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Kenya to feel heat of Russia-Ukraine conflict

BUSINESS
By Patrick Alushula | Feb 26th 2022 | 4 min read
By Patrick Alushula | February 26th 2022
BUSINESS

People from Ukraine rest at a refugee shelter in a culture house, after Russia launched a massive military operation against Ukraine, in Zahony, Hungary February 25, 2022. [Reuters]

Fuel and food are at the heart of international relations following Russia’s invasion of Ukraine on Thursday. 

Kenya, located over 7,800 kilometres away from these two eastern Europe countries, looks set to feel the heat, just like many net importing countries.

Russia and Ukraine are significant players in the global commodities market including oil, wheat and maize, with Kenya being one of the importers of these goods.

An extended conflict is likely to result in increased prices of wheat and fuel for countries such as Kenya, according to Ken Gichinga, the chief economist at Mentoria Economics.

“We expect to see fuel prices going up and disruptions to wheat supply too, and that adds pain to consumers given prices of foodstuffs were already pointing up,” he said.

The Nairobi Securities Exchange (NSE) on Thursday sent the clearest indication that Kenya is not spared from the impact of Russia invading Ukraine.

Foreign investors reacted by pulling out Sh195 million from the NSE in search of safety in bonds and fixed income as shares plunged, eroding Sh92.43 billion in a day.

UN Comtrade — a source for official international trade statistics — shows Kenya was in 2020 the sixth highest importer of agricultural products from Russia, with the main commodity being wheat.

Nearly half of Ukraine’s agricultural exports to Africa, including Kenya, is also wheat while maize is about a third.

This means lengthy military action and sanctions could set up Kenya for increased prices of bread and wheat, spooking a market where food prices were already on a rise.

Also caught up in this conflict are Kenyans who are living in Ukraine. Ministry of foreign affairs said yesterday there were 201 Kenyans in Ukraine, with 183 being students and 18 permanent residents.

The ministry has asked these Kenyans to exercise caution even as it appealed to countries neighbouring Ukraine to allow those wishing to return home to exit through their borders.

"Kenyans have been advised to make an assessment as to their circumstances and to take necessary precaution and/or make arrangements to leave as they deem fit in light of their own circumstances,"  said the ministry.

The situation in Ukraine remains fluid even as new sanctions are being prepared against Russia. But many experts are doubting whether such measures will move President Vladimir Putin.

Crude oil prices had jumped by Thursday, with Brent rising above $105 (Sh11,900) a barrel for the first time since 2014, exposing oil importing countries to increased prices at the pump.

Russia is the world’s third-largest oil producer and second-largest oil exporter. An extended conflict with Ukraine has raised fears that global energy supply will be disrupted.

Kenya has for the last five months been depending on a State fuel subsidy programme to save consumers from paying higher prices at the pump.

Pricing pressure

A sustained rise in global oil prices would, therefore, pile pressure on Kenya’s subsidy—a kitty that has twice been partly used by Treasury to fund other pressing budgetary needs.

Expensive fuel usually unleashes pricing pressure across the economy, with ramifications on the cost of living.

Producers of services such as electricity and manufactured goods usually factor the cost of fuel in their pricing.

The economy also uses diesel for transportation, power generation and running of agricultural machinery such as tractors, with a direct impact on the cost of farm produce.

Kenya National Bureau of Statistics (KNBS) data shows the country imported goods worth Sh37.99 billion from Russia and Sh7.47 billion from Ukraine in 2020.

The imports from the two countries made up 97.8 per cent of the Sh46.5 billion imports from eastern European countries.

But Kenya is also an exporter to these two countries. KNBS data shows Kenya exported goods worth Sh8 billion to Russia and Sh3.78 billion to Ukraine — the two making up 90 per cent of the country’s exports to eastern Europe.

This means instability in the two countries will almost paralyise Kenya’s exports, including tea, cut flowers and fruits, to the region.

Besides, a higher import bill triggered by a rise in fuel prices will also have an effect on the shilling and the country's fiscal deficit position.

Kenya's forex reserves — key for imports and foreign debt repayments — touched $8.125 billion (Sh923.4 billion) last Thursday, adrift of the peak $9.629 billion (Sh1.094 trillion) on September 9.

The falling reserves have coincided with a weakening shilling, which has been touching new lows. It opened Friday at 113.82 units to the dollar.

US and UK are considering a massive package of economic sanctions on Russia, which Mr Gichinga says could cut its exports from European Union markets.

Gichinga says such a development may throw an advantage to Africa as Russia seeks to strengthen its presence in the continent and counter the influence of the US and China.  

“If the EU market is closed off to Russia, then Russia would really want to maintain other markets. Countries in Africa such as Kenya will be key,” he said.

President Putin has been on the offensive in Africa and his administration is preparing for the second Russia-Africa summit, scheduled for October-November this year in Ethiopia.

The first summit was held in Sochi, a Russian city, in October 2019 to strengthen Moscow’s relations with Africa.

More than 40 African presidents, as well as heads of major regional associations and organisations, graced the summit where 92 agreements and contracts were signed.

Russia is among the five major emerging economies including Brazil, India, China and South Africa, which are associated with the acronym Brics.

The rise of Brics has been seen as a pointer that the world is heading towards a multi-polar world, with numerous superpowers.

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