The war in Ukraine has shocked many around the world. What implications does this war have for the future, though? What kind of an impact will this war and the sanctions it has brought on have? Will it lead to a new economic cold war, this time, between capitalist powers divided into two new blocks, which are actually still dependent on each other?
The western reaction
Immediately after Russia invaded Ukraine, the wave of sanctions started. Restrictions on Russian companies that export gas and oil have been imposed from western countries that were (or still are) dependent on Russia, like countries in the EU and the UK. Combined with an already sky-high inflation, the impact of the sanctions on Russia has been devastating for prices. In the end, all of this hurts consumers who have to put up with record-high prices. Russia has also been effectively removed from the international payment system SWIFT, further damaging already strained relations. The investments of Russia’s Oligarchs in western countries are either no longer available to them or have just been confiscated by western governments.
The economic cold war
Note, that the ones imposing the sanctions are western countries like Germany, the UK and the US. So how will the Russians deal with it? Well, one of the first things that the Russians did, was to close the stock exchange in Moscow on the 25th of February. You can no longer buy or sell Russian equity on the stock markets, since stocks like Gazprom have fallen as much as 60%.
It is pretty clear that the Ukraine war has led to a split between Russia and the western world. The sanctions imposed on Russia and the desire of the European countries to become independent from Russian Gas imply a complete second economic separation between the west and Russia, or even a second cold war: Two blocs with their complete separate economic systems. In this case, instead of communism and capitalism, there are two capitalist economies. It is also unlikely that this separation will be reverted soon, since it has been made abundantly clear by the west that they don’t want to find themselves in a scenario once more, in which they have to tolerate and even further Russia’s pro-war policies by buying recourses form them, simply because they do not have another quicker and much cheaper option.
While Russia and the west have their problems, China has certainly made it clear that they do not condemn the Russian invasion. This could mean that the Russians have not only found a future trade partner and ally in the future trade war against the west, they have also gained the allegiance of the country that produces almost everything that the west buys. China is the country with the most factories and its massive population certainly speaks for itself. China has spoken of a new era with Russia, meaning that the Russians are definitely not alone and will do anything to ensure independence from the west from now on.
What markets are affected by the war?
In order to assess the economic markets and opportunities during this war, the sectors that are most affected must be discussed.
Gas and oil
The most discussed sector that has been affected by the war is gas and oil. This is because the most important Russian exports are gas and oil and go, for the most part, towards the rest of Europe. Russia is the third biggest exporter of oil in the world. The EU gets 40% of its gas and 25% of its oil from the Russian federation and is the second largest oil importer, globally. Russia produces (or rather extracts) one fifth of the oil, globally and one fourth of all global gas. The Russians have these valuable recourses (including massive supplies of coal in the remote area of Siberia) in abundance, which is convenient for their western neighbours – until recently. The flow of gas in the newly built gas pipeline Nord-Stream-2 from Russia to Germany via the Baltic Sea has been suspended. Restrictions on Russian gas and oil (more specifically, their companies and owners) have been imposed and the EU wants import gas from elsewhere. The best option for Europe is liquid gas that does not flow through a pipeline, but is rather transported like other goods, by sea. The best candidate for this liquid gas is the USA. Since this is a rather unconventional form of delivering gas and with massive supplies just east of the EU, gas and oil prices have skyrocketed.
Possible oil exporters for the western world include the United Arab Emirates with 16.13% of all global oil exports, Saudi Arabia with 11.54% exports, Kuwait, with 7.55%, Iraq with 6.34%, Canada with 6.25%, the United States with 5.71%, Nigeria with 3.5%, Mexico with 3.4% and Norway with 2.5%. European countries will most likely resort to trading with the countries listed above as an alternative to Russia.
