Explained | Will sanctions against Russia affect the long-term supply of wheat, oil, metals and other goods?

The story so far: Commodity prices have soared after Russian forces invaded Ukraine last month. The Bloomberg Commodity Index posted its biggest weekly rally since 1960 last week, gaining 13%. Many fear a contraction in the supply of essential commodities like oil, metals and agricultural commodities could negatively impact the global economy, which is still recovering from the pandemic . The price of Brent crude oil hit nearly $120 a barrel on Thursday, its highest level in a decade.

Why are commodity prices skyrocketing?

The military conflict between Russia and Ukraine has disrupted the global commodity supply chain. Commodity traders were reluctant to buy oil and other commodities from Russia, fearing that sanctions imposed by Western governments would prevent them from selling them on the world market. The United States and the European Union have taken measures to weaken the Russian economy by cutting off Russian banks from the SWIFT payment messaging system and freezing Russia’s foreign exchange reserves.

There are also logistical difficulties in transporting goods from war zones. Exports from the region are already being affected and are likely to be further affected in the future and this risk has been priced in by traders. It should be noted that in 2020 Russia produced about 12% of the world’s oil and about 16% of the world’s natural gas. It also produced nearly half of the world’s palladium (the shiny white metal that’s a crucial component in catalytic converters — a part of a car’s exhaust system that controls emissions, for example). Ukraine, on the other hand, supplies about 12% of world wheat exports and 13% of world corn exports. In fact, the country provided nearly 90% of China’s corn imports in 2019. Disruptions in such important commodity supplies can impact global commodity prices.

At the same time, suppliers in other parts of the world have failed to increase production to compensate for lost production in Russia and Ukraine. The Organization of the Petroleum Exporting Countries (OPEC), for example, has made no effort to increase production despite repeated calls from various world leaders to ensure energy security. In fact, last week’s OPEC meeting was over in minutes.

Is commodity inflation all about the war between Russia and Ukraine?

No. Commodity prices have risen significantly since at least 2021, when lockdowns were slowly being lifted by governments and economies were allowed to open up. It should be noted that due to various frictions in the global economy, it has taken a while for supply chains disrupted by lockdowns to return to normal. The range of goods was limited and this shortage was reflected in higher prices. Some analysts have also blamed policies in several countries to replace fossil fuels with renewable energy as a possible reason for the rise in commodity prices. The emphasis on renewable energy, they argue, has discouraged investors from investing in traditional fossil fuel production. Meanwhile, the pandemic has also seen major global central banks like the US Federal Reserve and the European Central Bank inject massive amounts of fresh money into their economies. This led to an increased demand for all goods and services and caused their prices to rise. In short, too much money being printed by central banks chasing too few commodities has led to a rapid rise in commodity prices.

Global commodity prices, as measured by the Bloomberg Commodity Index, are up over 60% since early 2021. Meanwhile, the price of such an important commodity as oil has risen even more.

What lies ahead?

The currently unpredictable course of the Russia-Ukraine war will naturally affect commodity prices. The impact on resource supply could be greater the longer the war lasts and the uglier it gets. It should be noted that the isolation of the Russian economy from the rest of the world may affect not only Russia, but also businesses and consumers that depend on the Russian economy. Countries like Germany, for example, are heavily dependent on energy supplies from Russia. This could be the reason why the West has not yet sanctioned Russia’s export of crude oil and natural gas. Not only Russia will suffer from the war and sanctions, but the rest of the world. As the global economy struggles to grow while prices are rising rapidly, analysts have warned of the risk of stagflation, characterized by high price inflation and low growth.

Leave a Reply

Your email address will not be published. Required fields are marked *