Tensions have risen between Ukraine and Russia after Russian President Vladimir Putin authorized a “special military operation” in Ukraine on February 24, 2022. This was even after months of negotiations and diplomatic talks with the west.
Following air and missile strikes, Russian troops launched attacks from Ukraine’s northern eastern borders and the Crimean peninsula in the south. Ukraine president Volodymyr Zelenskyy responded by declaring martial law, severing diplomatic ties with Russia, and ordering general mobilization.
The invasion was preceded by Russian military buildup that began in early 2021, during which Russian President Vladimir Putin condemned the post-1997 expansion of the North Atlantic Treaty Organization (NATO). This was due to the possibility of threatening his country’s security, so he demanded that Ukraine be legally prohibited from joining the military alliance.
What is NATO
Founded in 1949, the North Atlantic Treaty Organization (NATO) was the United States’ first peacetime military alliance outside Western Hemisphere. Its stated goal is to protect the members from external aggression.
Following the devastation of World War II, the nations of Europe struggled to rebuild their economies and ensure their security. It required a massive influx of aid to assist war-torn landscapes and reestablish industries and produce food, while the others required assurances against a resurgent Germany or Soviet Union incursions.
The United States saw the need for a strong, rearmed, and integrated Europe to prevent communist expansion across the continent. As a result, Secretary of State George Marshall proposed a large-scale economic assistance program for Europe. The European Recovery Program also known as Marshall Plan, facilitated European economic integration and promoted the concept of shared interests and cooperation between the US and Europe.
Currently, the military alliance has 30 member countries, including former Soviet states such as Latvia, Estonia, and Lithuania, and has over 7 million active troops ready for deployment at any time.
Sanctions to Russia
Following the invasion of Ukraine, Western countries such as the United Kingdom, Europe, United States, and their allies have agreed to imposed heavy sanctions on Russia to destabilize its economy and punish their government for taking military action.
Among the measures is the removal of certain Russian banks from the Swift messaging system, which will cut them from the international financial system and “harm their ability to operate globally.” Western leaders have also agreed to freeze the assets of Russia’s central bank to limit the country’s access to its foreign reserves.
In addition, they have announced restrictions on products that can be shipped to Russia. These include dual-use goods: supplies that can be used for both civilian and military purposes such as high-tech items, chemicals, or lasers.
With an export ban on certain materials, the EU intends to make it impossible for Russia to upgrade its oil refineries. The sale of aircraft and equipment to Russian airlines is prohibited in an attempt to cripple the country’s economy and connectivity.
Following the recent events from the eastern part of Europe, the main question now is what impact it might have on our country’s economy, even the tensions are on the other side of the globe?
Consequences to the Philippine Economy
The Philippines may be far from Ukraine but it can have a significant impact on the country and the rest of the world. The conflict has pushed up commodity prices and it is expected to have an immediate effect as our local economy reopens.
The world is already dealing with high energy prices and supply shortage, which has resulted in high utility bills and adversity at the gas pump for consumers. Russia’s invasion of Ukraine has devastated energy markets, since Europe relies on Russia’s natural gas supplies, and is also a major producer of oil.
Russia is the world’s third-largest producer of petroleum and the second-largest producer of natural gas, accounting for nearly 17% of supply in 2020. It exports more than 35% of its output, and approximately 70% is delivered to Europe via pipeline, with much of it passing through Ukraine. Nord Stream 1 is the largest, with a capacity of 55 cubic meters annually.
To add, Russia is one of the world’s largest suppliers of fertilizer, related raw materials, and a major exporter of copper, aluminum, palladium, sulfur, and other essential commodities. According to World Bank data, Russia accounted for 1.9 percent of global trade in 2020, down from 2.8 percent in 2013.
Driving up energy and oil prices
The impact of the crisis has begun to spread in other nations around the globe, with oil prices skyrocketing as a result of ongoing strikes and financial sanctions imposed by the US and Western allies. Brent crude, one of the global benchmarks, has breached $100 per barrel for the first time since 2014.
According to the Observatory of Economic Complexity (OEC), Russia exported crude petroleum to the Philippines, amounting to $96.2 million. Data from the Department of Energy (DOE) showed that the country imports 77.4% of its gasoline, 80% of its diesel, and 84% of its kerosene needs.
According to the DOE, the ongoing conflicts will not have a direct impact on our country’s oil supply, since we do not buy oil directly from Russia. However, the country’s major trading partners including China, South Korea, and Japan are buying from Russia.
The prolonged tensions between Russia and Ukraine will have a significant effect on the Philippines’ other trading partners. The disruption in the global supply chain and soaring prices of oil could potentially cause a domino effect, putting the country’s inflation upward.
In a television interview, Rina Abad, director of the DOE-Oil Industry Management Bureau, stated that the Philippines could suffer an indirect hit if oil supply disruptions occur as a result of the conflict.
