“Lanka’s macro outlook will be impacted” | Sunday Observer
Russian invasion of Ukraine

“Lanka’s macro outlook will be impacted”

27 February, 2022

Higher commodity prices stemming from the Russian invasion of Ukraine will impact Sri Lanka’s macro outlook further putting pressure on the Balance of Payments and currency, said Ceylon Chamber of Commerce Chief Economist Shiran Fernando.

He said the potential impact on tourism inflows to Sri Lanka would be high as Russia is ranked among the top source markets for Sri Lanka.

Sri Lanka has seen an increase in the inflow of tourists from Russia and Ukraine, both ranked in the top five source markets in December 2021 and January 2020, Fernando said, adding that it would also impact Sri Lanka’s tea exports to Russia, a key market for Ceylon Tea.

He said Russia is ranked as Sri Lanka’s second export destination for tea (a share of 11% in tea exports in 2020) bringing in an export value of USD 132 mn last year.

He said Russia is the third largest oil producer in the world with a share of 11% (in 2020) and added that any disruption in oil supply would be felt not only in the EU but also across the globe.

There have already been price escalations in global oil markets with oil prices increasing to an average of USD 69/ bbl in 2021, a sharp increase of 67% over 2020, as a result of recovered oil demand and high natural gas prices which encouraged use of oil as a substitute. 

Oil prices touched $95 a barrel last week (Feb 16) with the latest developments in the Russia-Ukraine crisis. US oil prices also reached a seven-year high of $95.82 a barrel in mid February.

Russia is the EU›s fifth largest trade partner, representing 4.8% of the EU’s total trade in goods with the world last year, Fernando said, adding  that the EU is Russia›s biggest trade partner, accounting for 37.3% of the country’s total trade in goods with the world in 2020. 36.5% of Russia’s imports came from the EU and 37.9% of its exports went to the EU.

There are concerns over the possible disruption of gas supplies from Russia to the EU due to heightened tensions between Moscow and the EU.

The EU relies on Russia for around 35% of its natural gas needs. Russia is the origin of 26% of the EU’s oil imports and 40% of the EU’s gas imports. Energy price volatility is likely to have direct impacts on the volume of bilateral trade between EU and Russia.

The EU gas market is built as network of pipelines and many supply routes bypass Ukraine, Fernando said, adding that the two-way trade in services between the EU and Russia last year amounted to €27.7 billion, with EU imports of services from Russia representing €8.9 billion and exports of services to Russia accounting for €18.8 billion. He said the EU is the largest investor in Russia. In 2019, the EU’s outward foreign direct investment (FDI) stock in Russia amounted to €311.4 billion, Russia’s FDI stock in the EU was estimated at €136 billion.

Sri Lanka’s trade deficit narrowed marginally last year though it still amounts to a considerable gap despite the import restrictions.

Tea Exporters Association President Sanjaya Herath said the Association is adopting a wait and see policy as it is too early to comment on any adverse repercussions on tea exports.

However, there could be an increase in freight rates, shipping lines reacting and sanctions on state banks which may not directly affect transactions between Russia and the rest of the world. Ceylon National Chamber of Industries Chairman Canisius Fernando said the invasion will have a major impact on Sri Lanka’s exports particularly tea to Russia and the CIS, a large market for the beverage.

Joint Apparels Association Forum (JAAF) Secretary General Yohan Lawrence said Sri Lanka’s trade volume to these countries is relatively small. However, any escalation of the crisis between Ukraine and Russia involving EU region countries should be averted at any cost as it would have major ramifications on global trade.

According to the Energy Minister the fuel situation is grim with few days of stocks left in the country. It has been speculated that global oil prices would surpass the USD 100 per barrel mark.