Economic impact of Russian invasion of Ukraine on NZ would be 'mostly indirect'

Wednesday, 26 January 2022

US Nato ambassador Julianne Smith has warned President Putin invasion would have dire consequences.

The threat of a Russian invasion of Ukraine is weighing on financial markets, but neither the Ministry of Foreign Affairs and Trade nor NZTE have so far seen a need to issue advice to firms with interests in the region.

NZTE deferred comment on advice to the ministry, which deferred back to NZTE while saying it was “continuing to monitor developments closely and will respond as the situation warrants”.

A Ministry of Foreign Affairs and Trade spokeswoman noted it did not have any trade agreements or negotiations with Russia or Ukraine in place.

Russia is 25th on the list of New Zealand’s largest trading partners, with exports to Russia worth US$210 million (NZ$309m) in 2020 and imports totalling US$254m, according to Trading Economics.

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Trade with Ukraine barely registered, with exports totalling US$10m and imports US$19m.

Butter could be on the frontline in terms of NZ exports to Russia, in the event of an invasion and sanctions (file photo).

Former deputy prime minister Winston Peters advocated in 2017 for reviving talks over a free trade deal with Russia.

But Prime Minister Jacinda Ardern said in 2018 – following the attempted murder in Britain of former Russian double agent Sergei Skripal – that the talks remained indefinitely suspended.

British woman Dawn Sturgess died later that year when she discovered and handled a discarded perfume bottle used to target Skripal and his daughter Yulia with the Novichok nerve agent.

Among New Zealand businesses, Fonterra appears to have the highest exposure to any conflict and sanctions, with dairy products – and specifically butter – New Zealand’s top export to Russia.

In 2018, Fonterra took a 49 per cent stake in a joint venture, Unifood, that it established in St Petersburg with its Russian distributor Foodline despite pre-existing US and EU sanctions against Russia.

One potential sanction that has reportedly been canvassed by the US, which is preventing Russia from participating in the Swift interbank payments system, could make any trade with Russia problematic.

A Fonterra spokesman said the company had seven staff based in Moscow at its own Russian subsidiary and about another 35 employed at Unifood in St Petersburg.

Both companies were operating as usual, he said.

“We are keeping an eye on the situation and take actions as required, but have not taken any precautionary measures at this stage.”

Infometrics principal economist Brad Olsen said the impact on New Zealand of any conflict would be mainly indirect, through financial markets and the impact on global economic activity.

“Fuel prices would go up and energy, generally, I think would probably be the hardest hit.”

Dutch bank ING has forecast that an invasion followed by tough sanctions would raise the price of a wide range of globally-traded commodities, including petrol and wheat.

Russia is the world’s second-largest exporter of crude oil after Saudi Arabia, and the world’s largest wheat exporter, it reported.

A conflict would also be likely to impact financial markets, with investors tipped to respond by continuing a retreat to more “safe-haven assets” such as the US dollar and the Swiss franc.