The increase in global oil prices caused by the military conflict resulted in a year-to-date adjustment in the country’s oil costs. Based on Unioil’s latest fuel forecast, diesel prices could rise by P12.20 to P12.30 per liter and gasoline by P6.80 to P7 per liter from March 15 to 21. According to the Bangko Sentral ng Pilipinas (BSP), surging global oil prices could have an impact on transportation fares.
Meanwhile, power generators anticipate higher coal and fuel prices to drive up power rates, after the price of thermal coal hit $446 per ton on March 3, according to the DOE) following consultations with the industry. The Philippine Independent Power Producers Association (PIPPA) estimates that the price of fuel may drive rates to P9/kWh after the price of coal hit $446 per ton on March 3.
Agricultural commodities
The conflict between Russia and Ukraine also had an impact on global agricultural supply and prices. Wheat, oil, iron and steel, electronics, and other agricultural products are among the Philippines’ top merchandise trades between the two countries.
Russia and Ukraine produce nearly a quarter of the world’s wheat, the main ingredient used to make bread, pasta, and other foods. Russia and Ukraine are also major suppliers of barley, sunflower seed oil, and corn, among other goods.
According to Philippine National Bank (PNB) economist Alvin Arogo, the primary inflationary impact of the Russia-Ukraine conflict is higher commodity prices, particularly oil and wheat. If the conflict does not end soon, resulting in higher oil and wheat prices for the majority of 2022, average inflation for the year will likely be closer to our upside forecast of 4.1 percent.
Caroline Bain, chief commodities economist said that “Higher energy prices push up the cost of production of both metals and agriculture. Agri commodity prices are going to be higher for longer.” She also warned of possible crop damage, which could lead to further price increases, considering that the majority of Russian and Ukrainian agricultural exports pass through Black Sea ports.
Security Bank AVP and chief economist Robert Dan Roces stated in an interview with CNN Philippines on Feb.24 that the value of agricultural commodities imported by the Philippines, such as wheat and soybeans, have already increased.
Meanwhile, Mr. Steven T. Cua, president of the Philippine Amalgamated Supermarkets Association, stated that some grocery prices increased in early March in response to higher fuel costs. Prices for basic necessities and high-value commodities have risen by 3% to 6%, while as high as 8% to 15% for non-essentials.
Opportunities in Renewable energy investments
Accelerating renewable energy investment is seen as a significant benefit to our country from the tensions in Eastern Europe, since renewables become more viable as fuel prices continue to rise.
However, clean energy sources must keep up with rising demand, and stakeholders must build more facilities to meet the government’s goal of increasing the share of renewable energy in the total energy mix, according to CAC Energy president and CEO John Francia.
Meanwhile, Finance Secretary Carlos Dominguez stated that the country has an Energy Transition Mechanism Project that aims to accelerate the retirement of coal plants in the country. According to Energy Secretary Alfonso Cusi, the government is also considering incorporating nuclear power into its energy mix.
The need for energy independence
With all the uncertainty that is happening globally, it emphasizes the importance of energy independence and security, especially for a country like the Philippines. Further disruptions of supply and demand in the fuel market, where prices have been rapidly rising, have highlighted the importance of developing more energy sources and combating climate change.
Conflicts can provide opportunities to recognize that we need to accelerate our efforts to create greener initiatives and encourage long-term changes in energy production, land use, or urban development.
We must define pathways to reduce our reliance on gas and oil, as well as expand our climate recovery and mitigation projects, and climate adaptation programs. This will strengthen our resilience, particularly during the early stages of our country’s economic recovery.
Furthermore, in the midst of volatile and ever-changing geopolitical realities in the Indo-Pacific region and other parts of the world, ASEAN nations, including the Philippines, must be an association that promotes peace, development, and stability, while remaining nuclear-free zone.
Members of the ASEAN must be consistent and steadfast in promoting ASEAN Centrality on issues such as regional security architecture, regional order, and power dynamics between external powers with regional interests.
Written by: Mary Grace Ladringan and Angelo Gandia
Aviso Valuation and Advisory Corp. is a real estate consultancy firm that offers valuation and business advisory services compliant to international standards such as the International Valuation Standards (IVS) and International Financial Reporting Standards (IFRS). To assure that we only produce high-quality deliverables, as needed, we do tasks beyond the usual appraisal process like verifying pertinent property documents (i.e. land titles, tax declarations, etc.) with the appropriate government agencies for due diligence purposes prior to the acquisition of the properties.
__________________________________
https://www.nato.int/nato-welcome/index.html
https://history.state.gov/milestones/1945-1952/nato
https://www.bbc.com/news/world-europe-60125659
https://theaseanpost.com/article/ukraine-crisis-lessons-asia-philippines
https://newsinfo.inquirer.net/1562204/putins-war-on-ukraine-and-impact-on-ph-prices
https://www.aljazeera.com/news/2022/2/27/russias-invasion-of-ukraine-list-of-key-moments-from-day-4
https://www.bworldonline.com/power-rates-headed-upward-due-to-more-expensive-coal/
https://www.cnnphilippines.com/news/2022/3/12/fuel-price-hike-March-15-21.html
