Lessons from the Ukraine crisis price shock

News: The Russia-Ukraine conflict will cause major, long-term shifts in the global energy and commodity trade.

What are the driving factors behind the shift?

At Present

(1) The European nations & Other nations (due to western sanctions on Russia) are diversifying their energy supplies. This has been causing market distortions and high prices.

(2) The disruptions have triggered inflation. For example, it has led to increase in the prices of Crude oil, LNG, fertiliser and food. In addition, markets for several other commodities such as nickel have been disrupted.

(3) It could lead to widespread financial distress. For example, In India, the commodity price shock could derail the economy as it recovers from the effects of Covid-19. Sri Lanka and Pakistan are already facing economic turmoil due to high inflation, shortages of necessities and a default on foreign debt. As a result, these countries are also facing political turmoil.

Other reasons

Even before the Ukraine conflict, the oil and gas production were facing insufficient investment. For example, Norway’s sovereign wealth fund, announced they would no longer invest in traditional fuels — oil, gas, coal.

What are the upcoming  challenges?

There are uncertainties on multiple factors — the duration of the Ukraine conflict, the terms on which it is settled, if it is, and the response of the US and its allies, especially on the sanctions.

What does the future hold?

First, the European Union’s ties with Russia will continue to be strained. In the immediate term, the EU is trying to source its raw materials viz. oil, natural gas, fertiliser, agricultural goods and metals, from non-Russian sources. This will cause distortions and price spikes for those commodities in the global market.

Second, the sanctions on Russia are unlikely to achieve the desired political outcome. For example, The US Sanctions on Iran and Venezuela have failed to achieve the desired political outcome. Further, the restrictions are likely to remain for a long while.

Third, the emerging world will remain unwilling and unable to align with the West on the current sanctions. They are facing high prices of energy and other commodity inflation. Russia, which used to be their main supplier, is too big to be replaced as a supplier for these countries.

Further, attempts to buy from other countries will only distort the global markets further. It can lead to public anger and political unrest, as was seen in Tunisia and other Arab countries from 2010 on.

Way Forward

Immediate-Term: the country should collaborate with other similar economies to ensure that Russia doesn’t get locked out of global commodity markets.

Long term: The country must work on insulating its supply chains from global political crises.

Source: The post is based on an article “Lessons from the Ukraine crisis price shock” published in the Indian Express on 04^th June 2022.