Coal
Even though the EU has been dramatically reducing its coal consumption over the past three decades to 1/3 of what it was in 1990, coal is still imported from Russia. Coal imports from Russia account for 54% of all coal imports in the EU. There are multiple coal types, such as thermal / steam coal, which is used for electricity. Germany, in particular, is reliant on this type of coal, as about 30% of all its energy comes from burning lignite (20.2%) and hard coal (9.5%). Metallurgical coal, on the other hand, has industrial uses, as it is used in the production of iron and steel. More than 20% of all coal imports in the EU come from Russian metallurgical coal, whilst 70% of all thermal coal imported in the EU is Russian.
The EU wants to become independent from Russian coal. But, can you replace Russian coal quickly? Germany predicts that it can be done within months, so, pretty quickly. Whether current coal stocks in the EU will last during those few months is a different question. Note, that coal may even have to compensate for the lack of oil and gas, that the EU might flat-out refuse to buy from Russia. China and India might (and probably will) buy more coal from the Russians, meaning that the rest of the global market will be even more accessible for the West and the EU. The largest coal exporters are Australia, with 39.5% of global exports, Indonesia with 17.6%, Russia with 15%, the United States with 7.4% and South Africa with 4.7%. In fact, China actually imposed a coal import ban from Australia, giving them even more leeway for the EU. Importantly, countries around the globe with less access to coal, such as China and the USA are planning to increase coal production. The issue with coal is not whether the supply isn’t there. It’s how fast can Europe redirect trade routes for coal. Another implication of the Russian coal import ban in the EU is that import prices will rise, as the supply has decreased somewhat, oil and gas might have to be replaced with even more coal and the logistics will be more complex. The consumer once against shall pay the price.
Wheat and grains
The fertile lands around the black sea have long been used to harvest massive amounts of wheat and other grains. But Ukraine stopped supplying grains because they have the war to worry about. This is very unfortunate for Europe, since Ukraine and Russia collectively export about 30% of the world’s wheat. Just like with Energy prices, the price of grain will rise in Europe because of the lack of eastern grains. This time, the question of whether the US will be affected is articulated even more. It is still uncertain whether the impact of the lack of wheat will be big on the USA, but one thing is sure: Prices will rise. Actually, they already have, 50%, in fact. This leaves wheat at the highest price it’s been at in 14 years.
There are some options for importing wheat without Russia. Argentina and Australia are able to export loads of wheat to countries that intend to be independent from Russia. Middle eastern and north African countries are currently the largest consumers of wheat and will thus be affected the most by the Ukrainian halt on wheat exports. Actually, there is currently a wheat and grain crisis in north Africa because they no longer have access to Ukrainian wheat.
Metals
Russia is also a major producer of metals, such as iron ore and nonferrous metals (nonferrous just means that the metal in question does not have any amount of iron or steel mixed in).
Iron Ore
Russia is a major exporter of iron ore, with one sixth of all global iron being mined in Russia. Iron ore is typically converted into steel, which has a variety of applications, all of which concern consumers, as they include means of transportation, such as airplanes and automobiles. Furthermore, steel is used for ships, which is used to transport most goods that people in the western world consume. In essence, steel is indispensable in the industrial sector and a serious lack of this recourse would have grave consequences for highly developed areas. Incidentally, the EU is planning to impose even more sanctions on the Russian federation regarding the iron and steel industry.
„This will hit a central sector of Russia's system [and] deprive it of billions of export revenues […]“ – Ursula von der Leyen, President of the European Commission
Russia and Ukraine are some of the biggest exporters of steel for the European union, so this sudden halt has to be compensated by other big steel producers, such as turkey. Some Russian firms, like Severstal, have already halted shipments to the EU, despite it getting 27% of its steel sales in the European Union. The details of the sanctions regarding Russian iron/steel are still pretty unclear, but it is very likely that Europe isn’t just moving towards independence form Russian gas and oil – it’s becoming independent from all of Russia.
Nonferrous Metals
Nonferrous metals have not been targeted directly by sanctions, but some Russian firms are already stopping exports because the CEOs (the oligarchs) have had their finances confiscated in the west as a part of the sanctions. Still, others are not and even though this market is still technically open, premiums on nonferrous metals such as aluminum are still sky-high, since the market believes that the sanctions will come, sooner or later. And if they do finally come, what difference will it make? To illustrate this, I will explain the appliances and uses of some nonferrous metals.
