The war in Ukraine triggers a raw materials crisis
Ukraine has long been known as the breadbasket of Europe. The country’s vast, fertile plains of black earth have made it, along with southwestern Russia, one of the best places on the continent to grow wheat and other staple crops. Russia’s invasion of its neighbor – just before the planting season – threatens to spread the humanitarian disaster in Ukraine to the rest of the world. Staple food prices, as well as energy costs, have soared, raising the prospect of pushing millions into poverty and hunger.
Commodity prices more generally rose at near the fastest pace in more than half a century last week. Sanctions imposed on Russian financial institutions have led many traders to be reluctant to do business with the country, even for energy. Although there may be an exemption from trade restrictions for oil and gas, insurers and dealers have decided that the risks, reputational or otherwise, of continuing to do business with the country are not worth the benefits. Oil prices hit just under $120 a barrel on Thursday, the highest level since 2012, while wheat prices have risen about 50% since the outbreak began, near record highs.
More obscure products for which Russian exports account for a large part of global supply, such as neon gas – used in the production of semiconductors – and palladium, used in the manufacture of catalytic converters for cars, are also at risk. to miss. This will further increase consumer prices in countries where living standards are already under pressure. Sanctions against Belarus, Russia’s main ally in the war, could exacerbate the pressure: it is one of the world’s largest producers of potash, a component of fertilizers.
According to the futures markets, the effect of the war on raw materials should persist, even if it eases slightly. Prices have increased for wheat deliveries in a few years, as well as immediately. This indicates that traders believe there will be a reduction in supply for some time to come. A prolonged occupation of Ukraine and continued violence would clearly be bad for crops, and damage may already have been done to potential yields.
For wealthier countries, the challenge will be to ensure that the most vulnerable are protected from higher costs. Some measure of national solidarity will be vital, as the wealthiest taxpayers must shoulder some of the burden to ensure their fellow countrymen do not go hungry and stay warm. Investing to reduce dependence on imports, whether for fuel or food, will take time. The EU must act to prevent a repeat of the beggar-thy-neighbour policies seen in the early stages of the coronavirus pandemic, as countries scrambled to secure limited international supplies of personal protective equipment and other medical supplies.
In the poorest countries, especially those already facing financial difficulties due to the coronavirus pandemic, rising food prices are likely to be devastating. Commodity exporters can get a dividend – but only if they aren’t dependent on Belarusian potash – but importers who plan to buy essential food and fuel from international markets could struggle to get the foreign currency they need. need.
Much of the black earth plains of Ukraine and Russia are no longer just the breadbasket of Europe, but also an important source of supply for Asia, Africa and the Middle East. . Those trying to relieve famine-stricken parts of the world, such as Yemen, Afghanistan and Ethiopia, will face an even more daunting task. When food prices rose in 2008, it helped spark the Arab Spring and ultimately the civil war in Syria. Russia’s invasion of Ukraine has sown the seeds of a crisis that will be felt far beyond European borders.