Russia and Ukraine: how would the geopolitical crisis impact the Peruvian economy?

The revival of geopolitical tension between Russia and Ukraine has not only set off alarms in many economies around the globe. Although a direct confrontation has not yet been reached, for now only sanctions from United Statesthe truth is that the peruvian families they would feel its ravages despite the fact that the conflict takes place thousands of kilometers away.

The reason is simple: the World economy and financial, foreign exchange, and commodity markets are interconnected.

Arturo García, postgraduate professor at ESAN University, stressed that, up to now, there is a moderate impact, but that its degree will depend on the intensity, duration and magnitude of the conflict; that is, “if only Russia and Ukraine are focused or if other actors such as the North Atlantic Organization (NATO) and the US are added.”

For his part, Jorge Barrionuevo, finance advisor at Renta 4 SAB, stated that the situation will exert pressure on the price of agricultural commodities and the Petroleum; which will also affect local inflation, since the strength of the Slavic nation lies in the export of crude oil and grains.

Petroleum

Since January 10, 2022, the date on which the Russians and the Americans began negotiations in Geneva, crude oil has increased its value more than it had ended in 2020. Thus, the American WTI fuel went from costing US$ 78.23 to $92.35; its highest estimate came on February 14 ($95.46). Its British pair, Brent, reached US$96.84 on February 22, after having settled at US$80.87.

The Petroleum it could reach $120 to $140, adding about 2 percentage points to headline inflation in advanced economies; advanced Capital Economics to Bloomberg.

Although shipments of Russian crude are almost nil or limited to our country, experts affirm that the supply and demand of other types, such as WTI and the Brent if they are altered.

“Definitely, this is going to affect it because it is going to translate into a greater rise in global oil prices and local fuels, since companies have to import it and they have to do so at the prices that prevail at the time” warned Aurelio Ochoa, engineer and former president of PerúPetro.

Ochoa explained that Peru consumes 200,000 barrels of oil daily and imports between 180,000 and 200,000 barrels in the same period. Of the crude purchased, 75% of the oil is imported, detailed Barrionuevo, and comes from Ecuador, Brazil or Colombia.

So far this year, the reference prices of fuels, published by Osinergmin, presented an accumulated rise of up to S/ 1.63 per gallon, such as diesel B50-2500 ppm that went from S/ 9.82 on December 27 to S/ 11.47 this week.

Grain

The Russians have consolidated their exports of wheat since 2017. Meanwhile, Ukraine could be the world’s third largest exporter of corn in 2022 and the fourth largest exporter of wheat; according to the International Grains Council.

The entity reported that in January the wheat it became 27.3% more expensive than in the same period of 2021; and the corn 14.2% more. For its part, Bloomberg reports an increase in the futures of both grains between January 10 and February 22 of 10.6% (wheat) and 10.8% (corn).

Ukraine and Russia account for a quarter of world exports.

In 2021, our main wheat suppliers were Canada (1,395,580 MT), United States (214,989 MT), Argentina (177,685) and Russia (65,728 MT); according to Midagri information. The corn It came from Argentina (893,548,484 CIF), the United States (158,292,349 CIF), Brazil (13,741,938 CIF) and Bolivia (6,470,525 CIF).

Ramón Diez, an expert in agricultural economics from the Agrarian University, explained that the value of grains would grow more, since the Russian-Ukrainian conflict has added to their scarcity due to the severe drought that is plaguing Brazil and Argentina; both producers and exporters of corn and wheat.

High inflation, high dollar and capital flight from the BVL

Inflation in our country reached its highest ceiling in 13 years, in 2021; however, in January, this indicator was the lowest in nine months, registering only 0.04%, according to the Central Reserve Bank of Peru (BCRP). Barrionuevo explained that a factor that added to the result was the fall of the dollar, which accumulates -6.26% in 2022.

Both results were a consequence of the seven continuous rises in the reference rate by the BCRP, which today stands at 3.5%.

The analyst also assured that the Lima Stock Exchange is the market that has risen the most in the world with close to 20%; but this almost warlike scenario has had a brief impact on the park in the capital.

“The greatest growth occurred in January and now that this conflict has been reactivated, we see that there has been a slight drop in the BVL that has been correlated with the S&P 500, which is the US index,” he said.

An intensification of the conflict in Eastern Europe could “feed inflationary pressures throughout the world and, to the extent that this armed conflict lasts, it could cause the BCRP to raise the reference rate to counteract it,” Garcia said.

And it is that, investors would leave the appetite for risk to take refuge in the dollar with which its price would increase. “Swallow capital would come out of emerging markets like Peru, since most investors are foreigners, that will make them sell titles and sell soles and buy dollars and the exchange rate will rise, although the prices of minerals and the trade balance Peru would help mitigate this,” he specified.

Another actor that is paying attention is the United States Federal Reserve, which must announce next month whether or not to raise its reference rate to combat the inflation that in January it reached a year-on-year rate of 7.5% and that it could increase with the high price of oil; however, “the increase in oil could trigger this to be greater than 25 basis points if Russia and Ukraine do not put a stop to the crisis,” García warned, with which the greenback could rebound more.