IN. 1866 Nikolai Nekrasov, A Russian writer who began publishing “Who is happy in Russia”, describes in a four-part poem how the abolition of slavery a few years ago failed to enrich most peasants. The first chapter of “The chain is broken,” is over, and the recalling edges hit both sides at once.
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A century and a half later, his verses are an example of Russia’s brutality এবং and its possible consequences. Crushing the world’s 11th largest economy, comparable in size to Australia, should not necessarily cause a global catastrophe. But since the time of Nekrasov, and since the collapse of the Soviet Union, the chain of dependence on connecting Russia to the world economy has become stronger and more complex. Russia is the world’s largest exporter of natural gas, oil and coal, number one, two and three, respectively. Europe gets the lion’s share of its power from its former neighbors. Russia also accounts for half of US uranium imports. It supplies one-tenth of the world’s aluminum and copper and one-fifth of battery-grade nickel. Its dominance in precious metals such as palladium is even greater in the automotive and electronics industries. It is an important source of wheat and fertilizer.
The West has imposed a wide range of sanctions on other sectors, so far it has been exempted from exporting raw materials. The United States announced a ban on Russian oil on March 8, but it bought very few items; Britain will stop buying this year. However, growing signs that the West could go further have stunned commodity markets. US Secretary of State Anthony Blinken said on March 6 that while talking to allies about a general embargo, Brent crude had risen to 139 139 a barrel, double the price on December 1 – although it had returned to $ 113 by March 10. The change in gas prices was also violent: on March 8, European wholesale gas price contracts rose one-third to 5 285 ($ 316). MWh, 18 times their level a year ago, because Russia threatened to retaliate. On the same day, the London Metal Exchange (LME) Is the only time in the 145-year history that the nickel has suspended trading when the metal has doubled its previous record price. This week other metals hit all-time highs or close.
Without a precedent of so much depth and breadth. A key product index compiled by Thomson Reuters has risen more than ever since 1973 on a three-month basis. The week ending March 4th shows the largest increase since at least 1956. Outside of the trading floor, hysteria is still not visible. Not likely to stay calm. “Right now the price is printed on a screen. In four weeks they will become a reality, “said a businessman. As the tension increases, energy and metals may need to be rationed. Non-governmental organizations and private lives need to be painfully adjusted. The rich world will fall apart. Poor countries can be destroyed. In the end, Russia may be on the move, but not before the broken chain returns to the rest of the world with enormous violence.
The commodity market is in turmoil for two reasons. First, many were strong even before the war because of the strong demand. A strong post-lockdown economic recovery boosted energy and appetite for metals, pushing stocks to record lows. Giovanni Serio of Vitale, a major oil-trading company, said supplies, which are easy to cut but take longer to raise the ramp, have not been caught. Many “mid-range” facilities that were shut down during the Covid-19, such as oil refineries remaining offline, have created barriers.
The second cause for concern is the disappearance of supplies, which has been a major problem since the invasion of Ukraine. Some Russian oil is still flowing: millions of barrels are currently crossing the Atlantic. But most of it was bought and paid for a fortnight ago or more. Despite a 25% discount, new supplies from Ural Crude, Russia’s various pumps, are no longer running. Western companies, already stuck with their unsold goods, are already clearing possible sanctions. Many fear a backlash: on March 8, Shell said it would stop buying Russian oil after negative press coverage of Ural crude.
The problem in particular is the lack of funding. Most foreign banks, even Chinese banks, have stopped issuing credit letters for Russian trade. After decades of harsh fines for violating sanctions against Iran and other countries, banks are not taking any chances. Increasingly, this also applies to large commodity traders, such as Glencore, who long ago fought dictators in the name of strengthening the planet (and making a profit). Many fear that if they continue to do business with Russia, bank funds will be cut off from their lifeline.
Supply problems are no less important. Unable to insure, foreign ships are crossing the Black Sea. Maersk and last week MSc, Which together accounted for one-third of the container operations in Russia, pulled away from the country. Britain bans Russian ships from its ports; The I Thinking of a similar system. France has detained a Russian ship carrying steel and soy for another country.
Passive goods and erratic prices are putting pressure on the physical and financial infrastructure of the commodity business. Some European ports have severe traffic jams. Wrong-way traders are facing hefty margin calls. On March 7, a major lender, China Construction Bank, missed a payment. LME (Has made it since). Bunker-fuel prices have risen one-third since the aggression, hampering global shipping.
