Monday Market Musings>>> Sanctions Imposed on Russia; How Are They Affecting the Supply Chains?
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The world is still recovering from the pandemic, the conflict in Ukraine along with the economic sanctions against Russia could potentially derail the world from its track to recovery.
With significant globalization, interdependence is somewhat inevitable. This means implementing targeted economic sanctions is very difficult, other third-party countries almost always get effected in the process, even the parties imposing the sanctions have a high chance of being affected. So, the sanctions imposed may have been imposed in order to penalise Russia, but the effects of the sanctions have a high probability of having a global effect, and not in a good way.
The price of benchmark Brent crude recently jumped to more than $139 per barrel, the highest since 2008. Most likely due to the U.S and its European allies discussing, a possible ban on imports of Russian oil. Oil is a universal intermediary good which influences the costs of commodities and services. The oil price increasing can be a significant driver of cost push inflation.
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According to experts, more than 374,000 businesses rely on Russian suppliers. The disruption of Russian and Ukrainian exports, in the grain and energy markets will negatively affect a variety of sectors.
In 2020, Russia and Ukraine supplied 25% of globally traded wheat, and 73% of sunflower oil, and over 30% of global barley exports, along with a fraction of global fertilizer exports. It is clear that the rest of the world has a high dependence on Russia and Ukraine when it comes to agricultural goods as well as natural gas and crude oil.
The war in Ukraine is also cause of increase in global food prices. Russia is the world’s largest, along with Ukraine being the fifth largest wheat exporter. Over the last 30 years, exporting barley, corn, rapeseed alongside wheat, Ukraine and Russia have become the key grain suppliers to many countries that lack the proper conditions to grow such commodities, including, Lebanon, Sri Lanka, Tanzania, Egypt, Mongolia, Namibia, and Malawi.
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The Russia-Ukraine conflict has all but shut down grain exports from both countries, and since both countries supply vast amounts of fertilizer, the conflict could affect almost every farmer on earth, both this year and into the future.
The impact Russia and Ukraine have on global supply chains is vastly underestimated. Ukraine is under a considerable amount of stress and therefore the exports are under severe pressure. Many sanctions have been imposed on Russia. This could perhaps trigger the greatest food and financial crisis since World War II.
Many European economies that depend highly on Russian energy have sought to mitigate the negative effect of the sanctions. Several European firms in key industries will be affected severely. Financially capable companies in transport and logistics sectors could very well face bankruptcy if the sanctions remain in place for a long period of time.
“If this war doesn’t get sorted out in the next couple of weeks, things will get even worse,” Arif Husain, chief economist at the UN World Food Programme says.
“That’s the reality of a globalized world. We are all in this together.”
March 28th 2022 | 9:30 PM