Asian economies could be battered by high commodity prices in the wake of Russia’s invasion of Ukraine, even if nations do not rely directly on oil, pipeline gas or LNG imports from Russia.

Malaysia plans to review its current fuel subsidy in favour of a targeted programme for the needy due to the sharp increase in global crude oil prices, said Finance Minister Tengku Zafrul Aziz.

He said that the government could be paying up to 28 billion ringgit (US$6.65 billion) in subsidies for petrol, diesel and liquid petroleum gas for 2022, as the Russian-Ukrainian war has pushed crude prices over US$100 per barrel. In comparison, last year’s subsidies totalled 11 billion ringgit.

Tengku Zafrul added that the spike in global oil prices had already hit the government with a tenfold increase in its petroleum products subsidy – more than 2 billion ringgit in January 2022 versus 200 million one year prior.

Following Russia’s invasion of Ukraine and escalating oil prices, he now expects that Malaysia’s subsidy for petrol, diesel and LPG will cost the government more than 2.5 billion ringgit a month.

“If the global crude oil prices remain at over US$100 (RM418), the overall cost of subsidy for the whole of 2022 is expected to reach RM28bil compared to RM11bil in 2021," added Tengku Zafrul.

"The government cannot borrow to finance operating expenditures such as subsidy costs," he said.

"So, the increase in subsidies needs to be offset by additional revenue and expense savings."

He added that under the current scheme, the same subsidised oil and product prices are enjoyed by all, regardless of their income, adding that higher income households actually benefit the most as their energy use is typically higher than the less affluent.

Neighbour and fellow Asean oil and gas producer Indonesia too relies on fuel imports to help meet its burgeoning energy demand.

Indonesia’s energy subsidies including for petrol (benzene) and LPG – intended to keep fuel affordable for its 275 million population – already totalled 131.5 trillion rupiah (approximately US$9 billion), significantly higher than the initially budgeted 110.5 trillion rupiah.

“Thus, the current geopolitical conflict has the potential to trigger an increase in government subsidies and further weaken the nation’s energy security. Increasing government subsidies is not ideal at this moment since the reallocation of the government’s budget may derail Indonesia’s broader development plans,” reported The Diplomat.

The regional intelligence provided said that increasing the price of fuel might therefore be Jakarta’s most realistic option even though it is “politically dicey”.

Heavy cost to Pertamina

These subsidies come at a heavy cost for both the state budget and cash flows of Indonesia’s state-owned oil company Pertamina, which could book monthly losses of $500 million if the government does not hike prices, according to Bloomberg.

Soaring liquefied natural gas prices look set to drive up India’s 2022 budgeted 1 trillion rupees (US$14 billion) fertiliser subsidy bill, said the Institute for Energy Economics and Financial Analysis (IEEFA).

India’s heavy reliance on imported LNG as a fertiliser feedstock exposes the nation’s balance sheet to ongoing global gas price hikes and increasing the New Delhi government’s fertiliser subsidy bill, according to a new IEEFA report.

“By shifting away from expensive LNG imports for fertiliser production and using domestic supplies instead, India could reduce its vulnerability to high and volatile global gas prices and ease the subsidy burden,” the report said.

Not only has the Russia-Ukraine conflict exacerbated already high global LNG prices, but India also faces a much higher subsidy due to a slowdown of fertiliser supplies from Russia that will translate to soaring fertiliser prices globally.

Green ammonia critical for India

“In the longer term, the development of green ammonia will be critical to insulate India from expensive LNG imports and a high subsidy burden. As an interim measure, the government could allocate the limited domestic gas supplies to fertiliser manufacturing instead of to the city gas distribution network.”

Report author IEEFA analyst, Purva Jain, said that LNG spot prices are forecast to remain above $50 per million British thermal units through September and $40/ per million Btu until the end of the year.

Meanwhile, a senior member of Japan's ruling coalition said the government should compile economic stimulus measures to address the impact of soaring energy costs.

Reuters cited Natsuo Yamaguchi, head of Komeito, the junior partner in Prime Minister Fumio Kishida's coalition, as saying the measures were among steps needed to prepare for a further rise in prices of oil, wheat and other goods as a result of Russia's war on Ukraine.

Yamaguchi also urged the government to curb retail fuel prices by invoking a "trigger clause", which would allow it to cut the petroleum tax in addition to existing energy subsidies.

Japan had implemented a temporary subsidy scheme in late January in response to tightening global oil supply concerns before Russia’s 24 February incursion into neighbouring Ukraine.

The government has already called on 350 billion yen (US$3 billion) of emergency reserves for the fiscal year ending 31 March to fund these subsidies.

Japan sets a subsidy for the coming week if the pump price for petroleum exceeds the threshold of 170 yen.

Stockpile barrels released

South Korea’s response to prevailing market conditions has been somewhat different. The Seoul government has elected to release 4.4 million barrels of oil from its emergency reserves under the agreement reached by International Energy Agency member to help stabilise prices. The government also said it would extend fuel tax cuts by a further three months.

To the south, in the Philippines, the Land Transportation Franchising and Regulatory Board (LTFRB) this week is set to begin distributing fuel vouchers to almost 400,000 public utility vehicle drivers.

The first tranche of this LTFRB scheme will cost the government 2.5 billion pesos (US$47.7 million), with another 2.5 billion pesos-worth of subsidy due to be released in April.

The Manila administration will also disburse 500 million pesos in fuel subsidies to agricultural producers.

“Under the fuel subsidy programme, financial assistance amounting to 6500 pesos will be directly provided not only to affected jeepney drivers but also to qualified drivers of… buses… taxis [and] tricycles,” the Philippines Department of Budget Management (DBM) said.

The DBM added the fuel discounts would be extended to “farmers and fisherfolk who own agricultural or fishery machinery, either individually or through organisations".

The Paris-based agency IEA projected last November that subsidies in 2021 would soar by the highest annual rate ever to reach $440 billion. Last year’s total is expected to have come in higher than that forecast while global energy subsidies in 2022 look set to again surge unless the Russia-Ukraine conflict is soon resolved, and commodity prices stabilise lower.