A proper oil ban by the West could look like a pleasurable punt on cam. In normal years Russia exports 7m-8m barrels per day (bpd), half of which goes I. Theoretically, China could buy more from Russia, freeing up other supplies. But Rystad Energy, a consultancy, estimates that Russian pipelines could re-route only 500,000 bpd from Europe to Asia, adding another 200,000 bpd to the railways. Russian oil takes 5-10 days to ferry to Europe; It takes 45 hours to ship to Asia. If “secondary” sanctions target non-Western entities, it will be more difficult to redirect the flow. As the western payment system is out of bounds, traders will become clunky bartering. A better alternative, used by China or others, may take years to scale up.
This suggests that a fair share of Russia’s oil supplies could be withdrawn from the market. Other products will probably be affected. Russia has promised to reduce its gas exports to the West and respond to a full oil embargo. Limits on coal sales will also be painful and complicate Europe’s efforts to move away from gas. The share of coal imports from Russia has doubled in the last ten years to 80% due to poor quality of its own supply. In the case of both gas and coal, most of Russia’s supplies are not available on the market. Its gas storage facilities are almost full. It does not have a large fleet to transport coal to Asia, where it is most in demand (it sends coal to Europe by rail).
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The big question is whether increasing supplies from elsewhere can reduce such losses. Start with oil. America has already set a time to increase oil production by 1m bpd. The West may also put pressure on members of the Organization of Petroleum Exporting Countries (OPEC).OPEC) To increase supply, yield is probably more 2m bpd. Another 1m bpd could be added to lift sanctions on Iran. Emergency stocking will help, too. Last week, the United States and other major oil-consuming countries agreed to release 60 million barrels from their reserves. There are indications that more may be released.
All of this could increase the global supply by 3m-4m bpd — a lot, but probably not enough. And extra supplies will take a long time to arrive. OPEC Members cannot increase production quickly because they have not invested in new fields year after year. It took six months for the American shell well to reopen; Six more unpaid from them. In the interim, prices will remain unbearably high. And other problems. Retrofitting refinery which refers to Ural crude ghazal, which has high sulfur content, is difficult. Diesel is exhausted not because of the Lebanese oil shortage but because of its ability to process non-Ural grades.
Finding new gas supplies is a big problem in Europe. The continent will need less of it as spring approaches, and post-winter recovery may be delayed until autumn. In the meantime, Europe may start importing more liquefied natural gas from America, although this will require Europe to crank out its “regasification” capacity (to convert liquefied gas back to gaseous state). Scheduled summer maintenance on Norwegian rigs may be suspended so that they can continue production. Azerbaijan could supply more pipes to Europe. In all, such corrections could replace about 60% of Russian imports, Rystad thinks. A strong effort – but still insufficient.
It seems impossible to balance the market without reducing demand. The least brutal way to achieve this is through policy to limit costs, such as building heating caps or rationing electricity for industrial use. Most likely the market will adjust to rising prices, which economists call “demand destruction”: self-imposed cuts. Mr Serio of Vitol said raising the price of crude oil to 200 200 a barrel could lead to a “voluntary” deficit of 2m bpd, and 2m bpd costs would not be reduced. On March 9, Ristad said prices could reach 0 240 a barrel this summer if more countries joined the US embargo.
Such energy would take a huge toll on hell agencies and people. Destroying demand in metals will add pain. Lack of aluminum can prevent the manufacture of anything from cars to cans. A nickel deficiency could stop electric-vehicle production.
All of this will surely hubble to the rich economy. JPMorgan Chase, a bank, already expects the global economy to grow 0.8 percentage points lower in 2022 than it did a week before the attack, with the euro zone hitting 2.1 percentage points.
The immediate threat to the poorest countries is the current account deficit. Analyzed by Economist Suggests that, if all else fails, the current account balance of 37 oil importers at $ 150 per barrel of oil for one year will sink by an average of 2.3 percentage points. This will put countries like Pakistan and Turkey already under pressure (see Chart 2). China will see one percentage point close its current account surplus. Even exporters of large commodities, such as Chile, may suffer because the metals have not been appreciated. Oil-exporting countries will benefit but will still face problems, such as the valuation of currencies that weigh on non-energy exports.
The withdrawal of the high price ban may expire. Russia, seen as a disrespectful and risky business partner, will remain on the sidelines, says Tom Price of Liberia, a bank. As its capital markets and export earnings struggle to recover, investment in commodity production will decline. Together with the loss of skills and resources, it can shrink capacity. Even after 2022, high interest rates and slow global growth could eventually force the market to cool – at an exorbitant cost. In 1876, Nekrasov began writing the final and most enjoyable part of his poem, calling it the “Feast for the World.” The happy ending never came: the chapter remains unfinished. 3
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This article is published under the title “Barreled Over” in the Finance and Economics section of the print edition.