ISOLATED RUSSIA: RIPPLE EFFECTS ON GLOBAL ECONOMY

Russia’s military invasion in Ukraine snаpped attention away from the coronavirus pandemic to the clash between the two countries and its ripple effects on economies across the world. As Russia is already subject of comprehensive economic sanctions, its position of a leading commodities exporter means that these coercive measures are ultimately going to have negative spill-over effects across the globe. Russia is the world's top wheat exporter, while Ukraine falls in the top 10. Apart from that Russia, with its over 140mn population, is a huge market with the potential to offer a wide range of opportunities for investors in different industries. Ukraine, with its  over 600,000 km2, is the biggest European country territory-wise.

• Trade and commodities - commodity prices were already on the rise and the respective indices skyrocketed since the start of the invasion. The global crude oil prices, measured by the benchmarks Brent and West Texas Intermediate (WTI), have been following a steep upward path ever since mid-December 2021, long before the diplomatic tensions escalated to a full-scale military conflict.  

• Supply chains - Due to the accelerated demand which outstripped supply, the world saw heavily disrupted global supply chains, which, prior to the diplomatic tensions built-up, were far from any normalization. To a great extent, they were the result of the generous fiscal and monetary stimulus packages, which many authorities injected into the economies in order to support the recovery.

• Inflation - the combination of skyrocketing commodity prices and supply chains crunch ultimately led to spikes in both producer and consumer inflation in most developed markets, with Japan being the notable exception. In the Euro Area, energy inflation surpassed the psychological level of 30% in February, flash Eurostat estimates show. In the US the price indices are also posting record highs. Monetary authorities are faced with a quickly changing environment, where the outcome of any action is difficult, if not impossible, to predict.

• Finance and investment - the sanctions will definitely affect the financial interactions between Russia and the rest of the world, as Russia's participation in the financial and payments network is technically suspended. Russia's banking sector is dominated by domestic banks (Sberbank, VTB, Gazprombank), but this does nоt make the foreign banks' exposure to the sanction any milder. The British banks' claims to Russia for example were USD 12.7bn in December 2021. The French automotive giant Renault has a market share of 26% in Russia as of the end of 2021 and the sanctions will undoubtedly complicate the operations in its Russia factories. It is a matter of time for further examples of ripple effects to become more pronounced 

Commodity spot indices such as Bloomberg and S&P Goldman Sachs saw a spike in the last days of February after Russia's invasion of Ukraine. Both indicators include energy and agricultural commodities.

The fast-changing environment is also illustrated by the movements of the global oil benchmarks. The WTI for instance saw negative price of the futures in the spring of 2020 and less than two years later, together with the Brent, is on a consistent upward path. Further, some base metals, which are crucial for the production of semi-conductors, also experienced steep increases, especially in the first half of 2021. Later on, the growth rate of the prices decelerated, but stayed in the double digits. Tin, for instance, registered a 111% y/y price growth in November 2021. Zinc, nickel, aluminum, which are of key importance for the global high-tech manufacturers, reached similar peaks towards the end of 2021 and as of the beginning of 2022, there has been no obvious trend in terms of annual price change.

A deeper dive into Russia's energy exports distribution reveals the dependencies of a number of economies and suggests the potential negative implications which they will suffer from the sanctions. The notable exception is Belarus which is a key Russian ally. Almost half of Russia’s gas exports in 2021 went to only three countries: Germany, Turkey and Italy. As for the crude oil exports in the same year, over 50% was delivered to China, Germany and the Netherlands.

Germany stands out as very vulnerable to a potential halt of Russian gas deliveries even though only 2.8% of its imports in 2021 came from Russia. Almost 60% of these imports are only crude oil and natural gas. For the EU as a whole the distribution is even more pronounced. A total of 72% of the Russian goods delivered to the EU are fuel, oil and products of distillation. Russia registered a trade surplus with its key foreign trade partners, while the opposite is valid for Ukraine, which posted an overall trade surplus for the last time in 2015. Apparently, the Western efforts to punish Russia after the annexation of Crimea in 2014 and to reduce the dependencies on Russian oil and gas, were far from successful. This implies that the current sanctions' magnitude will be felt also in the markets imposing these sanctions.

Towards the end of 2021, the key indicators reflecting supply chains dynamic were starting to give some hopes for potential normalization. The PMI sub-indicator for the suppliers' delivery times in key developed markets seemed to have rebounded from the rock-bottom. The input prices indicator, which is inversely correlated, on the other hand, recovered from the record highs in the first two months of 2022. The orders-to-inventories ratio is yet to pick up with its valued for the observed economies still at 1 or above. In the face of the conflict in Ukraine, chances are that this normalisation will not happen any time soon, especially considering Russia's influence on the commodities' markets.

 

Russia's freight is mostly carried via roads, but the airspace bans for Russian planes in multiple countries should not be underestimated in terms of international cargo shipments. Any necessary adjustments might take a while and until then the global supply chains could experience additional strains.

 

As international trade in goods is still largely carried out by container ships, container handling in ports is an important indicator of global trade. The port of St. Petersburg might not be a major global port like many in China and Southeast Asia, but the container traffic there has been failing to recover to the levels prior to 2014.

 

The US Bureau of Labour Statistics publishes indicators for the international air freight prices and the inbound sub-indicator jumped significantly in Q2 2020, reflecting the disruptions caused by the pandemic and the mobility restrictions. Despite some up and down movements throughout the quarters ever since, it maintains an upward path.

 

Another key indicator for the global supply chains in the Baltic Exchange Dry index, which assesses of the price of moving major raw materials by sea. The indicator reached a peak in the beginning of October 2021 and fell subsequently. Nonetheless, it has been following a consistent upward path since the end of January 2022.