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

The story so far: Commodity prices have gone into a tizzy after Russian forces invaded Ukraine last month. The Bloomberg Commodity Index recorded its biggest weekly rally since 1960 last week with gains of 13%. Many fear that a drop in the supply of essential commodities such as oil, metals, and agricultural goods could negatively affect the global economy that is still recovering from the pandemic. The price of Brent crude oil on Thursday almost hit $120 per barrel, the highest in a decade.

Why are commodity prices shooting up?

The military conflict between Russia and Ukraine has led to disruptions in the global commodity supply chain. Commodity traders have been unwilling to purchase oil and other commodities from Russia fearing that they may be unable to sell them in the global market due to sanctions imposed by Western governments. The United States and European Union have been taking measures to debilitate Russia’s economy by cutting Russian banks off the SWIFT payment messaging system and freezing Russia’s foreign reserves.

There are also logistical difficulties in transporting commodities from war zones. Exports from the region have already been affected and are likely to be further hit going forward, 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 which is a critical 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 global wheat exports and 13% of global corn exports. In fact, the country supplied almost 90% of China’s corn imports in 2019. Disruptions in such significant commodity supplies can affect global commodity prices.

At the same time, suppliers in other parts of the world have failed to increase their production to make up for the loss of output in Russia and Ukraine. The Organisation of the Petroleum Exporting Countries (OPEC), for instance, has made no effort to increase its output despite repeated calls by various world leaders to ensure energy security. In fact, the OPEC meet last week was wrapped up in minutes.

Is commodity inflation just about the Russia-Ukraine war?

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

Global commodity prices, as measured by the Bloomberg Commodity Index, have risen by over 60% since the start of 2021. Meanwhile, the price of an essential commodity like oil has risen even more.

What lies ahead?

The course of the Russia-Ukraine war, which is unpredictable at the moment, will naturally affect the price of commodities going forward. The hit to commodity supplies could be greater the longer the war lasts and the uglier it gets. It should be noted that cutting off Russia’s economy from the rest of the world can affect not just Russia but also affect businesses and consumers that depend on the Russian economy. Countries like Germany, for instance, rely heavily on energy supplies coming from Russia. This could be why the West is yet to impose sanctions on Russia’s export of crude oil and natural gas. It is not just Russia that will suffer from the war and sanctions but also the rest of the world. Also, as the global economy struggles to grow while prices rise fast, analysts have warned about the risk of stagflation, which is marked by high price inflation and low growth.