Those hoping for a ‘return to normal’ after first Brexit, then Covid-19, now have another concern to cope with – a potential war in Ukraine, right on the borders of the European Union. Sadly, human tragedy has already struck, and things don’t look to be slowing down.
It’s a fast-moving situation, but at the time of writing, the Kremlin has officially recognised the regions of Donetsk and Luhansk in the East of Ukraine as independent republics. The Russian Parliament has voted to authorise the use of the Russian military. Russian troops have also moved into not just the border regions of Donetsk and Luhansk, but the rest of Ukraine too. Sanctions so far
The west has responded rapidly in a co-ordinated move by the White House. Germany has said that the opening of the Nord Stream 2 pipeline, bringing Russian gas in directly from near St Petersburg, has been frozen. And the US, UK and other nations have moved to impose sanctions on five Russian banks and a handful of wealthy individuals.
In an address from the White House, President Joe Biden condemned Russia’s moves as “a flagrant violation of international law, and it demands a firm response from the international community”. More sanctions should be expected. Risk and the impact on inflation
For investors, the effect of this situation has been immediate. First, it has raised what’s known as the geopolitical risk premium in relation to commodities, which both Russia and Ukraine export and on which we collectively depend.
The most obvious evidence is in the oil price, which has risen to over $100 a barrel. The other is natural gas. That had already risen dramatically in price before Christmas, and after dropping back a bit, the UK natural gas price has surged again on the ICE exchange. Stock markets have been extremely volatile.
In a press briefing, the White House security adviser has emphasised that the US and its allies do not wish to target Russian energy for sanctions. Deputy National Security Advisor for International Economics and Deputy NEC Director Daleep Singh said: “None of our measures are designed to disrupt the flow of energy to global markets. And we are now executing a plan in coordination with major oil producers and major oil consumers to secure the stability of global energy supplies.”
However, given how dependent Europe is on Russian oil and gas, the fear is that supplies of these vital commodities could nonetheless still be a casualty of the crisis. In 2019 Europe relied on Russia for 27% of its oil imports and 41% of its natural gas imports.
The EU also publishes what it calls a ‘dependency ratio’, which measures how reliant the EU is on imports for all of its gross inland energy consumption – the latest measure is 61%.
It’s not only energy which comes from Russia, but also foodstuffs, notably wheat. Russia and Ukraine together make up 25.4% of the worlds’ $44.1 billion of wheat exports. These go far and wide, not just to Europe but to major importers like Indonesia and Egypt.
History suggests that wars are, in general, inflationary, as trade and industry is disrupted at the same time as governments spend money to keep their economic and military efforts going. It’s unfortunate, to say the least, that this major dispute with Russia has already driven up the prices of critical items at a time when inflation was rising already.
At a time when many nations have decided to move towards Net Zero carbon emissions, investment in oil and gas projects has been restricted by various international agreements. These arose out of both the Paris Agreement and the Glasgow COP26 conference. Investors with strong environmental, social and governance preferences have also been avoiding carbon related projects.
We got a flavour of this when Shell published its Liquefied Natural Gas (LNG) Outlook 2022 this week. It forecasts that “a supply demand gap” will emerge in the middle of the next decade, with demand for LNG (which has lower emissions than coal and oil) outstripping supply. Demand for LNG is growing fast. Just under a third of new ship orders globally in 2021 were for LNG powered vessels.
George Trefgarne is CEO of Boscobel & Partners, a political consultancy. Hargreaves Lansdown may not share the views of the author. Investing in uncertainty
Emilia Booth, Investment writer
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source The Ukraine crisis – what it could mean for investors
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