Rising prices and volatility: How the Ukraine crisis could impact Singaporeans

SINGAPORE – Russia’s recognition of and ordering of troops into two separatist regions in Ukraine has led Western governments to retaliate with sanctions on the likes of those in Russia’s defence, banking and financial sector.

Oil prices rose to nearly US$100 a barrel on Tuesday (Feb 22) – its highest level since 2014 – after Moscow ordered troops into the breakaway regions, before edging lower on Wednesday, but there could be further price volatility if the conflict continues to worsen.

A spokesman for Singapore’s Ministry of Foreign Affairs said in a statement on Tuesday that all parties involved in the crisis must pursue dialogue to reach a peaceful settlement and avoid any action that would further raise tensions.

Earlier this week, several European airlines suspended flights to and out of Ukraine, citing safety concerns amid the escalating conflict. The International Air Transport Association previously noted in January that most airlines already avoid the airspace around the affected regions in Ukraine following earlier tensions.

The Straits Times looks at the impact of the Ukraine crisis on prices and how Singaporeans could be affected.

1. Higher food inflation

Analysts have cautioned that developments in Ukraine could impact the outlook for inflation, and prices of food staples such as wheat and corn could rise sharply.

Ukraine is the world’s third-largest exporter of corn and the fourth-largest exporter of wheat, while Russia is the world’s top wheat importer.

Any disruption of food supplies out of the region could further fuel food inflation – world food prices jumped 28 per cent in 2021 to their highest level in a decade.

Invesco chief global market strategist Kristina Hooper in a note said that the prices of wheat and corn, alongside other commodities such as palladium, are expected to rise.

Food inflation was one of the main drivers of higher consumer prices in Singapore in January, rising 2.6 per cent year on year on the back of higher inflation for both non-cooked food and prepared meals.

2. Increase in electricity costs

High energy prices have been plaguing global markets, with gas reaching record prices in recent months.

With Europe heavily reliant on Russian gas transiting through Ukraine – Russia provides Europe with around 40 per cent of its natural gas supply – the energy markets may also be hit.

European gas benchmarks and electricity prices in major European cities have been higher since the beginning of the year as the Ukraine crisis worsened.

Singapore largely relies on natural gas for electricity generation, and any impact on global gas prices could mean higher electricity prices for the Republic down the road.

Electricity and gas inflation in Singapore hit 17.2 per cent in January due to a steeper increase in electricity and gas tariffs.

3. Higher pump prices

Oil traders are vigilant about a potential escalation in conflict that may lead to restrictions on Russia’s oil exports, adding to supply constraints in an already tight market, said DailyFX strategist Margaret Yang in a research note on Wednesday.

Russia is the second-largest oil exporter after Saudi Arabia, shipping about five million barrels of crude oil per day.

“If the Ukraine crisis deepens further, it may spiral into an energy crisis, and push oil and gas prices higher,” she wrote.

In recent weeks, pump prices have been on the rise in Singapore, driven by higher crude oil and product costs.

For example, the price of 95-octane fuel has gone up from around $2.65 a litre in mid-January to around $2.80 a litre as at mid-February.

With the price of Brent crude oil reaching a multi-year high and the possibility of further increases should tensions worsen, this could mean higher diesel and petrol costs for motorists here.

4. Supply chain disruption and further inflation risks

Global supply chains, already battered by Covid-19-related challenges, could be further dislocated by the geopolitical tensions.

Singapore’s Ministry of Trade and Industry and Monetary Authority of Singapore, in a joint release of consumer price developments for January 2022, noted that while ongoing external supply constraints should ease in the second half of the year, leading to some moderation in imported inflation, there remain upside risks to inflation due to pandemic-related and geopolitical shocks that could further disrupt global supply chains.

Sanctions imposed by Western nations could hurt the Russian economy and possibly its trade partners which rely on its energy reports.

Escalating tensions and sanctions could also result in energy supply disruptions and potentially hamper the already burdened supply chains further, contributing to further inflation risks.