Lessons from a price shock

• In the short term, India must work to ensure Russia is not locked out of global commodity markets. In the long term, it must insulate its supply chains against global crises.

Global Energy and commodity trade

• The Russia-Ukraine conflict will cause major, long-term shifts in the global energy and commodity trade.
• Western sanctions on Russia and European diversification efforts of energy supplies are already causing market distortions and high prices.
  • Which has triggered inflation and widespread financial distress.
• In India, the price shock could derail the economy.
• Crude oil prices are at their highest level since 2014 and the price of LNG is at its highest ever.
  • Which led to higher fertiliser and food prices.
• High metal prices eg, nickel damaging further the nascent recovery.

Early signs

• The warning signs were visible long before the conflict in Ukraine began.
• Insufficient investment in oil and gas production in preceding years resulted in high prices and limited capacity.
  • A number of European investors, such as Norway’s sovereign wealth fund, did not invest in traditional fuels — oil, gas, coal.
  • The conflict in Ukraine precipitated the inevitable.
• Natural gas is used as a feedstock for fertiliser. An energy shock is then inevitably followed by a food price

What does the future hold?

• Multiple factors to decide: —
  • The duration of the Ukraine conflict,
  • The terms on which it is settled,
  • The response of the US and its allies, especially on the sanctions.
• The European Union’s ties with Russia will continue to be strained.
• 1st, In the immediate term, the EU is trying to source its raw materials — most critically oil and natural gas, but also fertiliser, agricultural goods and metals — from non-Russian sources.
  • This will cause distortions and price spikes for those commodities in the global market.
• Second, sanctions on Russia are unlikely to achieve the desired political outcome.
• Third, the high price of energy and the resulting inflation shows why much of the emerging world is unwilling and unable to align with the West on the current sanctions.