Global resource markets are still reeling from the impacts of Russia’s invasion of Ukraine; the two countries are major suppliers of energy, food and fertilizers. Supply disruption and the sudden imposition, in response to the crisis, of unprecedented economic sanctions, trade restrictions and policy interventions have caused prices of commodities to skyrocket.
Before the conflict, demand for global resources already exceeded supply and drove up prices as economies rebounded after the COVID-19 pandemic. This gave rise to a global cost-of-living crisis, characterized by increasing levels of energy and food poverty. This situation is likely to become much worse as a consequence of the war in Ukraine, and poses a threat to human security, particularly among low-income and vulnerable populations.
Governments must invest now to build resilient societies and economies to meet these long-term challenges. Mitigating the most immediate harms to populations is a top priority for policymakers, but failure to keep long-term objectives in mind – climate change mitigation, in particular – can lead to bad decisions that further embed existing fragilities in economic and social systems.
Direct impacts on energy and food markets
Economic sanctions and policy changes imposed by governments in response to Russia’s invasion of Ukraine have led to price spikes in food and energy markets.
The conflict in Ukraine has led to immediate and significant logistical disruptions in the energy, food and fertilizer sectors, and to swift and robust responses from Western countries in the form of economic sanctions against Russia. Together, these have prompted rapid worldwide price rises for energy, food and fertilizer products.
Economic sanctions, trade restrictions and policy interventions
Unprecedented economic sanctions have been imposed on Russia since the start of this war. These began with broad economic sanctions against the Russian state apparatus and against individuals allied with President Putin, but are increasingly addressing the energy sector directly, with the aim of cutting off the oil and gas revenues that are financing the war. Sanctions introduced so far include EU bans on investment in Russia’s energy sector and on dealings with Russian state-owned enterprises such as Gazprom and Rosneft, as well as sweeping commitments to phase out imports of Russian oil and gas, whether immediately – in the case of the US – or at a later date. For example, the UK government has pledged to end dependency on Russian oil and coal by the end of 2022, and on Russian gas as soon as possible thereafter.
The higher dependency of certain EU member states on Russian energy imports makes fossil fuel sanctions more economically and politically difficult – particularly so for Germany, for example – but pressure is mounting. In April, Charles Michel, the president of the European Council, stated in a speech to the European Parliament that the EU was proposing to introduce a ban on Russian coal imports, and that he believed ‘that measures on oil and even on gas will also be needed sooner or later’. Josep Borrell Fontelles, the high representative of the European Union for foreign affairs and security policy, also told the parliament on the same day that the EU had paid Russia €35 billion for energy since the start of the war. Meanwhile, the US government has prohibited American companies from investing in the expansion of Russian energy production, and US citizens from investing in foreign firms participating in Russian energy production.
Governments have, however, held back on implementing the strongest possible measures – including a full embargo on energy imports – partly due to the challenge of diversifying away from Russian imports and partly in order to maintain leverage in the event of further escalation. In the meantime, Russian gas continues to flow.
In light of the high dependency of the EU on Russian gas imports and the immediate impact of the war on European citizens, by way of both potential reductions in supply and the increased flow of refugees from Ukraine into EU countries, the European Commission introduced a proposal, agreed in principle by the European Council, that will see a rapid decline in the use of Russian fossil fuels and their complete phase-out by the end of the decade. In addition to a review of energy markets (with proposals from the commission expected in May 2022), the possible introduction of an emergency windfall tax on upstream energy companies and the redirection of revenues from emissions trading systems to aid consumers, the main elements of the proposal to reduce the use of Russian gas by 60 per cent in 2022 include:
- Expanded imports of LNG and diversification of pipeline gas, as well as the production of renewable gas;
- Increased energy efficiency in homes, including through behavioural change, accelerating the rollout of heat pumps; and
- Accelerated deployment of renewables.
The UK government’s energy security response has been different, favouring politically more expedient, longer-term supply measures and holding back support for demand reduction and onshore wind generation, which could be realized more rapidly. Notably, in contrast to the EU, the UK strategy proposes a new round of licences for North Sea oil and gas projects, together with investment in nuclear power and offshore wind.
