentage point-rise in consumer inflation, according to Nomura Research Firm. Morgan Stanley pegs retail inflation in Pakistan at almost 14 percent for the fiscal year 2023, much higher than the SBP figures. This has increased the risks of a higher import bill and, in turn, a widening of Pakistan’s current account deficit (CAD). The CAD is expected to widen by at least another 3 to 5 percent of the GDP in the financial year 2023, once these elements start kicking in fully, according to a report by Nomura Research. This is likely to further dent the Pak Rupee, which has already recently plunged to almost 182 against the US Dollars, in inter-bank exchange parity.
Pakistan’s defence supplies: It is believed that the multiple abstentions from a vote in the United Nations from Pakistan since the Ukraine invasion were driven by the country’s need to secure its supply of defence equipment, where Russia & China could play an integral part. Going forward, Pakistan is looking at Russia (after China) to play a pivotal role in meeting its defence needs and military equipment upgradation on easier financing terms. Technology transfer is yet another area where Russia could play an important role in making Pakistan self-reliant for its defence needs against an increasingly hostile India. By 2027, it is possible that Russia could account for as much as nearly 25 percent of Pakistan’s imported arms requirements, according to trends by a defence think tank Stockholm International Peace Research Institute. This explains that the importance of defence sustainability is something that is very dear to Pakistan. Key defence contracts could be in the areas of the Russia-developed S-400 air missile system, battle tank force composed predominantly of Russian T-72M1 and T-90S tanks (similar to the ones they recently sold to the Indians), and of course nuclear energy to induct sustainability in Pakistan’s struggling energy sector. Strictly from a military and national defence perspective, today’s reality may be that Pakistan will continue to regard this growing relationship and defence and energy ties with Russia as very precious, despite the US’ threat of sanctions or the possible withdrawal of the GSP+ Scheme by the European Union.
A ban on Russia’s crude exports: In reaction to the US’ ban on all oil and gas imports from Russia, Brent crude prices surged to nearly $130 per barrel last week, up 43 percent from the beginning of February. This is a major setback for global economic growth as Russia is one of the largest exporters of crude oil globally. Pakistan’s trade, however, comprises only negligible or nil oil imports from Russia, but there could be a spill-over impact in the form of high inflation and sluggish growth. On March 13, Morgan Stanley lowered Pakistan’s GDP forecast for the fiscal year 2023 by 50 basis points to as low as nearly 3 percent, citing risks to macro stability due to high crude oil prices. “Even as we expect the cyclical recovery trend to continue, we expect it to be softer than we previously projected,” it said in a report. “We believe that the ongoing geopolitical tensions exacerbate external risks and impart a stagflationary impulse to the economy.” It was noted that more risks could arise if global growth conditions weaken further, which would hamper Pakistan’s export and capital expenditure cycle. Already logistics and shipping is posing to be a great hurdle! Inflationary concerns: Pakistan depends on imports to meet up to almost 85 percent of its crude oil needs or perhaps even more. The surge in international oil prices to a 14-year high will now result in broader price pressures. Analysts conclude that the impact on Pakistan’s economy will be felt mostly through higher cost-push inflation weighing in on all economic agents—households, businesses, and government. Every 10 percent rise in crude oil prices leads to a 0.4 percentage point-rise in consumer inflation, according to Nomura Research Firm. Morgan Stanley pegs retail inflation in Pakistan at almost 14 percent for the fiscal year 2023, much higher than the SBP figures. This has increased the risks of a higher import bill and, in turn, a widening of Pakistan’s current account deficit (CAD). The CAD is expected to widen by at least another 3 to 5 percent of the GDP in the financial year 2023, once these elements start kicking in fully, according to a report by Nomura Research. This is likely to further dent the Pak Rupee, which has already recently plunged to almost 182 against the US Dollars, in inter-bank exchange parity.
Pakistan’s defence supplies: It is believed that the multiple abstentions from a vote in the United Nations from Pakistan since the Ukraine invasion were driven by the country’s need to secure its supply of defence equipment, where Russia & China could play an integral part. Going forward, Pakistan is looking at Russia (after China) to play a pivotal role in meeting its defence needs and military equipment upgradation on easier financing terms. Technology transfer is yet another area where Russia could play an important role in making Pakistan self-reliant for its defence needs against an increasingly hostile India. By 2027, it is possible that Russia could account for as much as nearly 25 percent of Pakistan’s imported arms requirements, according to trends by a defence think tank Stockholm International Peace Research Institute. This explains that the importance of defence sustainability is something that is very dear to Pakistan. Key defence contracts could be in the areas of the Russia-developed S-400 air missile system, battle tank force composed predominantly of Russian T-72M1 and T-90S tanks (similar to the ones they recently sold to the Indians), and of course nuclear energy to induct sustainability in Pakistan’s struggling energy sector. Strictly from a military and national defence perspective, today’s reality may be that Pakistan will continue to regard this growing relationship and defence and energy ties with Russia as very precious, despite the US’ threat of sanctions or the possible withdrawal of the GSP+ Scheme by the European Union.
