On Thursday, February 24, the long-running tensions between Russia and Ukraine descended into a full-blown war. Russian troops crossed into Ukraine, and the latter’s army mobilized to face the incoming threat. It was the start of the most violent conflict in Europe since the turn of the century.
Observers from across the globe have watched it unfold, and wondered what the outcome of the clash would be for the countries involved. For Ukraine, perhaps physically devastated cities; for Russia, an economy weakened by sanctions imposed on it by the West and its allies.
Thousands of miles away, people in Nigeria have followed the situation with keen interest. But while we’ve paid a fair deal of attention to the possible fate of the countries at war, not as much has been said about how the conflict could affect Nigeria. There’s an implicit assumption by many in these parts that the war poses little or no risk for nations a long way off from the war.
But this isn’t the case.
While Nigeria appears far removed from the battlegrounds of Kyiv or Kharkiv, it’s linked to Ukraine and Russia by trade (at the very least), as it is to the rest of the world. Any disruption to this trade– which can be caused by war –is bound to have significant consequences for us.
We’ll have a look at one such consequence for Nigeria below.
Rising Oil Prices And The Petrol Subsidy
As it turns out, Russia is the world’s third-largest oil producer, contributing about 11% of crude oil supplies. Ukraine is also an important transit point for global oil shipments. A disruption to the supply of oil enabled by these two countries will make the product less available, and cause its price to rise. That’s exactly what has happened.
Even prior to the war breaking out, the widespread fear of a conflict occurring was already driving crude oil prices higher. And in the days since the war began, crude oil prices have shot up even further. As of the time this article was written, Brent Crude, the benchmark against which the price of Nigeria’s crude oil is set, has crossed $110 per barrel. That’s the highest it’s been since 2014.
This ought to be good news for Nigeria, a country that earns a majority of its export income from crude oil sales. Higher oil prices should translate to greater revenues. But because Nigeria doesn’t refine its oil (due to the fact that its refineries aren’t functional), it has to import most of the petroleum that it needs. The result? It spends its revenues on the importation of refined petrol.
Then there’s the subsidy on petrol (Premium Motor Spirit, or PMS). The Nigerian government has already budgeted ₦3 trillion to cover the cost of petrol subsidy in 2022. With the sharp rise of oil prices, Nigeria will be spending far more on petrol imports and subsidies. The higher oil prices will be a net negative for the country.
Nigeria could either choose to fund the subsidy with more debt or eliminate it. If oil prices hold at their current levels or rise even further, the government may adjust petrol pump prices upward, or let it be determined by market forces. In either scenario, we’ll have to pay more than the present official pump price for petrol.
Wheat, Steel, And More
We should be concerned about more than just PMS.
Earlier, we referred to the trade between Nigeria on one hand and Russia and Ukraine on the other. Here’s where we take a closer look at them.
Russia is the world’s largest wheat exporter. Data from the Observatory of Economic Complexity (OEC) indicates that it sold $8.14 billion worth of wheat at the international markets in 2019 alone. It’s also Nigeria’s third-biggest source of commodity, with about ₦898.2 billion worth of wheat imported from that country between January and September 2021 (according to the National Bureau of Statistics).
The ongoing war between Russia and Ukraine is expected to disrupt wheat supplies from Russia. The resulting undersupply of wheat could push wheat prices higher, and make it more expensive for importing countries like Nigeria. We may see a hike in the price of wheat-based items like flour, bread and pasta soon.
Something similar may happen with steel. In 2020, Nigeria imported $124.6 million and $112.46 million worth of steel from Ukraine and Russia respectively (as reported by the UN COMTRADE database). With Ukraine now at war, we would be forced to seek an alternative source for the steel that it provides. In the meantime, steel prices may climb, and so will the structures which it’s used to make or build.
Nigeria exports far less to Russia and Ukraine than it imports from them. Although the individual businesses that supply materials like plastics and rubber to Ukraine or fish and fruits to Russia may struggle, the effect of the disruption to the trade in these commodities will pale in comparison to the uncertainties related to imports.
A Summary Of Outcomes
This isn’t the most convenient time for Nigeria to face challenges like the ones that could result from the Russia-Ukraine war. They have the potential to exacerbate an already aggressive inflationary trend and threaten the economy’s slow and fragile growth.
But we can hope that the government and its policymakers will have the courage to take the actions required to tow the economy off a problematic course and drive it down a path that leads to a more promising future.Featured Image Source: Bloomberg
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