Commodity market risk dynamics

Sanctions and commodity supply of Russia… Putin’s recognition of two separatist regions in eastern Ukraine and sending his troops there to keep the peace drew the reaction of the Western world and increased the tension. While the West is imposing sanctions on Russia over the Ukraine crisis, it may be possible to expand the package on a case-by-case basis after Putin launched a military operation this morning. The first round of sanctions against Russia was relatively ineffective – for example, nothing really crippled Russia as the sanctioned banks were military and state development banks, and most importantly, no sanctions were imposed on energy companies doing business with Russia. However, Biden’s statement about Nord Stream 2 and serious additional sanctions after the announcement of the military operation is important. Biden announced new US penalties for Nord Stream 2 AG and company officials. Germany had previously announced that it had stopped the certification processes for the Nord Stream 2 gas pipeline from Russia. In order to soften the rise in oil prices, the USA is expected to activate its strategic reserves.

 

Financial sanctions… Biden’s first financial sanctions against Russia will affect two Russian banks, VEB Bank and Russia’s military bank Promsvyazbank, at the first stage. In addition, this first package of sanctions will also affect the debt of the Russian government. With this move, the West generally aims to cut Russia off from Western financing. Biden also said in a statement that the first package of sanctions will apply to the Russian elite and their family members. In addition, the European Union imposed restrictions on many members of the Russian Duma. On an individual basis, Denis Bortnikov, head of the security organization FSS, and his son, Aleksandr Bortnikov, vice president of VTB, one of the country’s most important banks, stand out. Britain, on the other hand, put Gennady Timchenko, Boris Rotenberg and Igor Rotenberg, close to Putin, on the list. In addition, the European Union banned the purchase of Russian government bonds. A senior US official said that if Russia’s aggression against Ukraine continues, they may extend sanctions against the country’s largest banks, Sberbank and VTB.

 

New resources and current searches… The Russian economy is heavily dependent on commodity exports, with revenues from the sale of crude oil, petroleum products and natural gas, which constitute about half of Russia’s federal budget. Russia’s main exports are: fuels and energy products (63% of total shipments accounting for 26% and 12% of crude oil and natural gas, respectively); metals (10%); machinery and equipment (7.4%); chemical products (7.4%) and foodstuffs and agricultural products (5%). Main export partners: China (12%), Germany (9%), Netherlands (8.4%), Italy (5.8%), Belarus (4.7%), Turkey (4.4%) and Japan ( 4.1%). Total US dollar exports in Russia rose from $134,415 Million in the third quarter of 2021 to $152,932 Million in the fourth quarter of 2021.

 

Russia’s total exports… Source: Trading Economics, Bloomberg

 

We see that the prices of the commodity group in terms of global supply and precious metals in terms of investment may be on the rise in the new period. The entire commodity group will be affected by this situation regarding Russia. It seems likely that the commercial flow, especially energy, will be significantly interrupted. It is possible that Russia will turn more towards Latin America and China in terms of exports, while Europe will turn more towards Qatar LNG in energy imports and increase its renewable energy resources. The following detail may be important: Qatar’s Minister of Energy has announced that neither his own country nor any other country has the capacity to replace Russia as the LNG supplier to Europe. Even though Russia does not cut the supply, it can push the dependent parties more economically by increasing the unit prices.

 

  

Russia’s export items… Source: Trading Economics, Bloomberg

 

We will also expect price volatility in factors such as global demand, demand balance and supply problems in the automotive industry, technological production and, in this context, component supply, to increase with supply disruptions originating from Russia. This will affect groups such as palladium, nickel, aluminum, platinum and rhodium, whose production is directly related to Russia. Silver, which is needed in terms of protection demand and industrial use, may also be in demand at this point. Gold will be in demand as a safe investment tool.

 

Shifting export routes also means that we will see new dynamics. The slowdown of the Chinese economy is a minus, in this sense, factors originating from the supply limit and trade quotas slow down the movement area here. China, of course, also invests in clean energy from conventional fuels such as coal to reduce air pollution. Europe will similarly multiply the advantages of renewable energy. It seems that solar energy and electric vehicle technology will create a serious investment story in the new period.

 

Conclusion? Controlling inflation is getting harder and harder in developed countries, and new risk dynamics will make it harder to manage the situation through policy transition. Problems in goods exports and pipeline flows, which may arise with the application of both military cards and economic sanctions, will lead to serious price pressure. At this point, it is necessary to think very carefully about market positioning. As long as the crisis between Ukraine and Russia remains alive, the effects of this agenda, which we will follow in the short term, will be reflected. The possibility of business turning into conflict is on the relatively unlikely side due to strategic balances. In terms of both economic burden and political responsibility, it is more logical that the threat continues without realization, rather than the realization of the threat. It seems that these sanctions against Russia will continue. Markets are preparing for the effects of escalating tensions, increased risk of cyberattacks and corresponding sanctions on geopolitical, economic and credit conditions, energy relations, agricultural prices and commodity trading.

 

Kaynak Tera Yatırım-Enver Erkan
Hibya Haber Ajansı

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