Our base case for the Russia-Ukraine crisis entails little disruption to global energy and food supply, but tail risks threaten tight commodity markets
Although the risk of serious disruption to global energy and food supply is low, tensions between Russia, Ukraine, and the West will continue to drive price volatility. In preparation for the worst-case scenario of war in Ukraine, firms reliant on steel, grains, and seed oils as inputs should engage in planning exercises around the possibility of input shortages and price increases, considering alternative supply sources and materials substitutions.
Prices for oil, natural gas, metals, and agricultural commodities, particularly wheat and corn, have experienced upward pressure and heightened volatility in the last several days. The movements are partly founded on concerns that a war in Ukraine, or a broader conflict between Russia and the West, would result in disruptions to commodity production and transport.
Russia is Europe’s main supplier of natural gas, accounting for one-third of European consumption. Russia is also Europe’s main crude oil supplier and the second-largest global oil producer, as well as the second-greatest exporter of aluminum.
Ukraine looms large in global agricultural and steel markets. It is a major exporter of corn (maize) and wheat and a minor exporter of soybeans; it also accounts for a large share of the world’s seed oil and rapeseed production, which have several industrial uses beyond food.
Our base-case scenario for the Ukraine conflict—prolonged tensions that eventually result in de-escalation—should not materially affect energy, metals, or food supply. The primary sanctions being considered by the West target individuals, as well as weapons and technology exports. Financial sanctions that cripple energy activities, such as a ban from SWIFT, are off the table for now, due to the blowback to Western countries.
A scenario in which Russia launches a large-scale invasion leading to the capture of Kiev and a violent war in Ukraine opens up a variety of new risks. However, we believe disruptions to oil and gas supply and transport are still likely to be minor, on the assumption that both Russia and the West would give high priority to keeping production and transport intact. Russia relies heavily on oil and gas revenues and does not want to risk major disruption that might permanently drive Europe toward other trading partners. For Europe and the US, the threat of higher energy prices—already politically salient—would likewise deter actions that target energy infrastructure. However, global oil and gas supplies are tight. Even minor hiccups have the potential to drive prices higher.
Greater risks lie with steel and food. Since these are commodities produced in large quantities by Ukraine, any military conflict within the country has the potential to drive down agricultural and industrial production due to labor shortages, crop and infrastructure damage, and broken transport networks. Depending on events, Russia may intentionally target production or export facilities, such as Ukraine’s ports on the Sea of Azov. Global supplies of wheat, corn, and vegetable oils are already exceptionally low; any disruption to Ukrainian exports would have major negative impacts on the global economy.
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