As Asia was divided in its condemnation of the Russian invasion of Ukraine, the rise of the price of commodities is having an uneven impact over the region.
The more advanced economies are facing challenges similar to those that Europe is experiencing, where inflation and energy demands are the primary concerns.
In contrast, emerging markets are more concerned for their national food security.
However, lower inflation rates in China and Japan – the largest economies in the region – are helping to maintain relatively stable prices in Asia.
Still, China is the source of major uncertainty due to its strict Zero Covid policies that leave no foresight of when the end of lockdowns in Shanghai will be as well as in other affected cities.
The short-term effect of this will be an increasing pressure over supply chains chokepoints, like the port of Shanghai, while in the medium term it is possible to imagine a continued reduction in Chinese consumption.
This was already occurring over the last two years, after the first pandemic outbreak.
Dependency on imports
In terms of energy, Asian dependence on imports is high. Singapore, Taiwan, Japan, and South Korea all import almost 100% of their supply of coal, crude oil, and natural gas.
In contrast, Pakistan, Malaysia, Bangladesh, Thailand, and the Philippines’ coals imports are close to 80% of the total supply and crude oil.
These inbound shipments amount to over 75% of total demand for India, Bangladesh, China, Pakistan, Thailand and Vietnam.
The reliance on gas is less important, but still India, China, and Thailand’s imports for the sector are respectively over 50%, 35% and more than 30%.
If we look at the Russian share of Asian energy imports, China stands as the most dependent country, since in 2020 it imported 16% of crude oil, 13.5% of coal and 10% of natural gas.
The good relationship between Moscow and Beijing might lead China to import more in the future from Russia, probably at a discounted price.
Among the Asian countries strongly condemning the Russian invasion in Ukraine, South Korea and Japan are those importing more oil, coal and gas from Moscow. However, they do so at a much lower rate than the European Union, with a share of imports that peaked at 19% like in the case of Seoul’s coal imports.
Looking at other countries in the region, Indonesia, Malaysia and Myanmar rely on Russian coal respectively for 19%, 12% and 10% of their needs, while other sources are not very relevant anywhere in the Asia-Pacific.
This implies that energy imports are very significant for the region, but that cutting ties with Russia should not be too complex.
However, there could be a competition among European countries to gain access to other supplier and, in general, rising prices would be a cause for anxiety for the annual budget of regional countries.
Food security at stake
Notwithstanding the energy demands, the major concern currently is the food security for the most vulnerable countries, especially in South Asia.
Pakistan imports about 80% of its cereal from Russia and Ukraine, and Bangladesh and Sri Lanka take from Moscow and Kiev almost half of their supplies.
Vegetable oils are under the spotlight as well, given that the global shortage of sunflower oil that is largely produced in Ukraine and Russia.
Indonesia, along with Malaysia, is the leading supplier of the closest alternative – palm oil – but domestic reasons led the government to impose a ban on its export that will further put pressure on prices for agriculture products.
The threat to food security might have an immediate impact on the most instable countries. Sri Lanka is already in the middle of a political and economic crisis because of the combined effect of rising prices of oil and food, similar outcome somewhere else should not be dismissed, especially if the war goes on longer.
The US and the EU could step up (if they were willing to)
The general outlook is that of a worsening economic condition for the region, even if it will maintain the fastest pace in the world.
This should be analysed along with the currently building scenario of China and the US intertwined into a long-term strategic competition.
More countries will be in the need of economic help and will be ready to align with the top partner.
For this reason, the debate over the US lacking economic involvement will gain strength in the coming months.
It is not clear if the Indo-Pacific economic framework – currently under discussion – will be the proper tool to address the issue.
However, in the meantime, the Regional Comprehensive Economic Framework (RCEP) – the largest FTA in the world that is effective since this year and strongly supported by China – is presented as the major regional platform for economic cooperation.
If it is possible to think that the war in Ukraine might divert Washington’s attention from the Indo-Pacific, a worsened regional economic outlook will probably raise the need to boost economic engagement in the region as soon as possible for those – like the US and the EU – that want to improve economic ties with Asian countries.