The US announced last Wednesday the deployment of nearly 3,000 American troops to bolster Nato forces in Eastern Europe.
The deployment signals escalating tensions between Russia and the West over Ukraine, and the standoff adds volatility to concerns about rising energy and food prices by adding to existing global supply constraints caused by the pandemic.
CLOSE WATCH NEEDED
Sanan Angubolkul, chairman of the Thai Chamber of Commerce, said the conflict brewing in Eastern Europe requires a close watch by Thailand. A bad situation could worsen if the standoff between Russia and the West over Ukraine leads to fighting, said Mr Sanan.
“A conflict will not benefit any parties — be it Russia, Ukraine, Europe or the US,” he said. “In the short term, although transport has not been blocked, the tension brewing is likely to affect oil prices.”
According to Mr Sanan, if the conflict is prolonged and serious, it may lead Eastern European countries to adjust their monetary policy. This would eventually affect the purchasing power of people and deliver an indirect impact to the global economy, he said.
“The global oil price continues to rise, affecting the costs of energy and logistics in the global supply chain system. This also affects Thailand, as indicated by the rising prices of goods and services,” said Mr Sanan. “If the conflict escalates, it will definitely aggravate the supply shortage caused by the pandemic. The tension would also affect exchange rates, travel and tourism.”
BRACING FOR THE WORST
There are fears a Ukraine-Russia conflict could worsen pandemic-induced financial ills, posing a serious threat to Thai manufacturing and logistics sectors.
The dispute is a “warning sign” the global and Thai economies may plunge into trouble if the US, UK and EU decide to impose economic sanctions on Russia if it invades Ukraine, said Supant Mongkolsuthree, chairman of the Federation of Thai Industries (FTI).
“Trade between Thailand and Russia, especially for food and farm produce, would certainly be affected by such sanctions.”
Mr Supant encourages Thai manufacturers to brace for uncertainties by looking for new export markets before a conflict breaks out.
Russia, one of the world’s largest petroleum producers, may respond to the tension by reducing oil and gas supplies, driving up already inflated prices, he said.
The FTI is worried soaring energy prices will increase production costs, notably for oil, steel and aluminium. Such a move would eventually cause people to pay more for goods and services at a time when the economy is already sluggish because of the pandemic, said Mr Supant.
Inflation in the first six months this year may increase to 3%, although the rate should stand at 1.5%-2.5% for the whole year, according to an estimate made on Feb 2 by the Joint Standing Committee on Commerce, Industry and Banking.
If a war broke out between Russia and Ukraine — which would be helped by its allies — logistics is another sector that would feel the pain as oil and natural gas represent its core costs, said Jareeporn Jarukornsakul, chairman and group executive of WHA Corporation Plc, Thailand’s largest developer of built-to-suit logistics facilities.
However, Ms Jareeporn believes WHA would not be seriously affected because the company prepared by moving towards alternative energy, particularly solar energy and electric vehicles, to be less dependent on oil. WHA also adopted plans to reduce operating costs and increase efficiency in running logistics services, she said.
NO END IN SIGHT
Ronnarong Phoolpipat, director-general of the Trade Policy and Strategy Office, said the conflict between Russia and the West over Ukraine is not likely to end anytime soon and any economic sanctions on Russia by the US and its allies are expected to increase food and energy prices significantly.
If Russia retaliates by closing all gas pipelines to Europe and reducing crude oil and natural gas production, supply of these two would tighten, he said. Higher crude oil prices may increase the prices of food and other commodities in the world, said Mr Ronnarong.
“Energy and food prices will significantly increase if the conflict culminates in clashes between Russian and Nato troops as well as economic sanctions. Battles may well result in damage to farmland and the production of Ukraine and Russia,” he said.
Thailand should expect higher import costs because of rising oil prices and the tight supply of raw materials, said Mr Ronnarong. Thailand imports various commodities from Russia and Ukraine such as mineral fuel, iron and steel, fertiliser, aluminium and cereals.
In 2021, Thailand’s exports to Russia tallied US$1.02 billion, accounting for 0.4% of the country’s total export value. Key export products included tractors, rubber, rubber-made products, machinery and parts, electrical appliances and parts, and plastic.
Thai shipments to Ukraine totalled only $135 million, representing 0.05% of the country’s total exports. Key exports included tractors, rubber and rubber-made products, plant-based seasonings, machinery and parts.
He said the conflict is also projected to negatively affect tourism, with residents in Russia and Ukraine becoming more frugal.
RISING FUEL PRICES
Thai authorities already increased the diesel price subsidy to deal with higher global oil prices, which could soar to $100 a barrel because of the Ukraine-Russia standoff.
The board of the Oil Fuel Fund Office resolved to increase the subsidy by 0.69 baht, bringing the total support to 3.79 baht a litre. This tactic helps consumers with living costs, but does not reduce the diesel price.
Domestic diesel prices have continued to rise since Jan 5 and would have reached 33.04 baht had the government not capped the price at less than 30 baht per litre late last year. The subsidy previously stood at 3.1 baht a litre, keeping the diesel price at 29.94 a litre.
A recent decision by the Energy Policy Administration Committee to have oil retailers sell only diesel blended with 5% palm oil-derived methyl ester instead of the 7% formula is meant to ease the impact of the higher price associated with the greater methyl ester content. Sales of biodiesel B5, a mix of 5% methyl ester and diesel, take effect from today through March 31.
According to a report from the national oil and gas conglomerate PTT Plc, if the dispute between Ukraine and Russia escalates, a gas pipeline from Russia to Western Europe may be disrupted and demand for oil in the EU would increase, driving up global oil prices. Up to 38% of energy consumption in the EU comes from gas supplied by Russia.
Russia may use the pipeline to discourage the EU from interfering in the conflict, said the report.
While the release of 2.4 million barrels of oil from the US reserve increases global supply, prices may keep rising thanks to the 5% uptick in China’s refined oil demand to 7.74 million barrels per day as it hosts the Winter Olympic Games, said PTT.
Read More: Ripple effect from Russia-Ukraine standoff