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Lessons From the Ukraine Crisis Price Shock

Context

The Russia-Ukraine conflict, now more than three months old, will cause major, long-term shifts in the global energy and commodity trade.

Relevance

GS-II: Effect of Policies and Politics of Developed and Developing Countries on India’s interests, Indian Diaspora.

Dimensions of the Article

  • Factors responsible for High Prices
  • Future Trends
  • Way Forward

Factors responsible for High Prices

  • Ukraine war: Western sanctions on Russia and efforts of European nations to diversify their energy supplies are already causing market distortions and high prices.
  • Crude oil prices are at their highest level since 2014; the price of LNG is at its highest ever, fertilizer and food are up and markets for several other commodities such as nickel have been disrupted.
  • Expensive commodities are already causing distress in India’s neighbourhood, for example, in Sri Lanka and Pakistan.
  • Insufficient investment: Insufficient investment in oil and gas production in preceding years resulted in high prices, and shortages were being felt.
  • A number of European investors, such as Norway’s sovereign wealth fund, announced they would no longer invest in traditional fuels — oil, gas, coal.
  • Natural gas is used as a feedstock for fertilizer.
  • An energy shock is then inevitably followed by a food price shock.

Future Trends

Strained EU-Russia relations will distort prices

  • In the immediate term, the EU is trying to source its raw materials — most critically oil and natural gas, but also fertilizer, agricultural goods and metals — from non-Russian sources.
  • This will cause distortions and price spikes for those commodities in the global market, as can already be seen in the natural gas market, up 300 per cent in the last year.

Sanctions are unlikely to achieve the desired political outcome

  • The US and its allies are quick to impose sanctions — and these are rarely withdrawn, if ever.
  • Iran has been under US sanctions since 1979, and the same with Venezuela for over a decade.
  • In both cases, sanctions have failed to achieve the desired political outcome.
  • As Russia is much better placed than either of those two countries to weather sanctions, the restrictions are likely to remain for a long while.

Emerging world unwilling to align with West on sanctions

  • The high price of energy and the resulting inflation shows why much of the emerging world is unwilling and unable to align with the West on the current sanctions.
  • Russia is 11 per cent of the global landmass and among the world’s top five producers and exporters of oil, gas, fertiliser and other critical commodities like nickel.
  • It is too big to be replaced as a supplier.
  • In emerging economies, it can fan public anger and political unrest, as was seen in Tunisia and other Arab countries from 2010 on.

Larger emerging economies will disregard sanction

  • Larger emerging economies such as China, India and Brazil will disregard sanctions on their key economic interests, particularly food, fertilizers and energy.
  • Specifically for India, its dependence on these essentials is unlikely to reduce meaningfully over the next 15-20 years.

Way Forward

  • Collaborate with other economies: In the immediate future, the India should collaborate with other similar economies to ensure that Russia doesn’t get locked out of global commodity markets.
  • Work on insulating the supply chains: For the long term, it must work on insulating its supply chains from global political crises.
  • India needs to brace for the price shock emanating from the distortion caused by the shift in the energy policies of Europe. At the same time, India needs to collaborate with other similar economies to ensure that Russia doesn’t get locked out of global commodity markets.

Source – The Indian Express


 

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