Economy

How Russia-Ukraine row will hurt Kenyan homes

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Russian President Vladimir Putin. PHOTO | AFP

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Summary

  • Disruptions from any military action or sanctions could see oil, bread, and wheat flour prices increase.
  • A major risk event usually sees investors rushing back to bonds and the safest assets in what could hurt the flow of foreign investors to the Nairobi Securities Exchange (NSE).
  • Russian President Vladimir Putin on Monday called an unscheduled ‘extraordinary’ meeting of his full security council amid fears he is about to give the order for invasion.

Kenyan households are braced for higher energy and food costs as a result of the ongoing threat of war between Russia and Ukraine, which has sent global oil prices soaring and restricted wheat exports.

The conflict could also trigger a sell-off of shares, pulling down a market that has fully recovered from the economic damage caused by the Covid-19 pandemic.

A major risk event usually sees investors rushing back to bonds and the safest assets in what could hurt the flow of foreign investors to the Nairobi Securities Exchange (NSE) #ticker:NSE given the foreigners account for 58 percent of trading at the bourse.

The Russian invasion of Ukraine risks further fanning oil prices — and therefore inflation through costly transport, electricity and other manufactured goods.

Disruptions from any military action or sanctions could also see bread and wheat flour prices rally in Kenya, which relies on imported wheat from Ukraine and Russia.

Russian President Vladimir Putin on Monday called an unscheduled ‘extraordinary’ meeting of his full security council amid fears he is about to give the order for the invasion - sparking a bloody war and the most serious standoff between East and West since the Cold War.

Moscow has been threatened with sanctions if it invades Ukraine by western powers, which include being denied the chance to trade using the dollar, crippling its ability to trade with countries such as Kenya.

Russia is the fourth-biggest buyer of Kenyan tea, having taken up produce worth Sh6.2 billion in the 11 months to November 2021.

Prof Macharia Munene, a lecturer of history and international relations at United States International University (USIU), said the standoff was bound to affect the prices of key commodities like oil and grains.

“While Ukraine is far from Nairobi, the fact that the global price of oil is going up has a negative effect and direct impact on the Kenyan economy. For anything we import, the price will likely go up because of the problem in Eastern Europe,” he said.

The price of crude is expected to near $150 a barrel, according to JP Morgan, from the current $94.20, with traders worried that the geopolitical tension over Ukraine could cause disruption to Moscow’s fuel exports.

Traders calculate that supplies will struggle to cushion the effect from any significant disruption in Russian fossil fuel exports.

Demand for oil has outpaced production growth as economies slowly rebound from the worst of the pandemic, leaving the market with a small buffer to mitigate an oil supply shock.

Russia is the world’s third-largest oil producer, and if a conflict in Ukraine leads to a substantial decrease in the flow of Russian barrels to market, it would be risky for the tight balance between supply and demand.

This has the potential to drive Kenya’s pump prices upward and overwhelm the current State-backed subsidy that has kept pump prices unchanged for the fourth month in a row.

Consumers would have paid Sh133.89 for a litre of diesel in the absence of the subsidy that has kept the commodity at Sh110.60 based on the barrel at $82.03.

The rally in oil prices could raise the prices of nearly all other goods.

Besides the energy market, Kenya faces a further rise in the cost of bread and cakes on rising wheat prices, which will make the chapatis costly.

Russia and Ukraine are major sources of wheat imports for Kenya, which ships in 75 percent of its annual demand of 1.2 million metric tonnes of grain. Russia is the world’s leading wheat exporter, and Ukraine the fourth. Both countries ship their grain from Black Sea ports, which are directly in the line of disruptions from any conflict between them.

A disruption in wheat shipments will make the grains more costly in Kenya at a moment when Russia has imposed higher duty on exports to protect its local market.

The rising price of wheat has pushed up the cost of bread in Kenya for the first time in four years, hitting household budgets at a time when the price of milk has also gone up.

Nearly all bread brands recorded a price increase in January, with the 400g loaf retailing for Sh5 more at Sh55 and the 600g loaf being sold at Sh70 from Sh65 previously.

Bread is a breakfast staple in the country, meaning that any price increase is keenly felt.

A tonne of wheat has increased 30 percent to Sh33,000 from Sh25,300 in December, sparking a rally both on bakers and standard flour.

The conflict in Eastern Europe also has the potential to put the country in a tight spot diplomatically, given the different stances global powers have taken on the dispute.

While the US and its western allies in NATO are backing the Ukrainian government in Kiev, China has expressed support for Russia’s concerns, while calling for restraint from both sides.

Prof Munene said that Kenya, which maintains strong trading and diplomatic ties with the US, Russia and China, will be best served by keeping off the conflict.

The financial markets are also braced for potential capital flight to safety in Western markets, signalling a blow to the NSE, which is already grappling with high foreign net sales.

The dollar has also gained against other currencies globally amid the crisis as investors view the currency as a safe haven, potentially pointing to further pressure on the shilling locally.

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