Global Impacts of the Russian Invasion of Ukraine

Global growth slows and inflation pressures intensify amid rising economic headwinds

The Russian invasion of Ukraine and the subsequent imposition of sanctions by a range of governments have served to reset the global geopolitical compass, with an immediate impact on oil and gas markets and investments. While the war is continuing and full implications will take years to emerge, some early outcomes for above-ground risk are already crystalising.

Russia's regional ambitions represented a longstanding, open test. Yet, with the invasion of Ukraine on 24 February, Europe's security environment, Ukraine and Russia's economic outlook, the stability of markets have been thrown into the air and are in the process of reshuffling.

A recent S&P Global report titled "Russia-Ukraine crisis: Implications for global power and renewables" takes a look at the implications of the conflict for global power and renewable markets.

While reports earlier this year offered a look at important issues facing regional power markets in 2022, the IHS Markit Strategic Report "Six anticipated trends in 2022 for global power and renewables markets" provides an overview of key trends for global power and renewable markets in the coming year.

Syngenta expects agricultural output in Ukraine to fall by a third this year as a result of the ongoing invasion by Russia. "We hope to be able to save around two-thirds of what would normally be possible," the company says.

Our Materials Price Index (MPI) climbed a comparatively modest 0.5% last week, following a 0.7% increase the week before. Price increases were mixed with only half of the MPI's ten sub-components rising. After last week's increase, commodity prices are once again near their all-time high established in early March.

In addition to tracking changes in current business conditions, such as actual monthly changes in output, order books, prices and employment, the PMI surveys compiled by S&P Global also include a subjective question which asks companies about their own output expectations for the coming year.

Bayer is assessing the repercussions from the Russia-Ukraine conflict on the company's prospects and its threat to global food security, with chief executive officer Werner Baumann noting that the firm is working to mitigate business risks arising from the situation.

The JPMorgan Manufacturing Purchasing Managers' Index™ (PMI™), compiled by S&P Global, fell from 53.7 in February to a one-and-a-half year low of 53.0 in March. Production and demand growth was subdued by a combination of headwinds, including the Ukraine war and new COVID-19 related disruptions - notably in China.

The possibility of a supply disruption to Russian oil owing to the Russian-Ukraine crisis has caused a physical and financial shock to the global crude oil market.

The European Commission has launched an EU plan with several aid measures to safeguard food security against the impact of the war in Ukraine.

Since the start of the conflict, commodities including oil grains, vegetable oils, oil seeds, have increased sharply, while equity markets have fallen. Watch this update for the themes/ sign posts we've set out to track as events unfold.

As of early 2022, four Russian oil companies were present in different onshore and offshore locations in several African markets. Overall, Russian players tend to act as operators in North Africa (Libya, Algeria, Tunisia), while they mainly act as partners in Sub-Saharan Africa (Ghana, Nigeria, Cameroon, Congo and Mozambique).

Over the course of the first month of Russia's invasion of Ukraine over 3.6 million refugees left Ukraine, according to the United Nations, with another 7 million people internally displaced in Ukraine.

Preliminary PMI survey data showed only a modest impact from the Ukraine war on current economic growth in the world's largest developed economies in March. Headwinds from the invasion, soaring energy costs, a broader rise in cost pressures and ongoing supply chain constraints were largely offset by a boost from the further reopening of economies from COVID-19 related containment measures.

Eurozone business activity growth slowed in March as the economic impact of Russia's invasion of Ukraine offset a boost to demand from the further reopening of the economy from COVID-19 restrictions.

As war rages in Ukraine—including a Russian bombing raid within 20 km of a NATO member's border—the key question for the oil market is whether Russian oil export volumes fall or are redirected elsewhere, especially in April and May when flows will reflect deals made after the Russian invasion. Before the invasion, Russian oil exports were about 7.5 MMb/d—roughly 4-5 MMb/d of crude oil and 2-3 MMb/d of products.

Russia's invasion of Ukraine on 24 February has fundamentally changed the geopolitical landscape—with economic consequences. Four weeks into the war, Russia continues its bombardment of cities, encountering determined Ukrainian resistance. While the outcome is highly uncertain, a lengthy political impasse appears likely.

Even though some supply chain tensions have eased recently, the risks are rising again. Some sectors and countries are more vulnerable due to materials and labor shortages and surging prices. The Russia-Ukraine war will further exacerbate supply chain problems affecting commodity prices as well as energy-dependent and related industries.

In January, about 750,000 b/d of Russian crude oil was supplied through the Druzhba pipeline network to various European refineries. Although Druzhba is an established supply route to Europe, the connected refineries could likely face disruptions if Europe avoids Russian oil or if the pipeline is shut down for any reason.

With conflict in Ukraine comes more reminders of the fragility of the world's automotive supply chains. The March light vehicle production update from S&P Global Mobility (formerly the automotive team at IHS Markit) is likely to downgrade its 2022 forecast by 2.6mn units (i.e. to 81.6 million).

The European Union (EU), the United States (US), United Kingdom (UK), and others, have imposed stringent restrictions on exports to Russia, following its invasion of Ukraine. These new controls are intended to affect significant sectors of Russia's economy, such as energy, aviation, aerospace and technology.

China's top political consultative bodies recently convened for the National People's Congress to discuss the future road map for China's Economic Development. This session came against the backdrop of recent geopolitical tensions vis a vis the Russia-Ukraine crisis, moderating GDP growth rates in China and the increasing prospects of rising interest rates in the U.S.

Inflation rates have soared across the globe, reflecting various factors including elevated commodity prices, supply bottlenecks, rising transportation costs, rebounding demand, and COVID-19-related base effects. The rising prices of energy and other goods have been the principal drivers of the unusually rapid increases in consumer price inflation rates, and in the short term further upward pressure from both areas is expected, aggravated by the impact of the Russia-Ukraine conflict.

Supply disruption and price volatility are now evident, with German multinationals such as Bayer and BASF, the latter entering Ukraine after its independence in 1992, keeping a close watch on the rapidly changing security situation in the region, and its potential wider business impacts on production and personnel from sanctions.

Over the last few days, the response of countries and companies to the Russian aggression on Ukraine is widely discussed. Sanctions imposed by global players, such as the U.S. the EU or Japan, and South Korea are already severe and are expected to be augmented presently. In comparison to sanctions imposed after the Crimea invasion in 2014, which concerned primarily the energy sector, technology transfer, and financial measures (e.g. asset freezing), the recent response is likely to impact international trade of the Russian Federation even heavier.

Our Materials Price Index (MPI) jumped 8% last week, the largest weekly increase on record. Price increases were uniform with all ten sub-components in the index rising. After last week's increase, commodity prices have now surpassed the all-time high set in April 2011.

S&P Global Expert on European Gas Laurent Ruseckas returns to EnergyCents this week to discuss the implications to European gas markets of Russia’s Ukrainian invasion and related sanctions, and how recent events may impact the continent’s longer term energy supply strategies.

While Russian natural gas continues to flow via Ukraine to Europe as of 1 March 2022, it seems clear that the invasion of Ukraine by the Russian military will cause many European countries to look urgently for new gas supply sources. Particularly as the risk of an interruption in flows has increased, which would in turn impact other European states.

With a full scale invasion of Ukraine now under way, stock markets, global trade, energy markets, and commodities markets are all registering the impact of a new geo-political reality.

As the military situation between Russia and Ukraine intensifies, S&P Global Commodity Insights reports on how geopolitical factors are affecting commodity and energy markets in the region and the world at large.