The war between the two countries has led to several sanctions by the western economies on Russia, halting trade agreements, isolating the economy in various other capacities. However, Russia continues to be a very influential nation in many sectors of the world economy.
Russia is the second-largest exporter of crude oil in the world, making its oil supply a major determinant in the direction of crude oil prices. Also, it boasts of being one of the largest producers of natural gas and clean energy globally.
Notably, the Russian Federation supplies a significant volume of fossil fuels and is the largest exporter of oil, natural gas, and hard coal to the European Union. However, most western economies have desisted from all trade arrangements with Russia following the war.
Despite the distance of Nigeria from the warzone, we are not immune from the effect of the war, owing to the influence of Russia in world economy and Nigeria’s dependence on international trade and importation. Therefore, it is imperative to highlight how the continued war is causing mayhem to the Nigerian economy.
Surge in fuel price
Crude oil prices have risen to record highs in recent weeks, and even significantly higher following the attack on Ukraine by Russia with Brent already trading above $100 per barrel and Bonny Light at $110 a barrel.
- Nigeria as an importer of refined petroleum products is bearing the brunt of the surge in the crude oil market, as the price of diesel which is not a subsidized product in the country has skyrocketed to over N580 per litre, with some stations already selling above N600.
- The surge in the landing cost of refined products and the increased demand for diesel in the local market, forced by the recent epileptic power supply across the country, has driven the upsurge witnessed in the price of diesel.
- The increase in diesel prices has become a major bane for businesses operating in the country as the cost of operation will also record an uptick since most organizations make use of generators for their businesses.
- Similarly, Nigeria is currently battling with fuel scarcity after adulterated petrol was found and withdrawn in the market. This is likely to worsen in the coming weeks as vessels transporting petrol products into the country could find it hard to bring in petroleum products.
Cost of transportation
As prices of petroleum products continue to go up, the cost of transportation has also ballooned in most areas across Nigeria.
- The price of ride-hailing services in Nigeria especially in Lagos State has also witnessed a significant increase in the past two weeks. Recall that Nairametrics reported that Uber and Bolt, both ride-hailing car services increased their fare by over 100% in February.
- According to the report, the drivers attributed the increase to fuel scarcity and limited supply as most cars could not buy fuel due to long queues or lack of fuel. As an example, a ride from Lekki to Ikorodu road that was typically between N2,500 and N3,000 jumped to as high as N6,000 on Sunday.
- Increased cost of transportation is the least residents of Lagos State will want, considering the level of traffic ravaging the state on a daily basis.
Increased flight cost
The cost of air travelling has also increased significantly in recent weeks following the bullish trend in the global market that pushed the prices of jet-fuel higher. Flight operators in the country have been forced to reduce their flight frequency.
In February airlines jacked up airfares by a minimum of 100%, with a one-way economy ticket selling at over N50,000 as reported by Nairametrics.
Meanwhile, Nairametrics also reported last week that Air Peace, Arik Air, Ibom Air, and others airlines are expected to delay or cancel some of their flights from today, as Jet A1, popularly known as aviation fuel skyrockets, hitting N599/litre.
The surge in the cost of flight means that Nigerians who can afford it will have to pay hugely for their travelling obligations abroad and domestically. This also affects those who work in industrial areas like Lagos State, Port Harcourt, etc and who live in other states, as they would have to reduce their flight frequency thereby affecting their bonding time with their parents.
As is the case with the crude oil market, Russia is a major exporter of food products, one of which includes durum wheat, a food item particularly imported by Nigeria and has recorded unprecedented price increase since the invasion started.
- The price of wheat rose to its highest level in the past week following the Russia-Ukraine war. Meanwhile, Nigeria is a major importer of wheat products, being the third most widely consumed grain in the country.
- A glance at the data from the NBS shows that Nigeria imported durum wheat worth over N128.1 billion in the 9-month period of 2021, while it recorded a N144.1 billion import in the full year of 2020.
- Nigeria is already battling with high inflationary pressure and food supply chain disruptions, the surge in commodity prices further puts a strain on the local market, since Nigeria largely depends on importation to meet local demands.
- The price of rice has risen to over N34,000 per 50kg bag, sachet water already selling for N20. Nigeria currently spends over 50% of its expenditure on feeding, and with food prices rising at unprecedented levels, it only means disruption for Nigerian’s purchasing power.
High cost of imported goods
Nigeria adopts a managed floating exchange rate system, which is typically determined by the apex bank’s intervention in the market. However, a significant amount of FX is being traded at the black market, which is not monitored or captured by official records. This exposes Nigeria to the downside risk of a further weakening naira as Nigerians will source forex anywhere to meet their business obligations.
- Also, developed economies are grappling with inflationary pressure, US inflation rate surging to a 40-year high in February 2022. With Nigerians’ knack for importation, we would only be importing foreign inflation into an already inflationary infested economy.
- The lack of FPIs, FDIs, the decline in diaspora remittances from Nigerians living in Russia, Ukraine, and other neighbouring territories, will pile more pressure on Nigeria’s FX liquidity, exposing the country to the possibility of further devaluations.
- It would be undesirable if a crunch in FX supply reverses the positive recorded in both current account and international trade balance.
It is also worth pointing out that Nigerian youths in the country are currently staying at home due to the month-long ASUU strike and are now joined by thousands of Nigerians who will not be able to continue receiving lectures in Ukraine due to the unrest.
What this means for us
The significant increase in the cost of transportation, food items and other necessities in Nigeria, indicates a continuous dent in the purchasing power of average Nigerians. This could in turn reverse the movement of Nigeria’s consumer price index.
Recall that Nigeria’s inflation rate dropped to 15.6% in January 2022 and food inflation to 17.13% from 17.37% recorded in the previous month. However, with the sudden spike in the cost of basic items, the country bears the risk of experiencing another uptick in inflation numbers.