Escalating crisis could lead to higher costs for Singaporeans

Russia's recognition of two separatist territories in Ukraine and ordering of troops into the regions have led Western governments to retaliate with sanctions.

Oil prices rose to nearly US$100 a barrel on Tuesday - their highest level since 2014 - after Moscow ordered troops into the breakaway regions, before edging lower yesterday. There could be further price volatility if the conflict continues to worsen.

Earlier this week, several airlines suspended flights to and out of Ukraine, citing safety concerns. The International Air Transport Association noted last month that most airlines were already avoiding the airspace around the affected regions in Ukraine amid tensions.

The Straits Times looks at the impact of the crisis on prices and how Singaporeans could be affected.

Analysts have cautioned that developments in Ukraine could impact the outlook for inflation, and prices of food staples such as wheat and corn could rise sharply.

Ukraine is the world's third-largest exporter of corn and the fourth-largest exporter of wheat, while Russia is the world's top wheat importer.

Any disruption of food supplies out of the region could further fuel food inflation - world food prices jumped 28 per cent last year to their highest level in a decade.

Invesco chief global market strategist Kristina Hooper said that the prices of wheat and corn, alongside other commodities, are expected to rise.

Food inflation was a main driver of higher consumer prices in Singapore last month, rising 2.6 per cent year on year on the back of higher inflation for non-cooked food and prepared meals.

High energy prices have been plaguing global markets, with gas reaching record prices in recent months.

With Europe heavily reliant on Russian gas transiting through Ukraine - Russia provides Europe with around 40 per cent of its natural gas supply - the energy markets may also be hit.

European gas benchmarks and electricity prices in major European cities have been higher since the Ukraine crisis worsened.

Singapore largely relies on natural gas for electricity generation, and any impact on global gas prices could mean higher electricity prices here down the road.

Electricity and gas inflation in Singapore hit 17.2 per cent last month due to a steeper increase in electricity and gas tariffs.

Oil traders are vigilant about a potential escalation in conflict that may lead to restrictions on Russia's oil exports, adding to supply constraints in an already tight market, DailyFX strategist Margaret Yang said in a research note yesterday.

Russia is the second-largest oil exporter after Saudi Arabia, shipping about five million barrels of crude oil per day. A deepening of the Ukraine conflict could spark an energy crisis and push oil and gas prices higher, she wrote.

In recent weeks, pump prices have been on the rise in Singapore, driven by higher crude oil and product costs. For example, the price of 95-octane fuel went up from around $2.65 a litre in mid-January to around $2.80 a litre as at mid-February.

With the price of Brent crude oil possibly increasing further if tensions worsen, there could be higher diesel and petrol costs for motorists here.

Global supply chains, already battered by Covid-19-related challenges, could be further dislocated by the geopolitical tensions.

Singapore's Ministry of Trade and Industry and Monetary Authority of Singapore, in a joint release of consumer price developments for last month, noted that while ongoing external supply constraints should ease in the second half of the year, there remain upside risks to inflation due to pandemic-related and geopolitical shocks that could further disrupt global supply chains.

Sanctions could hurt the Russian economy and its trade partners which rely on its energy reports. Escalating tensions and sanctions could also result in energy supply disruptions and hit already strained supply, contributing to further inflation risks.