Wednesday, May 22, 2024 | 18:05 WIB

THE WAR IN UKRAINE What impact does it have on the Indonesian economy ?



Projecting from the embargo of western countries against Russia, there will be a sharp increase in ammonia demand. Besides being expected to be able to meet domestic fertilizer needs, fertilizer SOEs also need to increase exports to countries whose fertilizer supply is reduced. In the Asean region alone, Thailand and Malaysia import US$170.3 million and US$77 million of fertilizer each year from Russia. Fertilizer factories in Indonesia already enjoy special gas price incentives from the government, so fluctuations in international gas prices shouldn’t be a problem. Don’t let the momentum pass. 

Nickel as an important raw material for electronics, EVs and other automotive applications has been affected. Per year, Indonesia imports US$19.7 million of Nickel from Russia, equal to 22% of the total imported goods from Russia. The economic sanctions have made it difficult for Russia to export Nickel to other countries, mainly due to the non-functioning of SWIFT payments. Investment in nickel mining in Russia has also been drastically reduced, after European companies halted investments. 

Economic sanctions provide an opportunity for nickel producers from Indonesia to penetrate the market left by Russia. Russia’s nickel imports to the US are recorded at US$118 million per year, so US electronics and automotive companies will look to other sources of the metal. 

Nevertheless, there are challenges. First, some nickel producers in Indonesia are considered to have failed to meet ESG (Environment, Social & Governance) standards, while most Australian nickel mining and smelters have done so; thus, Australia has the opportunity to become Indonesia’s toughest competitor. Second, logistics costs in Indonesia are still relatively high at 23.5% of GDP, and ultimately affect competitiveness with other countries. Third, not all the quality of nickel produced by Indonesia can replace the quality of nickel from Russia. 


Although it is claimed that Indonesia’s nickel ore reserves reached 3.74 billion wet metric tons (WMT), it is necessary to improve the quality of our nickel. Fourth, domestically, Indonesia is studying nickel DMO for the battery industry, which is being developed. As a result, nickel producers may focus more on meeting the demands of permanent buyers from China and the domestic market itself. 

Other impacts 

Swelling of costs or cost overruns can also be a new consequence to strategic infrastructure projects, for instance national capital projects. In the context of Nusantara capital mega-projects in Indonesia, attention needs to be paid to rising steel prices. Indonesia also imports steel worth US$291 million from Russia and US$214 million from Ukraine. Can steel producer SOEs in the country be able to fill this void? In order to fulfill infrastructure projects and construction of existing housing, imports are still needed, especially in the construction of the nation’s new capital city. 

The invasion of the Ukraine also exerted an impact on palm oil prices. In addition to being a raw material for food and beverages, palm oil price trends are also influenced by crude oil prices. When the price of crude oil rises, consumers are also looking to biodiesel alternatives for vehicles and industrial machines. 

In this context, the government’s policy to stabilize cooking oil prices is considered ineffective. The release of DMO and HET immediately caused domestic cooking oil prices to spike. Although the supply is available at various retailers, the price of cooking oil is above IDR 24,000 per liter. Even based on the Strategic Food Information Data Center, the price of cooking oil in the eastern part of Southeast Sulawesi reached IDR 41,000 per liter. 

Before the pandemic, the increase in public retail spending was historically 10-15% higher during Ramadhan. Even basic needs such as cooking oil, shoots up by 20% during Ramadan, and at the peak of Eid al-Fitr, the increase can be 43% compared to normal times. 

Strategy to encourage CPO producers to fulfill domestic demand includes an increase in the export levy for CPO. The latest change of the export levy is considered still too small, only reaching a maximum of US$375 per ton. Meanwhile, the Rotterdam exchange benchmark CPO price currently reaches US$1,760 per metric ton. This means that export levies are still considered too low, so that CPO entrepreneurs continue to enjoy the momentum of soaring CPO prices. If CPO entrepreneurs feel that exports still provide a thick margin, the tendency to meet domestic supply will be reduced. It’s good that yesterday there was a DMO: it’s just a matter of enforcing the rules, now it’s been revoked and a levy is applied. 

The increase in food prices will continue, both on the demand side and because of the release of cooking oil into the market mechanism. This is not the momentum of Ramadan: of course during Ramadan the price will be higher. We also need to be aware of imported inflation, where the cost of importing raw materials has increased significantly, due to the war in Ukraine. From wheat grain to beef all have experienced a significant increase recently. So, the government must maintain the stability of this food in various ways, including finding alternative imports and encouraging long-term contract for commodities that cannot be produced domestically so that prices stay stable. 

People’s behavior will adjust to an increase of prices for a number of basic needs. There are only three choices. First, more frugality or delaying the purchase of other goods, because income is being eroded by rising prices. For example, if you want to pay in installments on a mortgage or buy a new motorbike, it will be postponed, as currently the focus is on spending on groceries. Second, look for alternative food items at affordable prices. (FIGURE-3) 

Many people are willing to downgrade, from buying packaged cooking oil to buying bulk cooking oil (curah). Third, reduce food portions, especially for families who are vulnerable to poverty. If you usually eat with various side dishes, the portion is reduced to only rice and instant noodles. The lower the income of the community, the composition of expenditure for food ingredients is greater, so it is certain that the vulnerable will cut back on the portion of food. In total, people’s purchasing power will be under pressure. This has been reflected in the Consumer Confidence Index, where job opportunities have not returned to the 100 level, or it is still difficult to find work, while incomes for lower groups are also slow to recover. (FIGURE-4) 

The impact of food and energy inflation makes poverty reduction much more challenging. The actual poverty rate still cannot be said to have fallen when compared to pre-pandemic times, namely, September 2019, where the poverty rate was recorded at 9.2%, while in September 2021 it was still 9.7%. Inflation is a serious problem that prevents poverty alleviation from returning to its pre-pandemic state. 

