Russia’s escalation in Ukraine poses risks to global food and energy markets

About the authors: Tim Benton He is director of the Environment and Society Program at Chatham House. Anthony Frogget He is deputy director and senior research fellow in the Department of Energy, Environment and Resources at Chatham House.

A few weeks ago, Ukraine was in a weak position. Some commentators were talking about whether it was time for Ukraine to negotiate a ceasefire. Over the past month, Ukraine has instead launched a long-planned offensive and largely pushed Russia back from some of the territory it occupied at the start of the invasion. Now Russia is on the back foot Ukraine is progressingSo much so that Russia is pushing for spurious referendums to be held in the Donbass region, possibly to provide spurious legitimacy for its formal annexation. Putin announced a partial mobilization of forces. It also threatens to use “all necessary means” to defend Russia’s “territorial integrity”, including nuclear weapons.

The future of the war is difficult to predict, but it is clearly unlikely that it will end any day soon. Russia will not collapse, and Putin has reformulated its goals. It now intends to “liberate” Donbass in eastern Ukraine. And although Ukraine has demonstrated its ability to advance, its progress is likely to slow as it approaches the region core to Russia’s stated interests. This slowdown arises from a geopolitical perspective — this region is what Putin said “special military operation” is primarily about, so Russia’s stakes are greater — and from a practical perspective, as Russian supply chains become less in length and more forces become. unified.

Given this uncertainty about the conflict and its direction, what this means for markets that have been severely disrupted by the war: food and energy?

Ukraine and Russia are both major players in global agricultural commodity markets, and Russia is also a major exporter of agricultural fertilizers. The invasion and the sanctions that followed supply disruptions. These changes were reflected in a sharp rise in global commodity prices, which built on the current tightening of markets after the Corona virus and increased prices. a Deal Allowing some grain exports through Russia’s blockade of Ukraine’s Black Sea ports, and ongoing negotiations to open up Russian fertilizer exports, have taken some of the heat out of the markets. Ukraine now exports about 3 megatons of wheat, up from 1.5 before the deal was struck, but this is far from the 7 million tons needed to create new capacity and provide income for farmers to cover next season’s planting. The hope of opening up fertilizer exports may now be faltered by the marked escalation of Russian rhetoric.

her grain prices Projection After the deal, but not far enough away for the problem to subside. Ukrainian wheat is cheap compared to other suppliers, so any shortages mean that replacing supply is costly, especially with a rising dollar, rising sovereign debt and a general inflationary economy driving cost-of-living crises around the world. These dynamics will lead many economies to use more of their domestic grain stocks, but this in and of itself presents a risk should the market tighten in the coming months. Moreover, the Black Sea deal officially expires in November. Rising tensions could jeopardize any efforts to renew them.

Fertilizer prices are still very high (20-80% this year, higher than last, depending on the product). Worldwide, rising fuel prices are constraining supplies; China Exports are restricted (in order to improve domestic availability) and exports from Russia and its ally Belarus remain restricted. As we enter the planting season in the Southern Hemisphere (and plantations of northern winter crops), there is still uncertainty about future commodity prices and inputs.

The effects of climate change are increasing from year to year. Some tough grain markets have swelled this year due to severe weather around the world. There is still a high probability that other weather effects will disrupt the market over the coming months.

In general, while some of the general panic may have subsided, there are few reasons for complacency.

Energy markets have also been disrupted by the conflict in Ukraine. Europe Global LNG markets are likely to remain tight through 2025, regardless of the outcome of the war. Even if the war ended tomorrow, trust between consumers and Europe and what was their main supplier in Russia was broken. New energy infrastructure is under construction, and annual investment in LNG terminals, which enable gas shipment, is expected to double in the next two years. Total global capacity is set to a plus From 380 million tons per year in 2021 to 636 million tons per year in 2060. Therefore, there is a short-term supply crunch and great demand uncertainty in the medium to long term, due to climate commitments.

In the next two or three years, rising fuel prices will destroy the demand for fuel. Companies and individuals change their behavior or simply cannot afford energy. Higher prices are also driving interest in increasing energy efficiency and rapidly building alternative supply options, particularly wind and solar power. These are accelerating many aspects of the energy transition driven by climate change.

The war has almost certainly changed the geopolitics of energy supplies. The West will never make sense Accreditation on Russian fossil fuels, especially gas. Russia will have to increasingly look east in search of its markets. So far in 2022, China has increased the total volume of fossil fuel imports from Russia, in addition to signing a new 30-year gas supply contract in February.

This week’s escalating geopolitical tensions demonstrate that the crisis is far from over. There is potential for a significant escalation that could further turmoil global markets. While 2022 wasn’t about global food or energy availability, and more about prices, that may not be the case in 2023.

Tensions between Russia, Ukraine, and its Western backers may not only be military. As in the early stages of a war, sanctions or export restrictions may mean the re-emergence of food and fuel as a powerful lever of geopolitical advantage. This could lead to supply securitization, trade with allies, and further disruption of global supply and prices.

The United Nations General Assembly this week highlighted many of these issues, with calls from the West for other countries to take sides. Some countries in the Global South may view this as a local war of a narrow set of interests, especially in the Global North. The global south may regret the way it reduces bandwidth and financial flows to address the existential crisis of climate change, to which many countries are highly vulnerable, as evidenced by Pakistan’s recent exposure to heat waves and floods.

Perhaps most importantly, undermining multilateralism and creating new geopolitical alliances and blocs of allied countries will lead to the restructuring of global trade. These changes will affect food and energy supplies for years to come. This may mean that we have entered a prolonged era ofinflationcost-of-living pressure, rising sovereign debt, and intensifying geopolitical competition.

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