Economic Insights
Conflict Triggers Commodity Shock
Conflict Triggers Commodity Shock <br/>俄烏衝突對大宗商品市場帶來衝擊

Conflict Triggers Commodity Shock <br/>俄烏衝突對大宗商品市場帶來衝擊

The war in Ukraine and the resultant sanctions against Russia have dealt global markets a one-two punch. 

This has created the biggest commodity shock since the 1973 oil crisis, given the fact that Russia is a major producer of industrial metals, agricultural products, and energy – producing 10.8 million barrels of oil per day in 2021, accounting for 11% of the global output. 

It is also the world’s largest gas exporter and a key supplier to Europe, where 40% of the total gas consumed last year came from Russia. On the other hand, Ukraine, known as the breadbasket of Europe, was a major wheat exporter with a 10% share of global markets. 

Before war broke out in February, the demand for and cost of energy, as well as a range of other commodities, had rebounded strongly from the historical lows recorded at the height of the pandemic. Disruptions to energy and food supplies resulting from the invasion have propelled prices higher (Figure 1) as Europe and its allies are taking active measures to wind down their dependence on Russian energy. 

In the case of food prices, these are expected to remain inflated as a number of countries, such as India and Indonesia, are prioritizing domestic needs over international markets by banning food exports. Over the past 12 months, prices of crude oil and wheat increased by 67% and 83% respectively, creating headaches for central bankers and policymakers who were banking on market stability.   

The surge in commodity prices represents a “terms-of-trade tax” that transfers wealth and purchasing power from energy-importing economies to exporting ones. Terms of trade (ToT) is defined as the ratio between the index of export prices and the index of import prices. Put simply, an economy with a higher ToT can purchase more imports for the same amount of exports, which is conducive to improving the living standards of its people. 

For net importers of energy and commodities, however, higher prices generally mean people are spending more on imports, which leaves them with less to spend on domestic products. 

Importers may initially absorb part of the price increase but are likely to eventually pass this on to consumers, to maintain their profit margins. How the burden is shared between businesses and households depends on the degree of sensitivity with demand to price changes. 

Lack of price relief would eventually translate into higher inflation, which could be exacerbated by a weakening in the purchasing power of the domestic currency. This phenomenon is plaguing several emerging markets at the moment due to a strong greenback that has been driven up by market expectations of a further and aggressive tightening in monetary policy by the Federal Reserve. 

Another casualty of Russia’s invasion of Ukraine is globalisation. Before the conflict, a rethink of hitherto integrated supply chains and just-in-time manufacturing was already under way, a development that was triggered by worsening Sino-U.S. tensions and Covid-induced disruptions. This is reflected in trade figures for 2020, when global trade as a percentage of GDP fell by nine percentage points from its 2008 peak to 52%. 

The recent conflict in Europe and an increasingly polarized geopolitical setting have further shaken faith in world trade as commercial and trade ties between Russia, the West and its allies fray and break. With the growing tendency for nations to weaponize trade and commerce – including the deployment of such sanctions as the freezing of foreign exchange reserves as relations chill – this does not bode well for the future of globalization. 

From a nationalistic standpoint, governments are inclined to embrace the ramping up of domestic production capacity especially in key supplies – from energy to food and medical equipment – as a means of becoming more self-sufficient and to shore up national security. 

On the other hand, inward-looking measures involving the use of sanctions and trade barriers have driven up costs and heightened operating risk for companies, which may be compelled to reassess their presence in certain markets and then relocate part, if not all, of their business closer to home. McDonald’s, the poster child for globalisation, has recently decided to exit Russia permanently more than three decades after the fast-food chain opened its first outlet in Moscow.

The shift in market dynamics will have a profound and long-term impact on companies’ behaviour: more attention will be paid to security rather than cost-savings, and greater emphasis will be given to social responsibility and corporate reputation at the expense of earnings. These outcomes may not necessarily be bad. However, the outlook does not look promising at this point in terms of consumer choice, competition and efficiency, and low prices.

Wilson Chong,  


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