Russia Invades Ukraine: How Will Soaring Oil Prices Impact India & the World?

Since Russia's invasion of Ukraine, the price of brent crude has been hovering between $100-105 a barrel.

As Russia continues its invasion of Ukraine, the fear of a disruption in oil supplies has set prices on fire.

(Photo Courtesy: iStock)

As Russia continues its invasion of Ukraine, the fear of a disruption in oil supplies has set prices on fire.

The price of brent crude had already reached a record $105 a barrel on Friday last week – a seven-year high that has not been seen since 2014.

Since Russia's invasion of Ukraine on Thursday, the price of brent crude has been hovering between $100-105 a barrel.

Dent in Russia's Oil Exports

In the case of sanctions on Iran, the United States had made sure that the countries buying oil from Iran gradually reduce their orders and shift to other oil exporters for their needs.

The same strategy is expected to be followed by the US in the case of Russia.

With sanctions by Western countries piling up against Russia, the latter's economy has taken a massive hit.

The Russian rouble fell to a record low of 89 compared to the US dollar as reports of explosions across Ukraine emerged on Thursday last week, Financial Times reported.

While India does not have significant oil supplies from Russia, the latter is a major supplier to a large number of countries, including a number of European countries. Hence, any disruption in the global supply chain is sure to indirectly impact India.

The global oil market, which has been in a poor state since the outbreak of the COVID-19 pandemic, has spelt disaster especially for countries like India, which meets more than 80 percent of its requirements for crude oil and Liquefied natural gas (LNG) through imports.

India is the world's third largest oil consumer, after the US and China. Indian diesel and petrol prices, which are already battering domestic fuel consumers, are bound to rise further amid a jump in inflation sparked by the war.

According to a report by Bloomberg, a 10 percent rise in oil prices could add 0.4 percentage points to inflation in India.

A higher oil import bill may also widen the current account deficit.

The European oil market in particular will take a massive hit because of its heavy dependence on Russian imports. Russia is the second-largest oil exporter in the world and meets 35 percent of Europe's oil requirements, as per reports by Times of India.

Targeting the Nord Stream 2 Pipeline

German Chancellor Olaf Scholz suspended certification of Nord Stream 2 in response to Russia's recognition of Donetsk and Luhansk in eastern Ukraine as independent nations.

The $11 billion project was aimed at connecting Russian gas supply to several other countries in Europe.

The impact of the cancellation of the deal between Germany and Russia will further dent the European oil market – which is sure to have global ramifications and adversely affect countries either directly or indirectly.

Impact on the Indian Rupee

The rising domestic inflation in India is also bound to destabilise the rupee further. When markets opened on Monday, the rupee was trading at an weak rate of Rs 75.75 compared to the US dollar. However, it recovered to some extent to reach Rs 75.33 during the closing bell.

Fitch Solutions had said in December 2021 that in the long term, the Indian currency would likely be quite weak, as per reports by The Economic Times. Its forecast for the rupee in 2023 was pegged at Rs 78 compared to the US dollar.

The ongoing Russia-Ukraine tensions are sure to dampen the rupee's prospects further.

"Rupee became the worst performing currency among Asian currencies on back of month-end dollar demand from oil importers. Also, safe-haven dollar demand has surged after Russia attacks on Ukraine fuelled sell-off in risk assets," Dilip Parmar, a research analyst in HDFC Securities, told PTI.

Apart from oil, domestic consumer products are also expected to see a jump in prices.

Krishnarao Buddha, senior category head of Parle Products, told PTI that fast-moving consumer goods (FMCG) like vegetable oil and RBD oil are likely to see a price hike.

According to data released by the Indian Ministry of Statistics and Programme Implementation, the inflation rate in the country shot up to 6.01 percent – a seven-month-high – in January this year.

Effect on Indian Markets

India's key indices – S&P BSE Sensex and NSE Nifty 50 – showed optimistic signs of recovery as they continued their gains from Friday as markets closed on Monday.

During the closing bell, the Sensex gained 388.76 points – a 0.70 percent rise to reach 56,247.28. The NSE Nifty rose by 135.50 points – 0.81 percent rise – to close at 16,793.90.

This comes after the markets continuously fell for six-consecutive days till Friday last week.

However, Indian stocks are still on thin ice, as are markets across the world. The reason for this is the absolute uncertainty regarding the direction that the Russia-Ukraine war may take in the coming days.

While rising oil prices are battering the global economy, inflation spurred by the invasion is also bound to make its dent – boiling down eventually as a severe burden on low-income households.

(With inputs from IANS, Quint Hindi, Bloomberg, PTI, ToI and Financial Express.)