War in Ukraine sparks a commodity crisis

Ukraine has long been known as Europe’s breadbasket. The country’s vast fertile plains of black soil made it, along with south-western Russia, one of the best places on the continent to grow wheat and other staple crops. Russia’s invasion of its neighbour — just ahead of the sowing season — risks extending the humanitarian catastrophe in Ukraine to the rest of the world. Staple food prices, as well as energy costs, have spiked, raising the prospect of pushing millions of people towards poverty and hunger.

Commodity prices, more generally, increased at close to the fastest pace for over half a century last week. Sanctions on Russian financial institutions have led many traders to shy away from doing business with the country, even for energy. While there may be an exemption from the trade restrictions for oil and gas, insurers and dealers have decided that the risks, reputational or otherwise, of continuing to do business with the country are not worth the benefits. Oil prices rose to just shy of $120 a barrel on Thursday, the highest level since 2012, while wheat prices have risen around 50 per cent since the start of the invasion, close to record levels.

More obscure commodities where Russian exports make up a large portion of global supply, such as neon gas — used in the production of semiconductors — and palladium, used in making catalytic converters for cars, are also likely to run short. That will raise consumer prices further in countries where living standards are already under pressure. Sanctions on Belarus, Russia’s main ally in the war, could exacerbate the squeeze: it is one of the world’s largest producers of potash, a component of fertiliser.

According to futures markets the effect of the war on commodities is likely to persist, even if it eases slightly. Prices have risen for wheat deliveries in a couple of years, as well as immediately. That indicates traders believe there will be a reduction in supply for some time to come. A prolonged occupation of Ukraine and continued violence would, clearly, be bad for harvests, and damage may already have been done to potential yields.

For richer countries the challenge will be ensuring that the most vulnerable are shielded from the higher costs. Some measure of national solidarity will be vital, as wealthier taxpayers must take some of the burden to ensure their compatriots do not go hungry and stay warm. Investing to reduce import dependency — whether of fuel or food — will take time. The EU must act to prevent a repeat of the beggar-thy-neighbour policies seen in the early stages of the coronavirus pandemic, as countries rushed to get hold of a limited international supply of personal protective equipment and other medical supplies.

In poorer countries, especially those already facing financial stress from the coronavirus pandemic, higher food prices risk being devastating. Commodity exporters may get a dividend — although only if they do not rely on Belarusian potash — but importers that rely on buying essential food and fuel on international markets could struggle to get hold of the foreign currency they need.

Much of Ukraine and Russia’s black soil plains are no longer solely Europe’s breadbasket but also an important source of supplies for Asia, Africa and the Middle East. Those trying to relieve famine-stricken parts of the world such as Yemen, Afghanistan and Ethiopia, will face an even more daunting task. When food prices rose in 2008 it helped to spark the Arab spring and, eventually, civil war in Syria. Russia’s invasion of Ukraine has sown the seeds of a crisis that will be felt well beyond European borders.