Update Country Report Maldives 08 Mar 2022

Asia's low trade vulnerability will limit direct supply-chain disruption

• Asia's direct goods trade exposure to Russia and Ukraine is low. Neither country is a significant export destination or source of imports for any Asian country. Supply-chain disruption from the conflict will be much lower than in Europe.
• Still, there are areas of import exposure. Russia represents a meaningful source of energy supply for China, Japan and South Korea. While our baseline assumption is that international sanctions will not compromise access to Russia's oil and natural gas, there may still be a desire among importers (especially US allies) to shift to alternative supply.
• Other niche dependencies include reliance on Russia and Ukraine as a source of fertiliser and grain in South-east and South Asia, which could cause disruption in the agricultural sector. North-east Asia-home to the world's leading chipmakers-also has some exposure to any disruption in the supply of rare gases used in semiconductor production.

The conflict's impact on global commodity prices and financial markets will be the bigger concern for Asia

• While direct exposure to the conflict is low in Asia, indirect consequences flowing from the conflict will still be meaningful for Asia's economies. Surges in global prices for energy and agricultural commodities will be the main concern in the region, given relatively high levels of import dependence (even if not directly on Russia and Ukraine). This will apply upward pressure on local prices and could affect energy and food security.
• There will be export benefits for some countries from higher commodity prices and a global search for alternative supply. Net exporters of coal (Australia, Indonesia, Mongolia), crude oil (Brunei, Malaysia) and liquefied natural gas (Australia, Papua New Guinea, Malaysia) will be energy producers to watch. A loss of Russian nickel supply will provide tailwinds for Indonesia and New Caledonia, while Australia and India may play a role in plugging the gap in global wheat supply.
• Risk-aversion in financial markets could also trigger capital outflows from the region, pressurising emerging-market currencies (which were already vulnerable to depreciation as a result of rising US interest rates this year).
• A further indirect concern is whether geopolitical tensions could prompt reprisal measures targeting countries that back measures against Russia. Cyber-attacks and punitive economic policies are potential areas to watch.

Sanctions on Russia's defence firms will lead to diversification of Asian arms supply

• Russia is also a significant supplier of conventional arms to several Asian governments. The country has been the major source of weaponry for China, India and Vietnam over the past 20 years, which has in turn underpinned strong military-to-military ties. This may be an influential factor in persuading India-the only democracy among the three-not to condemn Russia's invasion.
• International sanctions on Russian defence firms will impede the future access of Asian countries to these arms. This will create opportunities for companies from other countries, as well as domestic producers.

Asia is still open to Russian tourists, but they may not come

• Tourism is the main potential exposure within services trade, and with Asian air routes still open to Russian airlines, unlike those in Europe, such trade could continue (and potentially expand). However, the willingness of Russians to travel will probably be affected by economic disruption, rouble depreciation and the withdrawal of international payment services from Russia.
• Reliance on Russian tourists is low in the region overall. Thailand received 1.4m visitors from Russia in 2019, the highest number in Asia, but this still only accounted for less than 4% of total arrivals that year. Without the conflict, however, Russian tourism could have increased in importance, given ongoing curbs on outgoing Chinese travellers.

A handful of Russia-backed investments in Asia could be affected

• Russia's investment and lending footprint in Asia is small, despite efforts to deepen its presence in the region under its decade-long "pivot to the East" policy.
• There are a handful of Russia-backed projects that could be affected by international sanctions and diminishing financial resources, potentially leading to divestment. These include investments in energy infrastructure in Vietnam and the Rooppur nuclear power plant in Bangladesh.
• Asian investment and lending in Russia pales against that of the EU, and is unlikely to be a significant source of earnings for the region's companies and banks. Production facilities in Russia are mainly for that market only, suggesting that departures from the market-such as Japan-based carmaker Toyota's decision to shutter its plant in St Petersburg-will not have a significant impact on companies' broader and more lucrative European operations.

What role will Asia play in pressurising the Russian economy?

• Russia's invasion of Ukraine has been broadly, although not universally, condemned in Asia. US treaty allies and close partners have all announced that they will join sanctions, and some have indicated that they will adopt separate measures of their own.
• These measures will add to the stress created by Western sanctions. For example, while Russia's overall reliance on semiconductors from South Korea and Taiwan is low, a loss of access to the high-end chips produced by these countries will still cause problems for some key Russian industries, such as defence and space, given a lack of alternative supply.
• China stands out in Asia as holding significant economic leverage over Russia. The country accounts for almost 20% of Russia's external trade and provides about 70% of its electronic and technology goods. Although Chinese firms will tread cautiously on sanctions, their preference will be to find ways to maintain links; their ability to do so will be critical for Russia's economy.
• On the investment and lending side, we are sceptical that China-the only really possible candidate in Asia-will significantly expand its currently limited footprint in Russia, for a mix of commercial and diplomatic reasons. If Russia hopes that Asian countries might replace the foreign capital currently leaving the market, it is likely to be disappointed.