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Research

Russia-Ukraine War: Impact on Nigeria`s Economy.

After weeks of Russia’s surmounting presence at the borders of Ukraine, the Russian forces finally invaded Ukraine in what Russia termed a “special military operation. In the aftermath of the invasion, nations and international communities like the U.S, UK, Canada, and Paris have openly condemned this act, with the U.S president specifically terming it “an act of mass genocide against the Ukrainian people.” The onslaught has earned Russia and Russian Oligarchs strict economic sanctions from the U.S, UK and other nations.

The war between Russia and Ukraine has increased risks and uncertainties in the global economy. Right after the invasion, the implication was immediately felt as global stocks nosedived, while the price of gold (a safe haven instrument) advanced significantly ($2046.70/ounce as of the 8th of March). Also, the crises have exacerbated oil prices, given Russia’s position in the world’s oil and gas supply (The third highest producer of oil and most significant supplier of gas to Europe). In addition, Russia and Ukraine are big on agricultural commodities, they are both among the top 10 producers and exporters of wheat, Maize, Barley, Sunflower seed, etc., to the global market.

Source: FAO XCBS system

Impact on the Nigerian Economy

The global economy does not operate in isolation, given the interdependencies of nations (Theory of Comparative advantage). Nigeria, in particular, cannot be immune from the global happenings being an import-dependent economy, relying on international trade amidst the globalization of the financial market (global village). Therefore, it is against this backdrop that we highlight some of the impacts of a prolonged Russian-Ukraine crisis on Nigeria’s economy:

Petrol pump filling nozzles.

The surge in the price of fuel and other petroleum products: Oil prices shot up above the $100/barrel mark to $127.98/barrel (as of the 8th of March), impacting the price of diesel and aviation fuels (above N600 and N500 a liter, respectively), given that the government does not subsidize these products. Also, this increase has been attributed to higher landing costs on importation and increased demand (due to epileptic power supply) by Nigerians. For PMS, which the government subsidizes, the increase in global oil price has warranted a rise in the government’s subsidy to keep the price stable, causing a strain on the already depleted budget. Recently, the National Assembly passed an amendment to the 2022 Appropriation Act, which raised the subsidy on Premium Motor Spirit (petrol) from N3. 56trillion to N4.00trillion.

In addition to increasing energy costs, hike in transportation fares is another negative impact of the ongoing war on the Nigerian Economy. A surge in the price of fuel and other petroleum products will lead to a rise in transportation costs. Transportation cut across the movement of people and goods through the land, airway, railway, and sea and is one of the significant infrastructures needed for a viable nation. An increase in the price of PMS, aviation fuel (Jet A1), and diesel will have a bearing impact on the lives of citizens of a nation, given the ripple effect an increase in these commodities will have on the economy (increase in goods and services). People living in urban cities like Lagos, Abuja, and Port Harcourt are already bearing the brunt of the hike in transportation. Across these cities, commercial vehicles, private hailing services, and even government-managed transport services have all had to increase their fares.

Traffic and street market in Lagos Nigeria

The combination of Russia and Ukraine are heavy on agricultural commodities (with both nations responsible for about 14% of global wheat production and controlling about 29% of all wheat exports). Nigeria, as an import-dependent country, relies on these nations to supply such commodities as durum wheat. According to the foreign trade data report released by the National Bureau of Statistics (NBS), durum wheat import accounted for 6.2% (N1.29trillion) of the total import (N20.84trillion) recorded in 2021, making wheat the second most imported food item in Nigeria. The importance of wheat in the food value chain in Nigeria cannot be over-emphasized. According to Mr. Edward Lamick, the CBN’s deputy governor of corporate services, wheat is the third most widely consumed grain in Nigeria after maize and rice. Notably, many companies in the consumer goods industry rely on wheat as a primary raw material for their produce. With an increasing demand for wheat and a threat to a shortfall in wheat supply from Russia and Ukraine, Nigeria should expect the price of food items such as bread, pasta, semolina, noodles, and cakes, among others (which are the byproduct of wheat) to increase.

Top view of wholegrain and cereal

Nigeria is also at risk of increased debt service costs due to higher interest rates in advanced economies. Global economies are currently battling rising inflation. Nations like the U.S and the UK have printed inflation figures at a 40 high (8.3% and 9%), respectively. The spike in inflation has led to a hike in interest rates by the monetary authorities of these countries. For instance, in the U.S, the Fed recently approved a 50bps rate hike, with a possibility of a further six rate hikes before the end of the year, to tame inflation. In the UK, the bank of England has raised interest rates for the fourth time consecutively, to print at 1% presently. The implication to Nigeria is an increased cost of foreign debt servicing, which as of the 31st of December 2021, sits at USD38.39billion (DMO). Strikingly, Nigeria has not been able to take advantage of the rise in the global oil price to boost our earnings due to crude production shortfalls hence, relying on debt (foreign and domestic) to augment our meager budget. 

Given the rise in inflation to unprecedented levels in the global economy, Nigeria is at risk of being at the receiving end of the global inflationary pressures being an import-dependent country (high cost of imported goods). The rise in prices of essential goods and services across the globe could filter into the Nigerian economy, putting more pressure on our already inflated economy. As to the last inflation figures for March 2022, Nigeria’s inflation rate rose by 16.82% YoY, the highest recorded since August 2021.

Overall, it is evident that Nigeria cannot be isolated or excluded from global events as it has both a direct and indirect impact on the Nigerian economy. Importantly, this crisis has revealed to nations the need for self-sufficiency to a large extent. Remarkably, this is an eye-opener to the Nigerian government that there is an urgent need to ramp up investments in all the critical sectors of the economy to reduce the over-dependency on foreign nations for our basic needs. The crises in eastern Europe should have been a blessing in disguise for Nigeria, given that a surge in the oil price should amount to increased revenue for the government. Sadly, our foreign reserve still prints below the USD40billion benchmark, owing mainly to a lack of investments in our petroleum and gas infrastructures over the years.