In 2022, the increase in food prices and the adjustment of energy tariffs will make it easy for the purchasing power of the poor to fall below the poverty line. On the other hand, 76% of rural poverty line is influenced by food needs. This means that the poorer people in Indonesia are, the more sensitive they are to rising food prices. Next is the matter of labor absorption, although there is recovery, but it has not been evenly distributed in all business sectors. Tourism and informal workers related to the transportation sector, for example, cannot be said to have recovered. Here it is necessary for the government to formulate a special stimulus for job creation in sectors or areas whose recovery is lagging behind. 

Bhima Yudhistira

Producers have been experiencing production cost pressures since the end of 2021. The combined Producer Price Index (PPI) of three sectors (Agriculture, Mining and Quarrying, and Processing Industries) in quarter IV-2021 rose 2.74 percent compared to quarter III-2021 (QoQ) and rose 8.77 percent against the fourth quarter of 2020 (YoY). In fact, many producers are waiting for the momentum to increase from selling prices at retail. They first see how prepared consumers are with price increases or waiting for Government to issue 11% new VAT tariff. 

Monetary impact 

From a monetary side, the Ukraine war impels many central banks to tighten monetary policy. The Fed raised interest rates by 25 bps, not because of the economic recovery but because of fears of high inflation. The projections of various international institutions foresee a current threat of a global economy slowdown, due to supply disruptions and geopolitical risks. This is a condition that can trigger economic pressures both in the US and in developing countries, because consumers are actually not ready to face an increase in interest rates. 

Yields on Indonesian Government bonds rose even before the announcement from the Fed. According to ADB data, the yield on 10-year government bonds rose 37.2 bps since the beginning of 2022 to 6.75%. Rising yields indicate the risk of debt securities in an increasing trend. Investors also pressured the government to immediately increase the SBN coupons as compensation for rising interest rates globally. 

An increase in interest rates in various countries can exacerbate the burden on society. Interest on mortgages, motor vehicle loans and business capital loans will rise throughout 2022, even though the consumer confidence index (IKK) as of February 2022 actually weakened. The risk of weakening economic growth in the country could happen again, and the 5% growth projected for this year will be difficult to reach. 


Apart from the Russia-Ukraine events, there are difficult side choices in terms of the Indonesian point of view, while Russia’s role in investment is also important. The oil project in Tuban can be delayed or even canceled. The impact of sanctions will result in disruption of investment from Russia to Indonesia. The role of investment from Russia is relatively small in 2021, only reaching 27.8 million USD or 0.89% of total investment; compare this to China, which is placing 3.1 billion USD. The impact of sanctions against Russia by western countries and the invasion of Ukraine against Russian FDI will not significantly affect investment performance throughout 2022. What should be noted is that the trend of indirect investment from European Union countries, especially Eastern Europe, to Indonesia could weaken. You can delay or even cancel and that’s a pretty big value. 

Opportunities to take over investments that enter Russia are wide open. For example, Russia is a fairly large producer of agricultural fertilizers, with an annual value of 7 billion USD. This should be a golden opportunity to take over Russia’s role in the fertilizer market, where demand continues to increase. Indonesia also has large gas reserves for fertilizer raw materials. 

Then there are strategic products such as machinery, wood, and steel produced by Russia that can be taken over by Indonesian players, provided that certain conditions are met, for example, strong market intelligence to map Russia’s supply chain to its trading partner countries, including information on distributors and potential buyers. Next, there must be an increase in product quality, reducing barriers to export and import duties in export destination countries, to assisting in certification for Indonesian export players, so that they have access to markets left behind by Russia. 

To handle domestic purchasing power, the components of the Consumer Confidences Index that need to be increased are employment opportunities and purchases of durable goods. The government must accelerate the stimulus to the business world and MSMEs so that more workers are absorbed. In the end, optimal labor absorption will increase people’s income in general. It is also urgent to control prices, especially those for fuel and foodstuffs. 

Then the effectiveness of social assistance must be monitored and continuously evaluated. In 2022, several social assistance funds suffered a decline, as inflation was increasing and the pandemic was still a threat. Social assistance should not be in a hurry to be revoked; the minimum budget is IDR 300-400 trillion, specifically for social protection from the total PEN. The problem of data collection and verification of social assistance recipients can also be faster through the integration of the NIK with integrated social assistance data. Not only the NIK that is integrated into the NPWP (tax code), but also social assistance needs to be integrated with population data. 

Additionally, the government should postpone the 11% VAT rate increase. The policy of postponing the VAT rate is quite supportive of economic recovery, especially the impact of the geopolitical situation, impelling inflation much higher. On the other hand, loosened mobility post-quarantine and the lifting of the mandatory antigen-PCR test have made the demand side also encourage inflation. Actually, the increase in the VAT rate to 11% when household consumption starts to solidify doesn’t matter: right now the momentum is clearly not right. 


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