THE escalation of the Russia-Ukraine conflict poses a huge risk to the global economic recovery which was already dampened by the ongoing pandemic.

       The most significant impact of the geopolitical unrest is the skyrocketing global commodity prices, which has resulted in heightened uncertainties globally.

       As widely discussed, Malaysia will not be spared from the impact of Russia-Ukraine crisis. In fact, the country has already felt the pinch of turmoil due to the rising commodity prices which has translated into higher domestic prices of fuel, food, animal feed and more.

       As part of economic recovery and with the slowly diminishing base effect, Malaysia’s headline inflation started to normalise since June 2021.

       However, the inflationary pressure began to escalate at the end of 2021 due to unfavourable domestic factors such as labour shortages, disruptions in supply chain caused by floods as well as the restrictions imposed on certain imported food items.

       The Russian invasion of Ukraine has further exacerbated the situation by pushing the global oil price to above US$100 (RM421) per barrel, a level which was last seen in September 2014.

       As a result, the domestic fuel price of RON97 is reaching record high levels. Conspicuously, the hike in retail pump prices will have a negative effect on domestic inflationary pressures, particularly transport inflation.

       In line with higher oil prices, food prices are also surging due to increased transport charges.

       Considering the external risk, the imported inflation also contributes to inflationary pressures in Malaysia. Russia and Ukraine are key producers and exporters of wheat and corn. And these are key ingredients for animal feed, including chicken feed.

       While we have already witnessed the impact of increase in chicken feed prices last year, the conflict between these two countries will put even more upward pressure on the domestic food prices, thus further increasing the risk of higher inflation.

       The longer the war continues, there will be a greater likelihood of imported inflation, putting pressure on goods and services in Malaysia, thus hitting at the pockets of the average Malaysian.

       If right policies are not put in place, this will eventually reduce the disposable household income of Malaysians, especially those from the low income bracket.

       The weakening of the ringgit against the US dollar is also an issue that could pose a profound impact, especially on the stability of domestic goods prices.

       According to a study by Bank Negara, the direct impact of exchange rate changes on consumer prices is often not pervasive and limited to selected items. However, it tends to have a lag effect.

       As such, future consumer prices will be based on stock being bought at current rate. Hence, if the current weakness sustains, the rise in domestic inflationary pressure will persist in the medium term and this could be worsen if supply constraints remain in place.

       Concerns over fiscal sustainability

       As disruption to Russian exports leaves the global oil market short of supplies, the oil price will likely remain high above US$100 (RM421) per barrel as long as the Russian invasion of Ukraine persists. As a net oil exporter, high oil price is a blessing as well as a curse for Malaysia.

       While the government coffers may yield higher profits from the increase in oil prices, the allocation of subsidies and social assistance by the government will also increase.

       With the RON95 and diesel prices being capped at RM2.05 per litre and RM2.15 per litre respectively, the government will have to spend a lot on fuel subsidies which have fiscal costs.

       On the other hand, the government has also kept the prices of liquefied petroleum gas and cooking oil unchanged in spite of the sharp increase in the global price.

       In this regard, fiscal balance may be worse off if the government subsidies offset the potential increment in oil-related revenue. It is expected that the government may be able to withstand the rising subsidies as it can demand higher dividend payment from Petronas with the rising oil prices.

       Nevertheless, the government might be unable to channel the additional revenue for other purposes.

       Heightened risk of recession

       Russia is one of the major oil producers and also a major supplier of wheat, aluminium, palladium, nickel and other commodities.

       On the other hand, Ukraine is major supplier of rare gases, especially neon gas, which is used in semiconductor production. On top of the rising prices, potential shortages of these commodities will add to the disruptions in the global supplies.

       However, this will unlikely pose a huge impact on Malaysia’s trade as the combined size of trade with both countries is estimated at only 0.5% of total trade.

       Though Malaysia’s is not directly affected by the trade disruptions caused by the geopolitical tension, the economic recovery may likely be derailed due to the heightened risk of recession.

       With the recent developments surrounding the Russia-Ukraine conflict, we may anticipate the oil prices to experience a further spike that will likely bring on a business cycle slowdown due to the disruption in oil trade activities.

       The concern is valid as the United States ban on Russian oil tend to exacerbate the already surging oil and food prices while the United Kingdom and European Union also said they would phase out Russian fossil fuel.

       According to Goldman Sachs, Russia supplies 11% of global oil consumption and 17% of global gas consumption. If Russia retaliates by reducing if not halting the supplies, then this could easily push the key commodity prices to new highs.

       High energy prices coupled with global supply chain disruptions has significantly increased the probability of a mid-cycle slowdown in the US and Europe.

       Being our key trading partners, an economic slowdown in the US and Europe tends to disrupt Malaysia’s external trade performance in the medium term.

       Reflecting on these concerns, the Malaysian government should proactively monitor the developments surrounding the Russian invasion of Ukraine given the negative impact this geopolitical war will likely bring to Malaysian consumers and businesses.

       Manokaran Mottain has been an economist for over 30 years and he is currently the director of Rising Success Consultancy Sdn Bhd. He has been appointed as the industrial expert to Universiti Kebangsaan Malaysia. The views expressed here are the writer’s own.