Russia’s invasion of Ukraine is unleashing the biggest commodity shock since 1973, and one of the worst disruptions to wheat supplies since the first world war. Ukraine is considered to be Europe’s breadbasket and together with Russia makes up 30% of global wheat sales.
Russian President Vladimir Putin’s decision to plunder one of Europe’s healthiest economies also resulted in ordinary Russian citizens suffering the consequences of international isolation.
Russia is the biggest exporter of natural gas, the second biggest exporter of oil; it supplies half of the world’s uranium and a 10th of the world’s aluminium and copper supply. The country also has a global market share of 10 to 30% of crucial commodities including oil, gas and wheat. “On the ground, there’s chaos at the moment with undelivered cargos of food and oil,” said Patrick Foulis, The Economist Business Affairs editor. Foulis was speaking during a live digital event hosted by The Economist on Russia’s attack on Ukraine. “People have also begun hoarding supplies in the face of an intensified crisis,” reports Foulis. Overall indices of commodity prices are now 26% higher than at the start of 2022.
Energy markets the biggest short-term impact
This week, oil prices gyrated at record volatility and metal prices were also gravely affected, leading to the London Metal Exchange closing this week. “That market effect, which seems remote at the moment is going to feed into the economy,” said Foulis. “We are going to see energy prices going up, which means fuel bills increasing, food prices going up as companies adapt and absorb some of the shocks.” Overall, Foulsi predicts there will be lower growth around the world, particularly in countries affected by gas prices.
Inflation expected to go up by 1-2 percentage points
Perhaps the biggest effect of Putin’s war will be inflation. Global inflation is already running at about 7%. “We think it could go a percentage point or two percentage points higher. If the sanctions intensify and cover more oil, then the effect could be bigger,” predicts Foulis. Beyond that, this is the third biggest shock to globalisation in just a few years. First was the China-US trade war, then the pandemic and now this. Deeper ramifications of this invasion include more companies worrying about supply chains, and a change in the architecture of the global economy. “Hopefully China learns that Russia’s intention to build a fortress economy simply doesn’t work.”
Global food supply
Russia makes up a 10th of all calories or traded food items globally. “Having both Russia and Ukraine removed from trading is a huge event,” said Foulis. Experts expect that the wheat and vegetable oil supply will be drastically affected, the impact of which will reverberate through the middle east, which depends on Russia for wheat supply. Fertilizer supply, although a once-obscure commodity, will have a drastic impact on global farming. “Well over a third of the world’s potash (fertilizer) supplies are going to be affected,” said Foulis. Potash (potassium chloride, KCl) is used primarily as an agricultural fertilizer because it is an excellent source of soluble potassium, one of the three primary plant macronutrients along with nitrogen and phosphorus.“ That affects the future seasons of crop growing around the world.” Food scarcity is likely to have the worst impact on poor countries, in households where food makes up a large portion (25 to 30%) of the expenses.
Economic Armageddon’ for citizens in Russia
The effects of Russia’s invasion on its own citizens have been dire, especially for the country’s middle to upper class in the cities. In Moscow, the effects of global sanctions are very strong, tangible and visible. Ordinary boots on the ground have described the financial impact as an “extraordinary economic Armageddon.” Narrower sanctions on individual products are now taking a toll in an unpredictable way. Russian Airways is facing a supply and maintenance crisis since the west cut them off. Individual brands such as Starbucks and McDonald’s have shut down operations in Russia. Said the Economist’s Russian-European correspondent, Arkady Ostrovsky: “You can’t travel out of Russia, Russians are among the biggest world travellers, 6th in the world. The main airport has been shut down, and there are only a few destinations you can fly to. “You can’t change to dollars, savings in dollars and euros deposits are worthless, you can’t exchange money officially or withdraw those saving because there now capital control”. Capital control is an action taken by a government, central bank, or regulatory body to limit the flow of foreign capital in and out of a domestic economy.
McDonalds employees affected by brand shut down
Russia’s service industry employees are suffering due to a lack of income. McDonald’s in Russia employs over 62,000 people whose financial situation is unclear since the company shut down operations in the country. The burger franchise employees are still being paid for now, but it is unclear whether it will continue paying those employees as the attacks continue. The Economist Deputy Editor Edward Car said the economic effect is worse because the campaign has gone so bad. “While unleashing indescribable violence in Ukraine, and the lies he’s had to tell his nation, Putin is paranoid about the miscalculation he’s made,” said Carr. “The combination of political and economic ruin and unstable, declining Russia may be safe one day but for now while on its way down, is dangerous,” warned Carr
Information courtesy of The Citizen.