russia ukraine stock market impact: Russia sanctions: What’s the bad news for Dalal Street investors?

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NEW DELHI: Many countries, including the US, UK, Germany and Japan, have announced sanctions against Russia for its invasion of two regions in eastern Ukraine. But initial global market reaction suggests the announcements weren’t as harsh as expected, although further sanctions cannot be ruled out. Here are some things investors should be aware of before taking an investment call at this stage:

India is not a big buyer of Russian crude

Analysts noted that Russia exports about 5 million barrels of crude oil per day, more than half of which goes to Europe and 42% to Asia. India does not buy even 1% of Russian crude oil exports because most Indian refineries cannot process the heavy crudes that Russia exports. Also, the lack of pipelines between the two countries means transportation costs are high. This even though Russia is a close Indian partner in the defense sector.

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As noted by ICICI Securities, the biggest customer of Russian oil exports is China, which buys 31% of total Russian oil exports, followed by Germany and the Netherlands (11% each).

“Any sanctions against Russia will affect China’s access to oil, but will have little direct impact on India. Countries defying the sanctions would face retaliation from the Western banking system – and that could prove very disruptive for China’s ability to participate unhindered in the global trading system This would provide a potentially positive opportunity for India as an alternative supplier of manufactured exports, although the main initial benefits would go to ASEAN, Taiwan , Korea and Japan,” the brokerage said.

EU trade could increase

ICICI Securities argued that since the EU is the largest market for India’s exports, any disruption in EU supply is also likely to generate greater demand for steel and engineering goods, for which India is another supplier.

“The factors that made Indian exports outperform the world in 2021 will continue to hold in 2022, allowing exports to remain robust. India buys very little oil and gas from Russia, so disruptions short-term outlook for the Indian economy will be minimal, aside from the higher oil import bill,” ICICI Securities said.

What if crude prices boiled more?
Russia accounts for 11% of world crude oil exports. ICICI Securities said that if sanctions took about 60% of that amount away from global markets – China, Belarus and a few other perhaps sanctions-defying clients – global crude oil supply would drop by 3 million barrels a day. and the price of Brent will likely pull above the $110 a barrel level.

“The possible relaunch of the Iran nuclear deal (JCPOA), currently at a crucial stage in negotiations, could restore about half of that supply, adding about 1.5 mmbd of production and export within months. Iran’s production has fallen to 2.5 mmbd currently, from 4 million barrels per day before the reimposition of sanctions in 2018. However, even with the possible restoration of Iran as the main exporter of crude oil, Brent would likely stay above $100 a barrel for much of 2022,” he said.

That said, the biggest long-term swing factor in global oil prices is likely to be the impact on US shale oil production.

When Brent drops below $50-60, US shale oil becomes unviable except in the Texas Permian Basin. Brent has already been above $75 for nearly 6 months and steadily above $60 for more than a year since Feb. 8, 2021, ICICI Securities said.

“Given the nature of shale oil, approximately 60% of production from new fields is extracted in the first year, and new investment in fracking/drilling is constantly required. The longer Brent stays above 110 USD/bbl, the greater the possibility of US production reaching 14 million barrels per day, causing Brent prices to fall sharply once Iran returns to the market,” ICICI Securities said.

Why are the sanctions so far boring?
Kotak Institutional Equites said that given the EU’s heavy reliance on Russian energy imports, 26% of global oil demand and 38% of global gas demand, he does not believe the Russia’s energy exports will be sanctioned initially.

But further escalation, or in the worst case a war, could dramatically change the situation and further tighten energy markets, he warned.

Jeffrey Halley, senior market analyst for Asia-Pacific at OANDA, said the most significant sanction to date comes from Germany, which halted the Nord Stream 2 pipeline project.

“Nothing can hide that Europe’s NIMBY-ism (Not In My Back Yard) strategic ineptitude in linking its energy dependence on Russia leaves the bloc terribly exposed to further escalation,” he said.

“The unfortunate fact of the transition to renewable energy is that energy storage technology is lagging far behind renewable energy generation technology. Shutting down nuclear and outsourcing your energy needs to unreliable partners in the Is, whether it’s plastic recycling, energy or rare earth elements, leaves you strategically exposed when the flag is raised As long as this crisis lasts, I will struggle to be structurally bullish on the Euro or Europe,” he said.

Look beyond short-term setbacks: analysts
Abakkus Asset Manager’s Sunil Singhania said issues such as inflation, interest rate concerns and upcoming national elections were already known, but the new wildcard in the pack is the Russia-Ukraine crisis. “Over the past three or four months the market has been looking for some kind of reason to cool down a bit. Obviously the cooling has been a bit overdone, especially in the broader market. In absolute terms, the the momentum in the market has been broken to some extent and we are in a consolidation phase. We are not very negative on the market even in the short term,” Singhania told ET NOW.

Edelweiss AMC’s Trideep Bhattacharya said the message he is sending to his clients is that the first half of 2022 will be volatile, driven not only by geopolitics, but also by inflation and US interest rate fears. .

“In the second half, the earnings recovery would start to take shape. We advised investors to use the volatility in the first half to actually invest,” he said.

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