Pakistan on the front line of a war between Ukraine and Russia

PESHAWAR — The potential for a Russian-Ukrainian war is already rocking Pakistan as local prices for energy, food, raw materials, steel and semiconductor chips soar.

The conflict could also delay the repair and upgrade of T-80UD tanks under an $86 million deal Islamabad struck with Ukrainian arms conglomerate Ukroboronprom last year. Pakistan bought 320 Ukrainian T-80UD tanks in a deal worth $650 million in 1996.

Pakistan also imports most of its wheat from Ukraine, with 39% of its total imports coming from Kyiv last year. The country also imports barley, buckwheat, canary seed, oats, cereals and corn from Ukraine.

The crisis in a distant region could also contribute to distorting the country’s current account balance, which is already in bad shape, according to a report by Ismail Iqbal Securities (IIS) published on February 14.

In view of the impending war situation, the IIS report titled Imminent threat of war between Russia and Ukraine: implications for Pakistan said the wider indirect implications include a likely inflationary spiral in Pakistan.

The report predicts a transient spike in crude oil, liquefied natural gas (LNG) and coal prices and predicts a serious threat to the country’s steel sector, which could see prices for raw materials and finished products soar, the balance of the country’s current account going further downhill.

The report also predicts a “major risk” to the auto sector from chip shortages. The IIS expects steel industry raw materials and finished products to experience a sharp price spike.

“In the near term, rising prices for finished steel products such as cold-rolled coil, rebar and tabular steel could lead to inventory gains. However, demand destruction is likely to occur in the medium term due to already higher prices,” he added.

In addition to wheat imports, Pakistan also buys 37% of its foreign corn starch from Ukraine. In terms of exports, Ukraine holds a 28% share of Pakistan’s polyester staple fiber overseas sales.

A farmer harvests wheat in a field in Peshawar, Pakistan, May 2, 2020. Photo: AFP / Abdul Majeed

The report says Russian exports will continue even amid an escalating crisis, while Ukrainian exports are likely to face disruptions. Russia is the second largest producer of crude oil and natural gas with more than 60% of its energy exports to European countries in 2019.

“We do not foresee any major long-term risks to Russian exports… Ukraine is no longer a major transit country for gas exports from Russia,” he said.

Economic analysts say Pakistan’s concerns about a war between Ukraine and Russia are both political and economic.

Politically, they said, the country must not choose sides and not give up its neutrality. This aspect, they say, is necessary because Pakistan’s relations with Russia have improved. Prime Minister Imran Khan will make his first two-day visit to Moscow later this month.

Economically, Pakistan needs to be prepared for a prolonged $100/barrel oil price hike, as it has already hit the ‘nervous 90s’. A $10-20 rise in oil prices for a few quarters can burn $1-2 billion from national reserves, with a significant loss to the country’s purchasing power.

Analysts say policymakers in Islamabad panicked because rising oil prices would upend Pakistan’s growth prospects. The country, they said, would have to raise the interest rate to almost 12% if imports were not reduced and exports were not increased.

This month, Pakistan raised oil prices by 10% as Brent oil prices hit a seven-year high of $95 a barrel due to tensions at the Ukrainian border.

The country suffered another blow when long-term Pakistani liquefied natural gas (LNG) suppliers Eni SpA and Gunvor Group Ltd suggested they were unable to deliver shipments in March due of the global gas crisis, which led to a spike in LNG spot prices. level that is too much for cash-strapped Pakistan.

Pakistan eventually had to buy gas on the spot market after the order was canceled and has reportedly issued a tender for two shipments to be delivered next month.

Majyd Aziz, former chairman of the Karachi Chamber of Commerce and Industry (KCCI) and the Employers’ Federation of Pakistan (EFP), told Asia Times that Islamabad seemed very concerned about the deteriorating situation on the Russian-Ukrainian front.

“Moeed Yusuf, National Security Adviser, in a brief conversation at Karachi airport last night, warned that if war breaks out, gas, wheat and oil prices will rise as the two countries are major gas and wheat producers,” Majyd said. .

He added that Pakistan’s exports will fall after industries face gas shortage.

Workers unload gas cylinders from a truck at a market on the outskirts of Islamabad on September 2, 2020. Photo: AFP / Farooq Naeem

“The signs are already there. A few suppliers of regasified liquefied natural gas (RLNG) defaulted on March shipments and the government is now buying gas on the spot market at incredibly high prices,” he said, adding that Europe would be badly affected, because they depend on Russia. gas.

“I don’t think the situation will end in a war because Germany wants the Nord Stream 2 gas pipeline and will not listen to the American warning and would rather benefit from the cheaper and reliable gas supply from Russia” , did he declare.

The Russian-Ukrainian standoff has also worried the Pakistani defense establishment, which fears a repeat of the 2014 crisis when Ukraine ran into difficulties shipping engines used in Pakistan’s Al-Khalid (MBT) tanks. -2000).

The tanks were jointly developed by China and Pakistan in the 1990s and are a major component of Pakistan’s conventional ground forces. According to the media, the Pakistani army is particularly concerned about its Ukrainian tank engines.

Amid the 2014 Ukrainian-Russian crisis, Kyiv had to assure Pakistan through its ambassador that it would meet its contractual obligation to supply the engine within a stipulated time.

Defense cooperation between Pakistan and Ukraine has seen a tangible boost following the visit of the Chief of the Pakistani Army, General Qamar Javed Bajwa, to Ukraine in May last year. He then expressed his interest in various sets of military weapons, including the T-84 OPLOT main battle tanks and the Skif anti-tank system.

Growing military ties between Pakistan and Ukraine led to trials of Ukrainian T-84 tanks in Pakistan last year. Military sources say a new order for the supply of 6TD1 and 6TD2 engines was also in the works before tensions with Russia increased.