In food markets, a wave of export restrictions have been introduced since the start of the conflict. In early March, Ukraine introduced a ban on the export of wheat and other goods; though, by this time, shipments out of the country had already ground to a halt with the closure of the country’s ports. Despite commitments and calls from the G7 agriculture ministers, the Agricultural Market Information System (AMIS) Rapid Response Forum and the Food and Agriculture Organization of the UN (FAO) director-general to keep global food and fertilizer trade open, transparent and free from speculative behaviour, some countries have already moved to impose export restrictions. Ukraine and Russia have both banned fertilizer exports. In mid-March, Russia banned the export of wheat, maize and other cereals to Armenia, Kazakhstan and Kyrgyzstan,while Egypt, Hungary, Indonesia, Moldova and Serbia have all imposed export bans on staple crops.
Economic sanctions are expected to constrain global supply of nitrogenous fertilizers (which depend on nitrogen and gas exports from Russia), potassic fertilizers (which depend on potash exports from Belarus and Russia) and phosphate-based fertilizers (with Russia being a major exporter of phosphates). These fertilizers are needed now for spring wheat in the Northern Hemisphere (in Canada, the EU, Russia, Ukraine and the US, for example) and maize in Europe, and will soon be needed for the planting season in the Southern Hemisphere.
Price increases in energy and food markets
Russia and Ukraine’s importance as energy and food producers is such that the conflict has shaken global markets. The threat of an interruption of energy supply from Russia has triggered unprecedented price rises in fossil fuels: as of 6 April 2022, oil was $108 per barrel, having been below $80 per barrel at the turn of the year;natural gas in Europe very briefly reached €345 per megawatt hour (MWh) in March, up from €100 per MWh;and the Australian futures price of coal rose to $435/tonne in the first half of March – its highest price ever, and triple the price at the start of the year.While Russia is an important producer globally, it is not the sole determinant of prices, and decisions taken by the Organization of the Petroleum Exporting Countries (OPEC) will significantly determine further price trends, with some analysts suggesting that oil could reach between $200–250 per barrel later in 2022.If Russian production were restricted, the desire and the ability to ramp up production to relieve the tightness in the market would prevent further price rises.
Even before the Ukraine conflict began, many fertilizer producers in Europe were struggling to maintain their operations amid high gas prices, with two UK plants shutting down in 2021.
In the EU, the relative inflexibility of the movement of gas (the majority of which is pumped along fixed pipes) and the importance of Russian supply led to the particularly large price spike. The likelihood of long-term disruption to natural gas supply and a potential switch to coal in Europe sent a strong demand signal to carbon futures markets, with the price of carbon rising to nearly €100/tonne in the first three months of 2022, up from €60/tonne in November 2021.
High energy prices will have secondary impacts on the price of fertilizer, and will threaten the economic viability of its production. Even before the Ukraine conflict began, many fertilizer producers in Europe were struggling to maintain their operations amid high gas prices, with two UK plants shutting down in 2021.Moreover, there is historical precedent for high gas prices forcing the closure of plants.The current high price of fertilizer is already changing farming practice through reductions in areas sown and amounts of fertilizer applied, which will further constrain food supply in the near future.
Since February, forward markets for grains have risen significantly. Wheat futures for the forthcoming harvest were trading at 41 per cent higher on 23 March than on 1 February, and 21 per cent higher than on the day of Russia’s invasion.Wheat futures for December 2022, reflecting the next harvest, were at 35 per cent and 18 per cent for the same dates, indicating that the market expects long-running disruption. Maize futures were 17 per cent above 1 February prices on 23 March, and even soya – with few direct impacts on its availability as a result of the conflict – was up by 8 per cent.
Conflict-related supply disruptions
The bombing of infrastructure, including a nuclear power station (see Box 1) and the besiegement of major cities by Russian troops, together with the deliberate sabotage of critical assets by Ukrainian forces, have resulted in immediate and significant disruption to logistical supply chains in Ukraine – both in the energy, food and fertilizer markets, and beyond (see Box 2).
