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russia ukraine impact on stock markets: Russia sanctions: How bad is the news for Dalal Street investors?


NEW DELHI: A host of countries including the US, the UK, Germany and Japan have announced sanctions against Russia over its invasion of two eastern Ukrainian regions. But the initial reaction from the market globally suggests the announcements were not as harsh as expected, though further sanctions could not be ruled out. Here are a few points investors need to know, before taking an investment call at this point in time:

India no big buyer of Russian crude

Analysts noted that Russia exports about 5 million barrels per day of crude oil, more than half of which goes to Europe and 42 per cent to Asia. India does not buy even 1 per cent of Russian crude oil exports as most Indian refineries cannot process the heavy crudes that Russia exports. Besides, lack of pipelines between the two countries means transportation cost is high. This is even as Russia is a close Indian partner in defence sector.



As ICICI Securities noted, the largest single customer for Russia’s oil exports is China, which buys 31 per cent of the total Russian oil exports, followed by Germany and the Netherlands (11 per cent each).

“Any sanctions on Russia will hit China’s access to oil, but have little direct impact on India. Countries defying sanctions would face reprisals from the western banking system – and this could prove very disruptive to China’s ability to participate in the global trading system unhindered. This would offer a potentially positive opportunity for India as an alternative supplier of manufactured exports, although the primary initial benefits would flow to ASEAN, Taiwan, Korea and Japan,” the brokerage said.

EU trade may rise

ICICI Securities argued that given that the EU is the biggest market for India’s exports, any supply disruptions to the EU are also likely to generate greater demand for steel, engineering goods, for which India is an alternate supplier.

“The factors that caused India’s exports to outperform the world in 2021 will continue to hold in 2022, allowing exports to remain robust. India buys very little oil and gas from Russia, so the near-term disruptions to the Indian economy will be minimal, apart from the higher oil import bill,” ICICI Securities said.

What if crude prices boil further?
Russia accounts for 11 per cent of global crude oil exports. ICICI Securities said that if sanctions take about 60 per cent of this off global markets — with China, Belarus, and a few other customers possibly defying the sanctions — world crude oil supply would decline by 3 mmbd, and the Brent crude price would likely shoot above $110 a barrel level.

“The possible revival of the Iran nuclear deal (JCPOA), now at a crucial stage of negotiations, could restore about half of this supply, adding about 1.5mmbd of production and exports within a few months. Iran’s production has declined to 2.5 mmbd currently, from 4 mmbd before the sanctions were re-imposed in 2018. However, even with the possible restoration of Iran as a major crude oil exporter, Brent would likely remain above $100 a barrel for much of 2022,” it said.

That said, the biggest longer-term swing factor for global oil prices, will likely be the impact on shale-oil production from the US.

When Brent falls below $50-60, US shale oil becomes unviable, except in Texas’s Permian basin. Brent has already been above $75 for nearly 6 months and consistently above $60 for over a year since 8 February 2021, ICICI Securities said.

“Given the nature of shale-oil, about 60 per cent of output from new fields is extracted in the first year, and new investment in fracking/drilling is required constantly. The longer Brent stays above US$110/bbl, the greater the possibility of US production surging to 14mmbd, causing Brent prices to fall sharply once Iran returns to the market,” ICICI Securities said.

Why are sanctions dull so far?
Kotak Institutional Equites said given the EU’s significant dependence on Russian energy imports, 26 per cent of overall oil demand and 38 per cent of overall gas demand, it does not believe Russia’s energy exports will be sanctioned initially.

But a further escalation, or in the worst case war, could significantly change the situation and tighten energy markets further, it warned.

Jeffrey Halley, Senior Market Analyst for Asia Pacific at OANDA, said the most significant sanction so far is from Germany, which halted the Nord Stream 2 pipeline project.

“Nothing can disguise that Europe’s strategic NIMBY-ism (Not In My Back Yard) ineptitude in tying their energy reliance to Russia leaves the bloc woefully exposed to further escalations,” he said.

“The unfortunate fact of the transition to renewable energy is that energy storage technology lags behind renewable generating technology badly. Shutting down nuclear and outsourcing your energy needs to unreliable partners out East, be it plastic recycling, energy, or rare earth elements leave you strategically exposed when the flag goes up. As long as this crisis lasts, I will struggle to be structurally bullish on the Euro or Europe,” he said.

Look beyond short term hiccups: Analysts
Sunil Singhania of Abakkus Asset Manager said issues like inflation, interest rate worries and upcoming state elections were already known but the new joker in the pack is the Russia-Ukraine crisis. “Over the last three-four months, the market was looking at some kind of reason to cool down a bit. Obviously, the cooling down a bit has got a little bit exaggerated, particularly in the broader market. In the absolute term, the market momentum to some extent has been broken and we are in a consolidation phase. We are not very negative in the market, even in the near term,” Singhania told ET NOW.

Trideep Bhattacharya of Edelweiss AMC said the message that it is conveying to its clients is that the first half of 2022 will be volatile, driven by not just geopolitics but also fears on inflation and US interest rates.

“In the second half of the year the earnings recovery would start to take some shape and form. We have been advising investors to use volatility in the first half to actually get invested,” he said.


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