The World Bank has stated that the invasion of Ukraine by Russia has prompted a surge in commodity prices by disrupting the supply of the commodities for which both countries are major exporters.
The war has been a major shock to the global commodity market and exacerbates the existing stress resulting from the COVID-19 pandemic—which its recovery period, according to the World Bank, will last until 2023 for advanced economies, and years to come for developing countries.
This information was disclosed in the World Bank’s Commodity Markets Outlook: The Impact of the War in Ukraine on Commodity Markets.
The international financial organization stated that ‘’the recent rise in prices reflects supply disruptions, higher input costs, and geopolitical risk premia. It comes on top of already tight commodity markets driven by a strong demand recovery from the pandemic, and numerous pandemic-related supply constraints’’.
A chart from Bloomberg shows that commodity prices (in nominal terms) rose sharply following the start of the war in Ukraine, particularly for commodities for which Russia and Ukraine are key exporters.
Also, data from Statista reveals significant changes in average prices of 15 selected commodities with Coal and Wheat having 69.31 percent and 60.14 percent change from February 24 to June 1, 2022.
‘’This heightened volatility in commodity prices after February 2022 reflects concerns about the current and potential impact of the war on the production and trade of commodities, especially those for which Russia and Ukraine play a key role’’, said the World Bank.
Both Russia and Ukraine have a significant export capacity for major commodities and many countries rely on them for a substantial volume of import of these products. Even though advanced economies like Australia, Canada, the EU, and the United States do no depend on Russia and Ukraine for food supplies, many emerging markets and developing economies (EMDEs) depend heavily on supplies from Russia and Ukraine—more than half of wheat import in a lot of African countries, Middle East and some parts of Europe are sourced from Russia and Ukraine.
In addition to supply disruptions, the sanctions being imposed on Russia over its invasion of Ukraine is having a compounding effect on global commodity supply levels and a pass-through effect on the prices of these commodities.
What are the sanctions imposed on Russia?
The following are some sanctions revealed in the commodity outlook report
- European Union has announced a ban on imports of coal from Russia (starting in August 2022) and a two-thirds reduction of Russian gas imports by the end of 2022.
- The EU is also considering extending these measures to oil with an eventual phasing out of Russian fossil fuel imports by 2027.
- United States has banned imports of Russian oil, gas, and coal, and the United Kingdom has announced plans to phase out Russian oil imports by the end of 2022.
- Several large oil companies announced they would cease operations in Russia, while many traders chose to boycott Russian oil.
According to the world bank, this war in Ukraine causing rapidly rising energy and food prices will weigh on growth and increase inflation, further complicating policy decisions facing central banks–we have seen many central banks raising their interest rates, thereby tightening global financial conditions. It also tends to negatively impact the poor households more and can worsen inequality.
The world bank highlighted that an effective policy response is required to mitigate the short-term impact of this war-led disruption and to also effect a long-term solution. some of these responses include creating national oil reserves equal to 60days of oil import, and the use of targeted safety net interventions, such as cash and food in-kind transfers to mitigate the negative impact of food price shocks.
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