The Russia-Ukraine conflict has recently replaced inflation as the top trending topic for financial markets and business managers. While inflation has been on the rise for much of the past year, even prior to Russia’s invasion of Ukraine, there is a connection between the two. As New York-based investment banker Alex Fieldcamp explains, the Ukraine war and the West’s economic sanctions on Russia will be a significant source of additional inflationary pressure going forward.
The Rise in Commodity Prices
One major impact is on food prices, particularly in Western Europe. Ukraine is a major exporter of food commodities such as wheat, corn, and sunflower oil. It is likely that Ukraine’s sowing season will be significantly disrupted since the spring planting season has effectively started. Most of these exports from Ukraine end up in Western Europe, which should experience additional food price inflation as a result of the invasion.
However, according to Alex Fieldcamp, an even greater impact is expected from the sanctions on Russia that will disrupt global trade. Russia is itself a major producer of wheat, three times greater than Ukraine, but even more important are the country’s energy and metals exports. As Alexander Fieldcamp points out, Russia is the second largest producer globally of both petroleum and natural gas. The invasion has caused major economies, including the US and Germany, to re-think their reliance on Russian energy supplies.
Dilemma Faced by European Nations
Many political and financial analysts, such as Alex Fieldcamp, believe the dependency on Russian energy was a key reason Putin thought he could launch an assault on Ukraine with few repercussions. Would European members of NATO be willing to risk their winter heat to punish Putin for waging war in Ukraine, a neighbor of several NATO countries? On the other hand, if they did not respond forcefully, which country bordering Russia would potentially be next?
In addition to energy and wheat, Alexander Fieldcampnotes that Russia is also a major producer of important metals used in everything from steel production to the batteries that go in EV autos, including aluminium, copper, and nickel. The shock to the Nickel market was particularly sharp, with the London Metals Exchange halting trading for multiple days after futures prices surged 250%.
Effect of Economic Sanctions
Supply disruptions and price increases driven by Russia’s invasion of Ukraine, and the associated sanctions imposed by the West, will pass through the entire global supply chain and eventually impact consumer wallets.
According to Alex Fieldcamp, it is difficult to predict where the situation goes from here. Russia will try to divert its exports to China, India, and other countries that are either friendly or at least neutral to the conflict. At some point, this shift may free up non-Russian supplies of energy and metals, but it could take years to fully redirect Europe’s energy imports away from Russia. The world will continue to watch closely as events unfold in Ukraine.
