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Ukraine crisis fuels political tensions over commodities

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Crude oil at an eight-year high, European natural gas at an all-time record and wheat at its most expensive in 14 years: it was another day of records as the crisis in Ukraine drove commodities prices to their highest level in more than a decade.

But the Russian invasion has not just pushed up prices in already-strained markets; it has also highlighted the use of raw materials as a foreign policy weapon.

Line chart of S&P GSCI index showing Global commodity prices hit highest level in more than a decade

“Commodities have been weaponised for a long, long time . . . it’s always a question of when does a state pull the trigger,” says Frank Fannon, former assistant US secretary of state for energy resources.

As our Big Read explains, this began a decade ago with US fears of China’s control of supplies of rare earths — the metals used in many aspects of manufacturing. The reliance on a handful of countries or companies for raw materials was then highlighted by the pandemic. And now the Ukraine crisis has focused minds on Russia’s position as a key supplier of oil, gas, wheat, aluminium and palladium.

Although it is the world’s third-biggest producer after the US and Saudi Arabia, demand for Russia’s oil has collapsed as big users turn away following the invasion of Ukraine. This has left 70 per cent of its crude “struggling to find buyers” and helped drive up prices and pose a serious risk to global recovery.

“Brent crude is the biggest fear factor for equity markets,” said one investment executive. “If it goes ballistic and moves towards $150 or more a barrel, then [economic] growth really gets hammered.” Moves by the US and others to tap into reserves failed to stop the price passing the $113 mark earlier today.

As columnist Helen Thomas points out, the current crisis puts paid to the notion, if it still existed, that investors could ignore geopolitical risk, citing BP’s cutting of ties with Russia as a significant moment. ExxonMobil and Shell have followed suit, while Total is under similar pressure.

The UK meanwhile has started an urgent review of exposure to Russian gas and energy groups. Prime minister Boris Johnson has warned that households would have to live with higher energy prices as the cost of inflicting “pain” on Russia through sanctions.

Writing in the FT, Robin Brooks, chief economist at the Institute of International Finance, underlines the point that the war on Ukraine is not only a watershed for European politics, but also a big turning point for markets.

“All that anxiety about inflation is now old news,” he says. “What’s unfolding is a major negative shock to Europe.”

Latest news

  • The White House unveiled a new road map for living with Covid (NPR)

  • A World Bank adviser has become the first Russian official to resign from a prominent position at an international body in protest at the invasion of Ukraine

  • Trafigura, one of the world’s biggest energy traders, is reviewing its investment in a project being developed by Russian oil producer Rosneft

For up-to-the-minute news updates, visit our live blog

Need to know: the economy

Eurozone inflation hit a new record of 5.8 per cent in February, adding to pressure on the European Central Bank to speed up the unwinding of its stimulus programme and raise interest rates. Energy prices rose a record 31.7 per cent, while unprocessed food prices climbed 6.1 per cent. The highest national annual rate was in Lithuania at 13.9 per cent, while France had the lowest at 4.1 per cent. Compare inflation rates across the world with our global tracker.

US Federal Reserve chair Jay Powell told Congress that a rate rise would go ahead this month, despite the Ukraine war. Investors have been betting that the crisis would slow moves to tighten policy at the Fed and the ECB, a view also reflected by the head of Man Group, the world’s largest hedge fund.

Latest for the UK and Europe

UK chancellor Rishi Sunak told a parliamentary committee that the economy and public finances were “vulnerable” to higher inflation and interest rates, suggesting that tough decisions could be required in the months ahead. Business groups have called for tax breaks, but Sunak is not expected to make big changes to taxation or public spending in his spring statement on March 23.

One area that seems to be unruffled by the surge in inflation is the UK housing market: prices rose again in February in the biggest increase in cash terms since 1991, making the average house price £29,000 more expensive than a year ago.

The Italian economy grew a better than expected 6.6 per cent last year after a 9 per cent contraction in 2020, with a lower fiscal deficit than expected as investment, consumption and exports all bounced back. Italy is set to be the largest recipient of the EU’s Covid recovery fund, and will potentially be eligible for nearly €200bn in grants and loans.

Global latest

Australia’s economy is now bigger than it was pre-pandemic after a strong recovery in the fourth quarter when consumers emerged from lockdown. GDP grew 3.4 per cent in the final three months of 2021, compared with a 1.9 per cent contraction in the third quarter, when restrictions to quell an outbreak of the Delta variant threatened to push the country into recession.

Panic buying broke out in Hong Kong as local residents prepared for a new and stricter lockdown. South China correspondent Primrose Riordan says tightened restrictions are likely to threaten its airport’s status as Asia’s key regional hub.

Need to know: business

The pace of multinationals quitting or suspending business with Russia has accelerated. Apple, Boeing and Siemens have now joined Ford, Nike and others in the corporate boycott, while PR firms and support services such as accountants and consultants are cutting ties for fear of reputational damage. Russian businesses have started to withdraw from Europe as sanctions bite.

Attempts to cut off Russia from global financial markets are having a knock-on effect on fund managers that hold Russian assets. Russia-exposed funds with more than €4bn in assets have been frozen in Europe, meaning investors have no idea when they might be able to withdraw their money. The Austrian division of Russia’s Sberbank today became the first banking victim of international sanctions. Brussels is considering cutting VTB, Russia’s second-largest bank, and six others from the Swift international network. Russian shares traded abroad have plunged as sanctions trigger ‘panicky’ selling.

Line chart of MSCI Russian ADR/GDR index showing Russian shares traded abroad are in freefall

MSC and Maersk, the world’s two largest container shipping groups are suspending Russian cargo bookings as sanctions put more pressure on already strained global supply chains. Disruption has also spread to the air cargo market, where prices are expected to rise as aircraft are forced to reroute.

US retailer Target gave a bullish outlook for this year after recording growth during the pandemic and an increase in revenues of nearly $28bn, or 35 per cent. The company, which is benefiting from shoppers becoming more cost-conscious as inflation rises, was also able to stay open during lockdowns as a seller of essential goods.

Last year was a bumper one for dividends as companies recovered from the depths of the pandemic, but growth is forecast to slow sharply this year as the Ukraine crisis adds to inflationary pressures to depress company confidence.

Column chart of Corporate payouts hit record level in 2021 showing Global dividends recover from Covid-19 cuts

The World of Work

The pandemic has accelerated a shift in childcare towards fathers playing a more active role. Our Working It podcast discusses the latest trends in parental leave and whether we’re still hard-wired to think about men as breadwinners and women as caregivers.

Covid cases and vaccinations

Total global cases: 436.9mn

Total doses given: 10.8bn

Get the latest worldwide picture with our vaccine tracker

And finally…

The pandemic for many has seen medical treatment postponed as health services prioritised the fight against coronavirus. In this deeply moving account, FT journalist Miranda Green recounts her struggle with cancer care.

Drawings of Miranda Green
The FT’s Miranda Green on ‘negative outcomes’: ‘As a country, there is no more time for euphemisms’ © Nick Runge

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