Lessons from the price shock of the Ukrainian crisis


The Russian-Ukrainian conflict, which has now lasted for more than three months, will lead to major and long-term changes in the world trade in energy and raw materials. Western sanctions against Russia and efforts by European nations to diversify their energy supplies are already causing market distortions and high prices. These, in turn, began to trigger inflation and widespread financial hardship. In India, the commodity price shock across the board could derail the economy as it recovers from the effects of Covid-19.

The conflict has already had a global economic impact. Crude oil prices are at their highest level since 2014; the price of LNG has never been so high, fertilizers and food are on the rise and the markets for several other raw materials such as nickel have been disrupted. Expensive commodities are already causing difficulties in India’s neighbourhood, for example in Sri Lanka and Pakistan. In the case of Sri Lanka, economic turmoil due to high inflation, shortages of basic necessities and default on foreign debt payments also caused a political crisis.

The warning signs were visible long before the start of the conflict in Ukraine. Insufficient investment in oil and gas production in previous years led to high prices and shortages. A number of European investors, such as the Norwegian sovereign wealth fund, have announced that they will no longer invest in traditional fuels – oil, gas, coal. With investors on the sidelines, the conflict in Ukraine precipitated the inevitable.

Even without the conflict, another factor could have triggered the price shock. Natural gas is used as a feedstock for fertilizers. An energy shock is then inevitably followed by a food price shock.

The best of Express Premium
Prime
Urban agriculture can help make cities sustainable and livablePrime
The dangerous intellectual fad of “civilizationism”Prime
Explained: Basics of NAS - how inquiry to assess school learning is conducted.Prime

What does the future hold? The seriousness of the situation depends on several factors – the duration of the conflict in Ukraine, the conditions under which it is resolved, if it is, and the response of the United States and its allies, in particular with regard to punishments.

Although these results cannot be predicted, some trends are evident. First, whatever the outcome of the conflict, the European Union’s ties with Russia will continue to be strained. In the immediate term, the EU is trying to source raw materials – mainly oil and natural gas, but also fertilizers, agricultural products and metals – from non-Russian sources. This will lead to distortions and price spikes for these products on the world market, as can already be seen in the natural gas market, which grew by 300% last year.

Second, sanctions against Russia are unlikely to achieve the desired political outcome. The United States and its allies quickly impose sanctions – and these are rarely, if ever, withdrawn. Iran has been under US sanctions since 1979, as has Venezuela for more than a decade. In both cases, the sanctions failed to achieve the desired political outcome of regime or behavior change. As Russia is much better placed than either of these two countries to deal with the sanctions, the restrictions are likely to last a long time.

Third, the high price of energy and the resulting inflation show why much of the emerging world is unwilling and unable to match the West on current sanctions. Russia makes up 11% of the world’s landmass and is among the world’s top five producers and exporters of oil, gas, fertilizers and other essential raw materials like nickel. He is too big to be replaced as a supplier. Attempts to buy from other countries will only distort the markets further. In emerging economies, it can stir up public anger and political unrest, as seen in Tunisia and other Arab countries from 2010.

Major emerging economies such as China, India and Brazil will ignore sanctions on their core economic interests, especially food, fertilizer and energy. For India in particular, its reliance on these essentials is unlikely to decrease significantly over the next 15-20 years. In the immediate future, the country should work with other similar economies to ensure that Russia is not excluded from global commodity markets. In the long term, it must strive to insulate its supply chains from global political crises.

(Bhandari is Senior Fellow for Energy, Investment and Connectivity, Gateway House. He is also the author of India and the Changing Geopolitics of Oil)

Previous Pennsylvania FNB to expand into North Carolina with $117 million deal
Next PM Rowley - Opposition undermines T&T and Caricom