As Russia and Ukraine teeter on the edge of conflict, financial markets and economists are far more preoccupied with when and how much the US Federal Reserve will lift interest rates.
However, some leading global market analysts are warning that the risks of war, and even the costs of an uneasy peace, are being underpriced.
Chief among them is Rabobank’s global strategist Michael Every.
“We are in the unusual position of global headlines and politicians warning of the risk of a major war, and yet markets — until very recently — remain mostly unconcerned,” he wrote this week.
Beyond share and other financial markets, the crisis is already pushing up the price of oil and gas, as well as key metals used for everything from car making and electronics to kitchenware and construction.
But rather than solely focusing on the short-term implications of a Russia-Ukraine conflict on commodity supplies and prices, Mr Every has taken a deep dive into the longer-term ramifications under different scenarios.
“The Ukraine crisis represents a tipping point in a larger metacrisis: the fracturing of the post-1945, -71, -78, and -91 world order,” he warned.
“This obviously has huge market implications!”
So, what exactly are they?
Oil and gas
In the short term, it is widely acknowledged that a Russia-Ukraine war, even a limited one, would spark a further massive rise in oil and gas prices, especially in Europe.
Russia supplies about 30 per cent of Europe’s oil and 35 per cent of its natural gas, which would be cut off in the event of conflict.
Rabobank’s energy analysts believe that could push oil prices up from already-elevated levels of about $US90 a barrel to $US125, with gas prices following higher.
RBC’s head of global commodity strategy, Helima Croft, also believes prices will head higher in the event of Russian supplies being disrupted, despite the US government’s best efforts to source alternatives.
“While there is scope for LNG imports [mainly from Qatar] to help mitigate the impact of a Russian disruption to European consumers, available capacity is not all well connected to those that would experience disruption,” she explained in a note.
However, if it takes heavy sanctions against Russia to avoid conflict, Rabobank warns the price impact may be even more severe.
“Assuming all countries halt purchases of Russian energy, the potential price impact would be huge, with oil rising to $US175 and European gas to $US250,” the report forecast.
However, it noted it was unlikely that all countries would comply, with China likely to support Russia through large purchases, and even the EU unlikely to give up Russian energy entirely.
That could mean higher prices in countries applying the sanctions and lower prices for those still willing to buy Russian oil and gas.
Food and fertilizer
Other key commodities would also be hit by either war or sanctions, with Russia the world’s biggest wheat grower and Ukraine in around the top five. Large production of barley, corn, sunflower and rapeseed might also be affected.
While other countries, including Australia, might be able to compensate for some of the loss in supply, they might be facing a handicap: fertiliser.
Rabobank estimates 23 per cent of ammonia, 17 per cent of potash, 14 per cent of urea and 10 per cent of phosphates are shipped from Russia.
At a time when China has already reserved much of its output of urea and phosphates for domestic use, losing the Russian products would lead to further shortages and rising prices for key fertilizer ingredients.
Metals and manufacturing
Manufacturing supply chains also wouldn’t be immune from either a conflict or sanctions against Russia.
Russia’s share of global nickel exports is estimated to be about 49 per cent, palladium 42 per cent, aluminum 26 per cent, platinum 13 per cent, steel 7 per cent and copper 4 per cent.
“Removing half of global nickel exports for kitchenware, mobile phones, medical equipment, transport, buildings, and power; palladium for catalytic converters, electrodes, and electronics; and a quarter of aluminum for vehicles, construction, machinery and packaging would result in huge upside pressure on prices,” Rabobank warned.
In some sense, a hostile peace with long-lasting sanctions could be a more threatening prospect for the supply and cost of these commodities than the disruption from a short, sharp war. Of course, both war and sanctions could also occur.
Rabobank predicts that either war or heavy sanctions could see a flight to safety on financial markets, pushing bond prices up and interest rates lower.
This might be a compelling counterweight to the current trend towards rising interest rates across many advanced economies.
However, the picture would be complicated by even higher inflation driven by the potential commodity shortages outlined above.
Just how much central banks are willing to look through inflation caused by foreign sources outside of their control is yet to be truly tested in the current period as the Fed prepares to raise US interest rates in March.
Ironically, an extension to the period of low-interest rates might help arrest the recent market sell-off, although the offset of either a hot or cold conflict involving Russia, the EU, the US and potentially even China, and the global supply disruptions Inherent in that, might far outweigh the benefit of lower rates for longer.
On the currency front, Rabobank expects that the US dollar, Japanese yen, Swiss franc and gold would be the obvious go-tos in the event of a conflict.
Russia’s rouble would slump in the event of either war or sanctions, and the euro would also likely be out of favour.
What if Russia backs down?
This still seems to be what markets are generally pricing in, and it is what occurred in April 2021.
But even in this “most benign scenario”, Mr Every still forecasts longer-term consequences.
He predicted that the current Ukraine crisis would accelerate some of the global trends already underway, many of which had been sparked by the COVID crisis and China’s increasingly aggressive foreign and trade policy:
- From long supply chains to shorter ones
- From free trade to onshoring — as in semiconductors — increasingly tied to the defense sector
- To tighter controls on technology exports
- To more calls for decoupling from Russia and China so US capital does not pay for China’s military (as EU capital does via Russian oil and gas)
- Towards rapid rearmament, even if with new platforms
- To demands for access to/control of key raw materials
- To seeing energy as about more than just the green transition (eg, the EU shift to green nuclear power); and
- For central banks to be part of the solution by keeping rates low and acting more (geo)politically
Mr Every argued that it was hard to see how the US could impose crippling sanctions on Russia without also crippling large parts of the global economy and financial system.
Instead, he predicted the world would see an increasing trend towards close, mutually beneficial alliances with the most powerful nations, as evidenced, he noted, by the recent AUKUS and Quad pacts.
“As such, we would see an acceleration towards a different, more closed or more ‘Great Power’ form of globalisation,” he wrote.
“A more zero-sum global environment would represent a major challenge for many economies, especially EM (emerging market) net exporters, China, and the EU.”