Milan Cacic
February 26, 2022
Money Social media Economy Commentary In the news News Trending Weekly updateRUSSIA
On Monday, the Russian government announced they were officially recognizing two self-proclaimed separatist republics in eastern Ukraine, Donetsk and Luhansk. They also announced that they would be sending "peacekeeping forces" into these two breakaway regions. These actions were seen by most nations as a break from the 2014 and 2015 Minsk agreements, and violated Ukraine's sovereignty. On Wednesday, they launched a full-scale attack which left no ambiguity about their intentions. It should be noted that China stopped short of condemning Russia's actions.
The response from most nations around the world has been the imposition of sanctions. These sanctions are mostly directed against Russian banks and Russian elites. Some executive orders were also passed prohibiting investment in Russia. Russia and Ukraine are significant players in the commodities market as you can see from the chart below. It is also important to note that if there is a disruption in any one commodity, it can transition through to the value chain. A good example to illustrate with is natural gas. We use natural gas to make fertilizer and fertilizer to grow crops. A disruption in natural gas will in turn, impact the growth of crops. Any significant disruptions to commodities can have far-reaching effects in all parts of the market.
The chart below tells a better story than I can about the importance of Russian commodities to the world. It should be noted that when Russia annexed Crimea in 2014 their oil production did not drop at all.
Source1: JP Morgan, 2022 in How Ukraine Crisis Threatens Even Higher Oil, Gas and Food Costs, Bloomberg, Anna Shiryaevskaya, Mark Burton, and Megan Durisin, 2022
When it comes to commodities, we may feel removed from the effects of Russia's actions. However, European countries are likely more concerned. The chart below illustrates which European countries depend on Russian natural gas supply.
Source2: ACER EU, 2020 in Which European Countries Depend On Russian Gas?, Forbes, Katharina Buchholz, 2022
Long story short, the commodity trade still looks promising and Russia's actions are only adding fuel to the fire.
I have also included a piece from our CIBC Economics Team entitled "North America and the fog of war".
If you have any questions feel free to give us a call.
Have a great weekend.
Milan