The movement of goods in and out of the Black Sea region has become both more logistically challenging and significantly more expensive in the wake of the conflict, particularly with the closing of Ukraine’s ports. The designation of the Black Sea and Sea of Azov as ‘high risk’ areas for shipping has pushed up insurance premiums in that industry,while fears over further sanctions on seaborne trade have prompted some shipping companies to freeze deals with Russian suppliers.Vessels face delays at ports elsewhere as additional customs checks are undertaken to ensure that no sanctions have been infringed.Rail connections between Ukraine and Russia were destroyed by Ukrainian troops soon after Russia’s invasion,and the transit of rail freight between Asia and Europe is expected to be disrupted in the longer term both by economic sanctions and by private sector boycotts,likely prompting a shift to other modalities such as shipping. Impacts of the conflict on transportation costs are already becoming evident in the US: as demand for wheat pivots from the Black Sea to the US, the costs of exporting grain from the Gulf of Mexico have risen to a near eight-year high.
Russia’s invasion occurred at a critical time for the country’s grain and oilseed producers. The majority of the previous season’s grain, sunflower oil and sunflower seed was exported before the invasion. Total export volumes for the 2021–22 crop year were up 29 per cent for Ukraine,but down by about 21 per cent for Russia,leaving overall exports from those countries broadly similar to 2020–21. The main growing season in Ukraine normally begins in late March to April, when spring crops are planted, and is concluded by August;winter wheat and barley were planted in autumn 2021. Many activities are unlikely to be possible this year: even if farmers can reach their fields, they are short of fertilizers, pesticides, herbicides and fuel for farm machinery.Many of Ukraine’s most important growing regions – particularly for barley, maize, sunflower seed and wheat – are located in the east and northeast of the country, where the conflict has been most intense.FAO predicts that ‘between 20 and 30 percent of the areas under winter cereals, maize and sunflower seed in Ukraine will either not be planted or remain unharvested during 2022–23 season, with the yields of these crops also likely to be adversely affected’.
Downstream operations have also been disrupted and recalibrated: Ukraine’s leading food supplier has been prioritizing humanitarian food distributions within the country,while, on the day of the invasion, Bunge – one of the major oilseed companies operating in Ukraine – closed its crushing facilities in Dnipro and Nikolaev.
Box 1. Nuclear energy in a conflict zone
Ukraine operates 15 nuclear reactors at four separate nuclear power plants, which between them provide about one-half of the country’s electricity. The Chernobyl nuclear power plant is also located in the country. In 1986, Unit 4 at Chernobyl exploded and a subsequent fire spread radiation across Europe, making it by far the world’s worst civilian nuclear accident.
The Russian rocket attack on the operating Zaporizhzhya nuclear power plant in the east of Ukraine on 4 March 2022 was unprecedented. Modern nuclear power plants such as Zaporizhzhya – which houses six water-water energetic (VVE) 1000 reactors, making it one of the largest nuclear power plants in Europe – have a secondary containment structure around the reactors designed to withstand missile attacks. However, damage to less well-protected equipment such as power lines or backup generators can threaten the integrity of a power plant. During the 4 March attack, damage was caused to the transformer of Zaporizhzhya’s Unit 6, which then took a month to repair.
The attack against Zaporizhzhya serves both to reduce immediate power output for civilian use and to terrorize the population. According to the International Atomic Energy Agency (IAEA), on 5 April seven reactors in Ukraine were still in operation, including two at Zaporizhzhya.Halving the output from nuclear power will add to existing supply burdens in Ukraine.
Russia also took over the site of the Chernobyl nuclear power plant (although, by 1 April, it was being reported that Russian troops were leaving the area), damaged a nuclear research institute in the city of Kharkiv, and, according to the Ukrainian authorities, hit a nuclear waste disposal site near Kyiv during missile strikes.
