Research & Insights #21

Oil & Gas. Tensions between Russia and the West over energy have escalated in recent days. For the first time, Moscow has cut off gas supplies to Poland and Bulgaria since Vladimir Putin threatened “unfriendly countries” with having to pay for natural gas in rubles. This demand is intended to stabilize the Russian economy in the face of Western sanctions. On Wednesday, the European Union’s executive proposed the toughest package of sanctions yet against Moscow. The measures should mainly target Russian oil as well as all shipping, brokerage, insurance and financing services offered by EU companies enabling its transportation. The Commission’s proposal must still be unanimously approved by the 27 EU countries. It plans to phase out deliveries of Russian crude oil in six months, and of refined products by the end of 2022. Several countries worried about the impact of cutting off Russia oil imports stand in the way of agreement. The Ukrainian conflict calls into question more than half a century of partnership in the energy field between Europe and the USSR, then Russia.

Central Bank. On 29 April 2022, the Bank of Russia decided to reduce the policy rate by 300 basis points to 14% per annum. Recent data indicate a slowdown in current price growth rates due to a strengthening ruble and weakening consumer activity. Indeed, the ruble has recently reached its highest level in over two years against the dollar and the euro, supported by capital controls. There are currently no concrete signs that the Central Bank will reduce capital controls in the near future. For its part, the finance ministry said it had managed to make payments on two dollar-denominated bonds, potentially averting a default on the country’s external debt. Russia made the payments from bank accounts that were not subject to direct sanctions, according to people familiar with the matter. Moscow has ample resources to service its debt from oil and gas revenues. But Western sanctions have complicated the country’s efforts to make sovereign bond payments. In early April, the US prevented Russia from using US banks to repay its foreign debt.

Russia-China relationship. China’s leading provider of information and services to the coal and coke industries, Fenwei Energy Information Service Co, has revealed that several Chinese companies purchased Russian coal in Chinese currency in March 2022. The first shipment would be made in April.  It is also the first shipment of Russian commodities paid for in yuan to arrive in China after Russia was sanctioned by Western countries. Chinese buyers have also used yuan to purchase Russian crude oil. China’s total imports from Russia have recently increased significantly. According to the latest mid-April report from the General Administration of Customs, in the first quarter of 2022, total Chinese imports from Russia reached US$21.73 billion, a 31% year-on-year jump, second only to Indonesia (31.4%). Since the outbreak of war in Ukraine, China has refused to condemn Russia’s actions and has criticised the radical Western sanctions imposed against Moscow.

Commodity Shock. According to the World Bank, global energy prices are projected to rise dramatically, culminating in the biggest price jump in commodities in nearly half a century. In its April commodity market outlook report, the institution expects global energy prices to rise by 50.5% in 2022. Sanctions on Russia are the main reason for the disruption of the global trade supply chain, which is causing dramatic energy price increases. Food costs are expected to rise by 22.9% this year, the largest increase since 2008, with wheat prices peaking at 40%. Ukraine was expected to produce 10% of the world’s wheat in 2022, but between 25% and 50% of that production has been affected by the conflict. Meanwhile, metal prices are expected to rise by 16% before declining next year, but they will remain at high levels. According to the report, soaring commodity prices have contributed to inflation levels not seen for more than 40 years in the US, and a record 7.5% jump in consumer prices in Europe.

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