A year after Russia launched its invasion of Ukraine, South Asia remains burdened with the costs of a distant war
17-02-2023
The year since Russian tanks rolled into Ukraine on 24 February 2022 has seen the unnecessary loss of hundreds of thousands of lives, with most of those who died fighting on either side possibly questioning whether they really needed to be on the battlefield at all. The widely reported absence of morale in Russian troops was at least partially due to their inability to comprehend what the war was being fought over, with the stated strange motives such as the ‘de-nazification’ of Ukraine hardly being likely to inspire skeptical and reluctant soldiers. On the other side of the war, indignation and ire at their homes and cities being blown up and their families either being killed or forced to flee abroad as refugees would have contributed to the reported commitment and drive of Ukrainian soldiers. They would be wondering, as they went into battle, whether their country had indeed provoked Russia to the extent that it thought it proper to attack with the force that it did. Meanwhile, in addition to the rising death toll brought about by prolongation and escalation of the conflict, the global economy and energy supply chains have been adversely impacted, and affected smaller developing countries, including those in South Asia, have been hit the hardest.
Within a couple of months of the war beginning, the World Bank in its twice-a-year regional update revised downward the growth projection for South Asia by 1.0 percentage point to 6.6 percent. The World Bank pointed out that countries in South Asia were already grappling with rising commodity prices, supply bottlenecks, and vulnerabilities in financial sectors. The war in Ukraine would amplify these challenges, further contributing to inflation, increasing fiscal deficits, and deteriorating current account balances. The World Bank anticipated that all countries in the region would face challenges ahead. In India, household consumption would be constrained by the incomplete recovery of the labor market and inflationary pressures. Maldives faced vulnerabilities due to its large imports of fossil fuels as share of GDP and a reduction in tourists from Russia and Ukraine. In Sri Lanka, the economic outlook was highly uncertain due to fiscal and external imbalances. In Afghanistan, higher food prices would exacerbate food insecurity. One of Pakistan’s challenges would be its energy subsidies, which are the largest in the region, and Bangladesh would face weaker demand from Europe for its exports, primarily garments. Hartwig Schafer, World Bank Vice President for South Asia, summarized at that time that “South Asia has faced multiple shocks in the past two years, including the scarring effects of the COVID-19 pandemic. High oil and food prices caused by the war in Ukraine will have a strong negative impact on peoples’ real incomes. Given these challenges, governments need to carefully plan monetary and fiscal policies to counter external shocks and protect the vulnerable, while laying the foundation for green, resilient and inclusive growth”.
Dr. Gareth Price, Former Senior Research Fellow of the Asia-Pacific Programme at the think tank Chatham House, also noted that the invasion of Ukraine had caused price shocks in South Asia at a time when its countries were already struggling to cope with economic crises. The region faced reduced foreign earnings primarily due to the pandemic and increased foreign outgoings, particularly since the commodity price shock caused by the Ukraine invasion. India and Bangladesh had healthy foreign exchange reserves, more diverse sources of foreign exchange, and lower external debt, but elsewhere in the region a prolonged period of high fuel prices coupled with lower foreign exchange receipts quickly ran down reserves. With limited foreign exchange reserves, the situation became unsustainable for the smaller countries in the region. In the coming months, even years, Sri Lanka, Pakistan, and probably Nepal would all face prolonged belt-tightening economically, but their strife-ridden political pathways were less obvious, he postulated.
Pointing out that South Asian countries are generally net importers of fuel and food, with only Pakistan and India self-sufficient in rice production but Pakistan still needing imports to top up domestic production of its staple, wheat, and with Sri Lanka’s ban on fertilizer imports having harmed its food production, Dr. Price concluded that the spike in commodity prices had come at a bad time. He drew attention to the economic importance of overseas workers’ remittances for the smaller countries of the region, adding that when these countries faced previous economic crises, an outflow of workers to regions such as the Gulf served to counter domestic woes. COVID-19, however, harmed remittance inflows and overseas opportunities remained limited, while earnings from tourism – vital to Bhutan, the Maldives, Nepal, and Sri Lanka – also declined dramatically.
India, the largest and fastest growing economy in the region, perhaps has the greatest resilience due to its strong foundations. India had swiftly addressed the economic downturn caused by the pandemic through economic reforms and financial incentives. The sky-high fuel prices that the Ukraine war caused posed a major challenge to New Delhi, which relied predominantly on imports from the Gulf. In tune with its energy diversification policies, and taking advantage of the fact that Russia has been selling crude oil to it at a heavily discounted rate of up to $40 per barrel since March last year, India’s import of Russian oil have risen from about 1 percent of its total imports in January 2022 to about 25 percent in December 2022, in which month its oil imports from Russia surged to an all-time high of 1.25 million barrels per day. This increased further in January 2023, when according to energy cargo tracker Vortexa Russia’s share in India’s oil imports rose to 1.27 million barrels per day.
