Russia-Ukraine unrest could push up Kiwi fuel, food prices

While Ukraine and Russia are on the other side of the world, New Zealand’s economy is unlikely to escape the impact if hostility between the two nations boils over into outright conflict. Petrol prices, the kiwi dollar and food costs are all vulnerable to any military action.

Over the past few weeks, tensions have flared in Eastern Europe where Russia has amassed tens of thousands of troops along the Ukraine border.

This has led to concerns that Russia could launch a full-blown military action, plunging the region into war at a time when the European economy is already reeling from the impacts of Covid-19.

The United States has responded by readying 8500 troops to deploy to Ukraine if required.

Politicians around the world, including New Zealand Foreign Minister Nanaia Mahuta, have expressed concern about Ukraine’s sovereignty amid the Russian threat.

Prime Minister Jacinda Ardern went further, suggesting that the New Zealand Government may look to retaliate through diplomatic measures (such as limiting aid programmes or travel to New Zealand) in the event of a breach of Ukraine’s sovereignty.

Understanding the animosity between the nations requires a look back to 2014 when Russia annexed Ukraine’s Crimean Peninsula and threw its weight behind a separatist insurgency in Ukraine’s east.

The fighting that ensued killed more than 14,000 people. At the time, Ukraine accused Russia of sending troops and weapons to support the rebels – allegations that Moscow denied.

In 2015, a peace agreement was brokered, which saw Ukraine regain control of its Russian border on the condition that rebels were given amnesty and separatist regions afforded autonomy.

The agreement is complex because Russia claims it played no role in the fighting and thus shouldn’t be bound by the terms.

The icy relationship leaves the situation on a knife edge, with everyone waiting to see how far Russia is willing to push the boundary.

New Zealand may have the advantage of distance from any military action between Russia and Ukraine, but this doesn’t shelter us from the global market and economic pressures likely to emerge from any conflict.

Mark Lister, head of private wealth research for Craigs Investment Partners, says geopolitical issues are always tricky because it’s difficult to predict how some of these situations will play out.

However, he has started to warn his New Zealand clients about the growing risk posed by the unrest in the region.

“Since former US President Donald Trump left office, geopolitical risks haven’t been talked about nearly as much, although they haven’t gone away,” Lister says.

“Inflation and interest rates are getting all the attention, but geopolitical risks are also something to keep a close eye on.”

Lister believes that any direct impacts would be quite limited, but the flow-on effects could reverberate globally.

He anticipates that there could be a drop in the value of the dollar, as world markets start to flock to safe havens like the US dollar and Japanese yen.

From a sharemarket perspective, New Zealand does have the safeguard of larger, more defensive businesses that aren’t are sensitive to global unrest.

“During uncertain periods like that you usually see the more economically sensitive companies fare worst – the likes of Air New Zealand, tourism companies, retailers, banks and so forth,” Lister says.

“The more stable, defensive businesses tend to hold up much better, such as the electricity companies, Spark, Chorus, Vector and so forth.
“On balance, our sharemarket is dominated by sectors like healthcare, real estate, infrastructure and utilities, so we would be more insulated than most.”

This would be good news for KiwiSaver investors who are in more conservative funds, but those with a riskier spread could take some short-term hits (provided the unrest doesn’t drag on too long).

The biggest factor likely to influence New Zealand is any significant movement in global oil prices.

“We could expect a spike in oil prices,which would mean higher fuel costs for New Zealand consumers and businesses,” Lister says.
“This would put additional pressure on inflation and the cost of living, which is already rising more than we would like, and it would leave the Reserve Bank in an even more difficult spot – higher inflation combined with rising economic uncertainty.”

Inflation data this week came in at a 31-year high of 5.9 per cent for 2021, roughly in line with economists’ expectations.

In its analysis, Westpac said New Zealand faced a “potent cocktail of supply chain pressures and firm domestic demand” which had pushed up prices.

Economists also pointed the finger at high oil prices, boosting local petrol prices. Earlier this month, global oil prices hit a seven-year high, with local analysts predicting $3 a litre petrol prices at some point this year.

Infometrics principal economist Brad Olsen says the tension in Eastern Europe will only heap further pressure on oil prices.

“Higher energy prices would flow through to the pump in New Zealand, and over the medium term could also increase the price of some imported goods,” he says.

Grain prices are also likely to rise, which would indirectly raise the price of farm feed for Kiwi farmers. New Zealand gets its farm feed from countries closer to home, but the pressure on prices in the global market would push up prices from our suppliers too.

New Zealand’s dairy sector could also be affected, Olsen says.

“Access for New Zealand’s dairy sector into Russia could become difficult if sanctions are imposed on Russia for aggression again Ukraine.

“Dairy is the key export that New Zealand sends to Russia, meaning part of our primary sector is slightly exposed to these tensions.”

The challenge with geopolitical flare-ups is that it’s difficult to predict whether they’ll blow over or mark a prolonged period of unrest.

If anything, the troubles in Ukraine and Russia offer a reminder that global fight against the pandemic hasn’t done away with the old feuds that have always typified global politics.

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