Tensions over Ukraine are ratcheting up, with the prospect of sanctions on Russia threatening to further raise prices of commodities key to the global economy.
After continued warnings from the US and its allies that Vladimir Putin could be planning to invade Ukraine – something he has repeatedly denied – the Russian president officially recognised two self-proclaimed republics in eastern Ukraine and ordered what he called “peacekeeping forces” to go into the areas.
Western leaders condemned the moves, with the US and UK planning to announce new sanctions as soon as Tuesday, while the European Union will start the process of agreeing penalties.
Markets have been on edge for weeks, and an actual conflict – or sanctions – could drive energy and food prices even higher, and push Europe into a major supply crisis.
Crude oil is approaching $100 a barrel and European natural gas surged on Tuesday. Other commodities have also gained, with aluminum nearing a record and wheat climbing to a one-month high. Gold, a time-honoured haven, is near the highest since June.
“Rising geopolitical tensions are further amplifying the case for commodities, given Russia’s far-reaching impact on global commodity markets,” JPMorgan Chase said in a report.
Sanctions could lead to shortages of food and energy, causing prices of both to soar, Bloomberg Intelligence said recently.
Capital Economics said the biggest impact is likely to come through commodity prices, and a worst-case scenario could see oil reach $120 to $140 and gas jump higher, adding about 2 percentage points to headline inflation in advanced economies this year.
Agreeing on the scope of sanctions won’t be easy since Russia’s moves fall short of a clear military attack, while penalties could threaten to further raise prices of key goods at a time when household budgets are already strained.
The first steps could be penalizing individuals involved in the recognition of the two breakaway regions in eastern Ukraine, a more limited move that could happen relatively quickly.
With traders and policymakers scrutinizing every move and comment in the standoff, here’s a look at the potential consequences for key raw materials.
One of the biggest impacts so far has been on Europe’s gas markets. Geopolitical tensions have been amplified by already limited supplies from Russia and below-average stockpiles, with prices in the region jumping nearly fourfold in the past year.
A full-blown conflict could disrupt the massive volumes that Russia sends to Europe, about a third of which typically comes through Ukraine. Sanctions could hit trade and keep a new pipeline, Nord Stream 2, from bringing Russian gas to Europe. That could all have a big impact on refilling inventories in the summer, making next winter difficult as well. Prices could surge even higher, and send Europe’s economy reeling. Russia would also lose huge amounts of revenue.
Still, many think it’s unlikely gas supplies would stop, or even be cut significantly. Russia plans to continue uninterrupted supplies of gas to global markets, Energy Minister Nikolai Shulginov said in Qatar, where he’s attending a gas forum.
Food and fertiliser at risk
A major casualty could be even higher food prices. Ukraine and Russia together are heavyweights in global wheat, corn and sunflower oil trade, leaving buyers from Asia to Africa and the Middle East vulnerable to more expensive bread and meat if supplies are disrupted.
That would add to food-commodity costs that are already the highest in a decade.
When Russia annexed Crimea in 2014 wheat prices jumped even though shipments weren’t substantially affected. Russia and Ukraine’s share of world exports has increased since, with nations like Egypt and Turkey reliant on the Black Sea breadbasket.
So far, cargoes are still flowing freely and there’s no indication of significant disruptions. But should that happen, global markets already grappling with shrinking grain stockpiles could see further shortfalls.
Russia is also one of the world’s biggest exporters of all three major groups of fertilizers. Any cuts in supply may result in a surge in already high nutrient prices, affecting crop yields and cause further food inflation.
Traders are also weighing the risk of disruption to Russian exports of metals including aluminum, nickel, palladium and steel, even as analysts stress that targeting Russian producers directly with sanctions would be a major own-goal for the West.
US sanctions against United Co. Rusal International PJSC sparked turmoil in the aluminum market in 2018, and policymakers may not want to risk a repeat. Rusal’s shares have plunged in Hong Kong in recent days.
But should Russia get cut off from the Swift international payment system as part of any sanctions, it would slow down the flow of funds and hit exports. Any disruptions to gas flows could also exacerbate problems for metal producers in Europe who’ve been cutting output in response to high energy prices.
Even short-lived disruptions could have an outsized impact at a time when manufacturers are already facing critical shortages of metals from aluminum to zinc. The fallout could be particularly dramatic in the palladium market, where Russia accounts for about 40% of global supply.
The country is less dominant in base metals, but remains one of the world’s leading suppliers, with JPMorgan estimating that it accounts for about 4%-6% of global refined production of copper, aluminum and nickel.
Any disruptions to oil flows from Russia, with low spare production capacity in other countries, could easily send prices rallying. JPMorgan’s analysts have even tested the possibility of a spike to $150. Prices in London are approaching $100 a barrel. Additional sanctions on top of those already affecting Russia’s oil industry could take oil higher much more quickly.
At that price, the impact on the global economy could be debilitating. It’s a reason many don’t expect sanctions to be so severe that oil flows are significantly affected. Besides, Saudi Arabia and some others in the Middle East could potentially fill the gap.
Still, traders remain edgy. Around half of Russia’s oil and condensate exports are directed to Europe. Disruptions could wreak havoc, and force trade routes to change.