India is reportedly refining some of this oil in Indian petroleum refineries and shipping it onwards to Europe. Since the refined petroleum is technically sourced from India, not Russia, it escapes United States (US) sanctions. Washington, on its part, has an interest in maintaining supplies of petroleum products, including diesel, to avoid global shortages and rising prices. The gains derived by India from trade with Russia are likely to enlarge after the latest sanctions imposed by the European Union (EU) of banning imports of Russian fuels, led by diesel, came into effect on 5 February. Al Jazeera quoted an official at an Indian refiner as saying last month that “India’s oil imports from Russia would continue to rise this year as well mainly because of discounts if there are no further stringent actions by the Western countries targeting Russian oil”.
Other South Asian countries have also started taking advantage of the availability of discounted Russian crude – for example Sri Lanka, which has been grappling with a severe economic crisis. Pakistan, which like Sri Lanka is also confronting great economic strife, has been negotiating with Russia to purchase discounted oil, although no deal has yet been struck. India supplies oil and gas to Nepal, Bhutan, Afghanistan, Maldives, Bangladesh and Sri Lanka, and it has extended substantial lines of credit, grants and finance facilities to these countries to import food, fuel and fertilizers to cope with their economic challenges.
Sri Lanka’s economic condition continues to remain grave. It used to get large numbers of Russian and Ukrainian tourists, which dried up completely as soon as the war in Ukraine began. Tourists from other countries have also reduced to a trickle, both due to the external war and the internal strife that engulfed the country last year. Foreign cash inflows from tourism, which ranged between $4 to $7 billion annually in pre-pandemic times, have dwindled considerably, causing further economic stress, unemployment and popular discontent.
Landlocked Nepal’s problems, in some ways, are similar to those of Sri Lanka. It imports more that 40 percent of its consumer requirements, and 100% of its fuel needs. Its foreign exchange reserves have decreased as remittances from the estimated 4 million expatriate Nepalis, who are also battling the effects of unusually high inflation in foreign lands due to the Ukraine War, have reduced. Another of Nepal’s major foreign currency earning sectors, tourism, has been badly impacted ever since the pandemic.
Pakistan’s polity and economy have been under tremendous stress for several years, with debt levels rising and the cost of living and poverty levels spiraling. This had generated tremendous political discontent. The Ukraine war has exacerbated and compounded Islamabad’s existing severe problems, and the country is reeling from a debilitating fuel and power crisis and grappling with a major wheat supply disruption. For Afghanistan, on the other hand, the biggest tragedy of the Ukraine war is that it has caused the country to fall even further from the global radar, and the consequent greater isolation has led to further deterioration in the already challenged lives of the Afghan people.
Ali Ahmadi, an executive fellow at the Geneva Centre for Security Policy, in an article in The Diplomat made the interesting point that as the Ukraine war and the resulting sanctions redraw trade maps in Asia, Iran stands to be the primary beneficiary. He argued that the war in Ukraine and the associated economic embargoes have created significant blockages with regard to the New Eurasian Land Bridge (NELB). While Beijing grounds its Belt and Road Initiative (BRI) in the mystique of the ancient Silk Road, its primary land route to its target markets in Western Europe goes through the NELB, which passes through Central Asia and Russia to reach the European continent. This route is so important that Chinese officials have in the past worried about overreliance on Russia for their logistical needs. Now those fears look prescient. As many experts have noted, the NELB route has become increasingly problematic. The security issues brought about by the war aside, Western sanctions have made Russia increasingly difficult to work with. Major logistics firms withdrew from Russia even before they were forced out by sanctions, and European countries like Poland and Ukraine, which once held ambitions of being key hubs for the NELB, have eschewed economic relations with Moscow and championed sanctions as they prioritize security needs. Ahmadi feels that all these factors have made it increasingly necessary for China to look toward the lower tier of the “Belt”, going through Iran.
Ahmadi also referred to Russia’s own quasi ‘look East’ strategy to mitigate the effects of sanctions by diversifying its trade away from Western economies. He argued that “While Russia’s route to China or Central Asia is straightforward, its land route to India, a key trading partner that has refused to join the Western sanctions coalition, is far more complicated. India, mostly surrounded on land by adversaries Pakistan and China, must be reached by sea. While India-Russia trade is mostly carried out by sea, traveling through the Suez Canal, the absence of a more direct route can become a vulnerability, especially in the current charged political environment. This enhances the importance of the International North-South Transport Corridor (INSTC), which traverses the Caucuses to connect Russia to the Iranian port of Bandar Abbas on the Strait of Hormuz, from which point a shorter maritime route to India is available. This not only drastically shortens transit time for goods shipped between India and Russia but also avoids narrow maritime routes that are potentially susceptible to political blockages”. Ahmadi pointed out that transportation infrastructure in Iran was a major point of focus for India too. New Delhi sees connecting to the southeastern Iranian port of Chabahar as its best trade path to Afghanistan, Central Asia, and beyond. He added, “Critically, Russia has also expressed a desire to use the INSTC to connect to Pakistan. This has important implications for the BRI project”.
While these larger geo-economic calculations are being considered, South Asia, with its current huge developmental challenges and ongoing politico-economic crises, continues to endure the unsolicited collateral damage from the war in distant Ukraine, which most South Asians believe they had nothing to do with.
