All attempts at diplomacy seem to have failed and the administration is said to have credible evidence that Putin is set on invading Ukraine. What will be the economic consequences of an invasion of Ukraine by forces of Russia and Belarus? And, how will those economic consequences affect the markets? Although as American we hope and pray that war will not break out as options traders we need to be ready to deal with the consequences of any Russian actions.
Ukraine Food and Energy Supplies
With a most recent harvest of 33 million tons, Ukraine is one off the world’s leading grain suppliers. Ukraine is the fifth leading exporter of wheat at 12% of the world’s supply. The country produces about 42 million tons of corn which amounts to 16% of global exports according to Reuters. The country also grows soybeans but at a much lower volume. Much of Ukraine’s wheat goes to Africa and the Middle East which will be badly hurt if supplies are cut off.
While Ukraine produces oil and natural gas, 90% of production is in the Eastern region controlled by Russian-backed separatists. But of greater significance is that Ukraine is a transit country for Russia’s crude oil exports going to Hungary, Slovakia, the Czech Republic, and Hungary via the Druzha pipeline network. Crop prices may go up in the event of an all-out invasion and a significant part of Europe’s energy supplies could be cut off.
Sanctions Shutting Off Russia from the World Financial System
Russia vies with the USA and Saudi Arabia in terms of oil and natural gas production. It currently provides 40% of Europe’s natural gas and a fourth of its oil Notably, Russia is the world leading exporter of wheat supplying all of Turkey’s wheat and 70% of Egypt’s. Russia is also the leading exporter of metals like palladium and nickel. If Russia cannot get paid for these commodities through the banking system it will not export. Prices will go up and we will see another glitch in the global supply chain affecting things as diverse and auto exhaust systems, dental fillings, and mobile phones.
European banks have billions of Euros in outstanding debts from Russia. How these get repaid if money cannot be transferred is up in the air. Russia’s economy is smaller than Italy’s and much smaller yet when oil and natural gas are excluded. They can still trade with China by exchanging Yuan vs Rubles. If sanctions endure for years Russia will pushed closer to China. We suspect that Putin’s trip to the Olympics featured a discussion in that regard. If China buys more Russian oil and natural gas the Chinese will buy less from the Middle East who will then be free to sell to Europe so over time that will level out oil and natural gas prices but in the short term expect a bump up in prices. Companies that could be adversely affected are Total, Shell, and BP. Total and Shell have joint ventures in Russia and BP in Europe. And, Exxon Neftegas Ltd operates the Sakalin-1 oil and gas project with $5 investments planned over the next five years.
Effect of Russian Invasion on Stock Markets
An invasion will wreak more havoc in Europe than in the USA as more European companies and banks do business with Russia than their American counterparts do. Likewise, the US is energy self-sufficient while Europe imports oil and natural gas. When the supply chain for titanium coming out of Russia is blocked by economic sanctions Airbus will have issues building airplanes but the cell phone makers and automakers across the world may have more supply problems when palladium and nickel supplies dry up. Although there will be specific fallout if Russian goes all out in taking over Ukraine there will first be the shock of the greatest military conflict in Europe in 77 years and the would likely drive the market down significantly before we would see a partial recovery similar to that happened with the Covid Crash as the market sorts out winners and losers.
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