Despite the conflict, gas has continued to flow from Russia to the EU, with around one-half of those flows transiting Ukraine. At the end of March 2022, Gazprom said that it was supplying natural gas in line with requests from European countries but, on 25 March, the Russian government announced that Gazprom would have ‘to accept payments in roubles’. Current economic sanctions make this very difficult for Western buyers, and prices have spiked further in response. With many of the supply contracts stipulating payments in US dollars or euros, and with the German government advising companies against paying in roubles,Russia changed its position on 5 April, announcing that the move to payment in roubles would be incremental for ‘unfriendly states’, rather than immediate. Despite the war, Russia continues to pay Ukraine for gas transit rights. However, if international financial sanctions are expanded to exclude Russia altogether from the SWIFT international payments system, this would increasingly affect the ability of both Russia and other countries to pay for, and to determine the currency of payment for, commodities such as gas.
Russia has also continued to export oil, although exports from the Caspian Pipeline Consortium were halted at the end of March. This was apparently due to storm damage, with the company claiming that repair work could be delayed due to the unwillingness of Western companies to supply parts. The shutdown halted the export of 1.4 million barrels a day of oil and led to a 5 per cent rise in the price of Brent crude.Flows of electricity have changed in recent years, with Ukraine having decoupled from the Russian electricity grid and become fully synchronized to the European network. The connection on 16 March of the Ukrainian and Moldovan grids was already planned, but has been accelerated to help increase grid stability in Ukraine.
Box 2. Supply-chain disruptions beyond energy, food and fertilizers
Additional supply-chain disruptions and economic ripple effects from the war include the worsening of the current semiconductor supply shortages. Before Russia’s invasion of Ukraine, the latter provided about one-half of the world’s supplies of neon – a gas needed for high-precision laser equipment used to manufacture microchips.Furthermore, Russia provided a large share of US supplies of palladium, used in semiconductors and catalytic converters. Chip shortages cost automotive companies $210 billion in revenues in 2021, while microchips are also key components for many renewable energy technologies, including electric vehicles, wind turbines and solar photovoltaic (PV) equipment. Russia is a significant exporter of titanium, which is used in the aerospace industry because of its relatively low weight, indicating potential disruption to the aerospace supply chain.Other important Russian metals exports include nickel, aluminium and copper.
Sanctions have now begun to be imposed on Russian metals exports, with the EU banning key iron and steel imports as part of its fourth wave of sanctions,and with the UK applying additional tariffs of 35 per cent on a range of imports, including copper, lead, primary aluminium, and aluminium alloy. However, the imposition of significant sanctions on Russian exports of metals and minerals does have the potential to increase traded prices where alternatives cannot be delivered quickly. So too does the prospect of damage to production capacity, as seen with Russia’s bombing of the Azovstal iron and steel works in Mariupol, one of Europe’s largest iron and steel facilities. Concerns about disruption have raised prices for key London Metal Exchange contracts such as for aluminium during March, with knock-on effects for delivered prices increasing costs for industry and, in the longer term, potentially raising the cost of deploying energy-efficiency, renewable-energy and clean-energy technologies that are crucial to alleviating dependence on Russian oil and gas.
Private sector actors have also stepped back from engagement with Russia. A number of oil and gas companies have announced that they would exit their share of oil and gas fields or companies. These include BP’s 20 per cent stake in Rosneft; ExxonMobil’s participation in the Sakhalin-I project in eastern Russia; Shell’s joint venture with Gazprom in the Sakhalin-II project; and all of Norwegian company Equinor’s Russian ventures. In the food and fertilizer sectors, a number of major private sector companies have discontinued or reduced operations in Russia: Bayer – a key supplier of agricultural inputs in Russia – has made its supply for 2023 contingent upon Russia ‘stopping its unprovoked attacks on Ukraine and returning to a path of international diplomacy and peace.’The agribusiness conglomerates Bunge and Cargill have announced the suspension of new investments and of their export businesses in Russia (although their existing grain and oilseed operations continue);while ADM – another large agribusiness – has said it will scale back its activities in Russia.Meanwhile, the mining firm Rio Tinto has also exited its joint venture with Russian aluminium producer Rusal.
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