November 25, 2022

What the Russia-Ukraine crisis means to Sri Lankan economy?

2 min read

By First Capital Research

Sri Lanka as a country with strong diplomatic and trading ties with Russia is required to be on alert for any adverse or favorable developments of the tensions over Russia’s invasion of Ukraine. Although some officials predict that the unfolding of conflicts between Russia and Ukraine may hinder Fed’s aggressive move towards a tighter monetary policy, it may not change the course completely. Fed may opt for a softer
landing given the add-on financial uncertainties upon Russia’s invasion which welcomes inflation via further shocks in oil and other commodity prices. However, with the latest update that Russian and
Ukrainian negotiators agreed on negotiation talks, there is a possibility of peace talks to get successful and the threat of the tension to wear off and thereby letting Fed to deploy its aggressively hawkish decisions as
planned. In terms of the Sri Lankan context, the following effects may stem over this geopolitical tension.


Crude oil prices may skyrocket due to imminent supply shortages


The OPEC and allies led by Russia, collectively known as OPEC+ is in the verge of increasing their output targets for 2022 amidst the soaring oil prices. However, possible sanctions on Russia upon invasion of Ukraine may crack the output targets and thereby further fuelling the global prices. Sri Lanka, as a nation currently undergoing a severe economic downturn with foreign reserves failing to accommodate essential
supplies may get further hammered at a higher degree out of this move.


Weighing negative effects on Tourism and Tea may worsen the BoP


With the reopening of borders and gradual rebound of tourism in Sri Lanka following the Covid-19 pandemic, Russia and Ukraine were identified as the biggest source markets for tourist arrivals in Sri Lanka.
Therefore, this geopolitical tension is prone to have a negative effect on the earnings from tourism and worsen the Balance of Payments (BoP). Furthermore, Russia is one of the largest buyers of Sri Lankan tea.
Therefore, any global sanctions for Russia may adversely affect export earnings and thereby adding further pressure on the trade balance.

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