How Asean feels the heat from 'someone else's war'

In a webinar on March 14, Chua ob­serves that although Asean has relative­ly small trade links with Russia, with the latter only making up only 0.4% of trade and 0.1% of foreign direct in­vestment (FDI), the effects of the con­flict could spill over to affect the Eu­ropean market, which could have a “larger adverse impact on us”, he says.

Chua points out that among the Asean countries, Thailand and Viet­nam have a larger exposure to Rus­sian final demand, albeit still at low levels, at 0.8% and 0.6% of their nom­inal GDP respectively. Final demand, also known as aggregate demand, is a measurement of the total amount of demand for all finished goods and ser­vices produced in an economy.

However, the larger impact will come from Europe, which accounts for 9% of Asean exports and 11% of Asean FDI inflows. Europe also accounts for the largest share of tourism for Thailand, Indonesia and Singapore, which will be affected by higher costs and flight times, due to aviation bans over the Russian airspace.

Hence, Chua expects the conflict to dampen travel between the two regions and delay Asean’s tourism recovery.

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Notably, Russian tourists account for the third-largest source of tourism rev­enue in Thailand, with 3.4% of visitor arrivals and 5.7% of tourism revenue.

In terms of FDI and outward direct investment (ODI), Europe naturally accounts for most FDIs into and ODIs from Russia, with eight of the top 10 FDI coming from European countries, as well as having eight of the top 10 destinations for ODI from Russia.

However, a stand-out name from Asean is Singapore, which ranks eighth in terms of outward direct investment from Russia, with US$11.4 billion ($15.5 billion) of ODI, making up 2.4% of to­tal ODI from Russia as of 3Q2021. The republic is also Russia’s 16th largest source of FDI, with US$4.3 billion in­vested in the country as of 3Q2021.

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Chua thinks some Singapore in­vestments could be affected, such as Changi Airport Group. “[It] manages four airports in Russia, including Vlad­ivostok airport, so some of this has to be written off,” he says.

He also points at investments made by state investor GIC and Temasek Holdings, who have US$200 million and US$300 million of Russian assets respectively, according to Global SWF, a data platform that tracks all the world’s sovereign wealth funds and public pen­sion funds. However, these are a tiny sliver of the overall portfolios managed by these two entities. Temasek, for ex­ample, reported a net portfolio value of US$381 billion as of March 31, 2021, in its 2021 annual review.

Singapore’s exposure to the EU’s final demand is markedly more, with 7.7% of its nominal GDP exposed, 20 times that of the 0.4% exposed to Russia.

Thailand and Vietnam, despite be­ing the most exposed countries in Ase­an to Russian final demand, are also much more exposed to EU final de­mand, at 5.4% and 4.3% respectively.

“What this means is that if Rus­sian GDP, hypothetically, collapses by 50% because of all the sanctions and so on, Thailand’s GDP growth will be –0.4%, Vietnam’s impact will be –0.3%. And that will really be man­ageable,” Chua says.

On the other hand, Chua estimates that if Europe’s GDP falls by just 10%, “that would have wiped out 0.7%–0.8% of Singapore GDP growth, or 0.5% of Vietnam’s GDP growth”.

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Commodity conundrum

The more critical aspect of this crisis are Russia and Ukraine’s roles in the global commodities market. They are net exporters of commodities like oil, wheat and certain metals, and import­ers of electronic products.

For example, data from World Top Export, the Observatory of Economic Complexity and Maybank IBG shows that Russia accounts for 16.8% of global natural gas exports and 11% of global oil exports, while Russia and Ukraine combined account for about 25% of global wheat exports and 71.1% of global sunflower oil exports.

As the conflict sends commodities prices skyrocketing, Chua says, this will result in an uneven impact on Asean, where countries that are commodity importers — like Thailand, Singapore, the Philippines and Vietnam — will be more negatively affected, compared to exporters like Indonesia and Malaysia.

Meanwhile, the disruption to raw materials supplies like industrial met­als, palladium, and nickel could dis­rupt Vietnam’s electronics manufactur­ing production, and in turn its exports.

Chua points out that with Russia being a major player in the global oil market, higher energy prices will mean that countries in the Asean region that subsidise their fuel prices will be hit with an increased fiscal burden.

This may cause them to raise fuel prices to be closer in line with market prices, possibly resulting in an infla­tion shock and bringing forward poli­cy rate hikes, he adds.

The only exception is that as a coal exporter, Indonesia could benefit from the higher commodity prices. The country is the second-largest export­er of coal in the world, with a 16.6% share of global coal exports, even high­er than Russia.

Indonesia also benefits from higher gas, palm oil and nickel prices, which may help offset a rising oil import bill. Malaysia is also likely to benefit from higher oil, gas, and palm oil prices.

Sanctions complications

Chua warns that Western sanctions on Russia will also compound the impact on Asean in the areas of pay­ments — with sanctions on the Swift banking messaging system, tech and military equipment, and also the im­pact on Western firms that have hubs across Asean.

He says: “I don’t think we can rule out the possibility of a recession at this stage, given how heavily dependent Eu­rope is on Russia. You have the sanc­tions, plus you have the exposure of many European banks to Russia. There will probably be widespread defaults on Russian debt and Russian loans that could also spill back to the finan­cial system.”

Maybank economist Brian Lee ex­plains that Russia is now the world’s most sanctioned nation, surpassing North Korea and Iran. Russia has been hit on various fronts with bans and re­strictions, including a ban on advanced semiconductors, and freezing assets held by Russian oligarchs as well as some foreign currency reserves held by its central bank.

The exclusion of some Russian banks from the Swift messaging sys­tem, Lee points out, will likely disrupt cross-border payments and slow Ase­an’s trade with Russia.

Separately, Lee explains that Rus­sia has been the largest arms suppli­er to Asean over the past 20 years, which means countries like Vietnam, Laos and Myanmar who are particu­larly dependent on Russian arms could be affected by sanctions. Vietnam re­lies on Russia for 82% of its military capabilities, which have been used to modernise its military and deter Chi­na in the South China Sea.

Finally, he notes that the sanctions and decisions by Western companies to pause operations in Russia means that even though Asean nations (except Singapore) have not imposed their own sanctions on Russia, their exports to Russia may still be suspended.

This is because they may be pro­duction bases or hubs for MNCs that are required to comply with export con­trols imposed by their governments.

Indeed, the conflict and its impact will be far-reaching, and this is perhaps best captured in the uncannily presci­ent words of Ukrainian president Vo­lodymyr Zelensky in 2019 to the UN General Assembly: “In today’s world where we live, there is no such thing as ‘someone else’s war’.”