Long term impact of sanctions against Russia on supply of wheat, oil, metals and other goods
- Bloomberg Commodity Index recorded its biggest weekly rally since 1960 last week with gains of 13%.
- Many fear that drop in supply of essential commodities could negatively affect global economy that is still recovering from pandemic.
- Price of Brent crude oil almost hit $120 per barrel, the highest in a decade.
Why are commodity prices shooting up?
- Commodity traders have been unwilling to purchase oil and other commodities from Russia fearing that they may be unable to sell them in global market due to sanctions imposed by Western governments.
- Exports from region have already been affected and are likely to be further hit going forward, and this risk has been priced in by traders.
- In 2020 Russia produced about 12% of world’s oil and about 16% of the world’s natural gas.
- It also produced nearly half of world's palladium
- Shiny white metal which is a critical component in catalytic converters
- A part of a car’s exhaust system that controls emissions
- Ukraine supplies about 12% of global wheat exports and 13% of global corn exports.
- In fact, it supplied almost 90% of China’s corn imports in 2019.
- Suppliers in other parts of world have failed to increase their production to make up for the loss of output in Russia and Ukraine.
- OPEC has made no effort to increase its output despite repeated calls by various world leaders to ensure energy security.
Is commodity inflation just about the Russia-Ukraine war?
- Owing to various frictions in 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 form of higher prices.
- Some analysts have also blamed policies in several countries to replace fossil fuels with renewable energy as possible reason behind the increase in commodity prices.
- Global commodity prices, measured by the Bloomberg Commodity Index, have risen by over 60% since the start of 2021.
- Meanwhile, price of an essential commodity like oil has risen even more.
What lies ahead
- Cutting off Russia’s economy from rest of the world can affect not just Russia but also affect businesses and consumers that depend on the Russian economy.
- Countries like Germany 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.