Aluminium is used a lot when dealing with electronics. Many computer and airplane parts are made of aluminium and some kitchen utensils are, too. Russia is the fourth largest exporter of aluminium, behind the US, Canada and the middle east, which have not been sanctioned. All of these countries are far behind the biggest exporter, though: China. If China decides to officially join the Russian side or also happens to be sanctioned, the west will have lost the largest producer of aluminium. Even though Europe won’t be as directly affected, since China exports very little aluminium to Europe, other countries like the USA and Japan will be far more affected by the consequences of sanctions. The production of aluminium also requires massive amounts of energy (i.e., coal, gas and oil). Around 40% of the production costs go towards energy. This means that while China will have the most aluminium, it can’t actually make it without (most likely) Russian energy.
Copper is a major export of Russia and is extremely important for electrical equipment, such as wires, as it conducts electricity extremely well. Copper is also produced in greater quantities in Germany, the USA and Japan, though, so any sanctions regarding this industry will not be that noticeable in the western world. However, copper trades between Russia and China have been increasing, meaning that the two global powers are indeed moving closer together, economically.
Gold is one of the most valuable metals in our society, both for industry, like in phones and computers and for jewellery. The most gold is mined by far in China, followed by Australia and then Russia (the US is up next with a little more than half of what Russia mines). Russia and China, once again have the upper hand in terms of who controls a big share of the market.
Lead was used way more, about a century ago, until people realised that it was poisonous. It still has many uses today, such as in car batteries, cable sheathing and interestingly, radiation protection (like in x-ray machines). Russia exports 2.8% of lead but lags behind other countries like Australia with 10.8% of global exports, South Korea with 10.8%, the UK with 7.9%, Canada with 6%, Germany with 5.5%, India with 5.4%, Belgium with 3.5%, Mexico with 2.9% and Bulgaria with 2.8%.
How long can the sanctions keep up?
There’s still one thing to keep in mind during all of this: Is this really possible? Can you have two completely independent blocs without incurring harm? Well, they did it with communism and capitalism, so why not now? Can you just switch imports at the speed of light or will Europe have to wait some time before it can be fully independent from Russian gas and oil?
First of all, there’s inflation, which, in case you forgot, is still sky-high. The exploding costs of energy and metal aren’t exactly helping and in the end, consumers might not be able to pay for basic recourses or living needs, like electricity or heating. If inflation gets even more intense, if the pandemic lasts a lot longer or if Europe might not find other sources of energy quick enough, this scenario might actually happen and still importing Russian coal, gas and oil might be in the best interest of everyone.
Next, there’s climate change. While everyone is talking about oil, gas and coal, few people are talking about green energy. Rather, Europe is starting to get energy using atomic power plants, which is, to put it mildly, not good, since atomic energy produces a radioactive material that takes hundreds of thousands of years to wear off. Still, there is the problem that Europe can’t safely start up all of its power plants before winter, meaning that, at least for some time, Russian energy is still a more than viable option. Amid all of this, turning to green options has been rather a second priority when now is the perfect time to invest even more money into this area. Instead of finding other sources of fossil fuel for the long term, climate goals should be considered as well.
Now, let’s talk about political events that could make the sanctions stop. There’s always a chance that the leadership will change in either side. When that happens, everyone is open for renegotiations and being dependent on each other might not be a bad idea.
Conclusion
The sanctions imposed on Russia are far-reaching and whether they will last long is not yet certain. The west has decided that being dependent on Russia is no longer an option and Russia has responded by starting building its own “bloc”, which may include China, as they have not imposed any sanctions on Russia. This could create a second economic cold war for the foreseeable future. This means that each bloc will have to learn how to get by without each other. Europe, especially, will have to deal with the lack of Russian metals, oil, gas and coal. As a result, high prices combined with high inflation mean that the consumer is the one, who, in the end pays a big price for the sanctions.
Comments