Since the beginning of Russia’s war on Ukraine, the commodity markets have experienced high volatility due to the impact of sanctions on exports.
Western sanctions on Russia have had global ramifications as both Russia and Ukraine export many commodities. Russia is the world’s largest exporter of wheat, pig iron, natural gas, and nickel, and accounts for a significant share of coal, crude oil, and refined aluminium exports.
The European Union imports a substantial share of its energy from Russia, including natural gas (35%), crude oil (20%), and coal (40%), according to the World Bank.
Debate over how the world's top industrialised countries might support Ukraine in fending off Russia's invasion while minimising the global fallout on food prices and energy costs dominated the annual Group of Seven (G7) summit which was held in the Bavarian Alps in southern Germany this week.
"We will explore further measures to prevent Russia from profiting from its war of aggression," the communique of the G7 meeting said.
The G7 said it will look into options, such as prohibiting the transfer of Russian oil that has been sold for more than a specific price cap, "to prevent Russia from benefitting from its campaign of aggression."
Unless the Russian oil has been "purchased at or below a price to be agreed" by the G7 consultation with international partners, the group is considering "a possible comprehensive prohibition of all services, which enable transportation for Russian seaborne crude oil and petroleum products globally."
“We will further reduce reliance on civil nuclear and related goods from Russia, including working to assist countries seeking to diversify their supplies,” the group said.
In addition to sanctions on Russian oil, the G7 said it remains committed to its “unprecedented coordination on sanctions for as long as necessary” and will untie to reduce Russia’s revenues, including from gold.
The sanctions on gold imports have been expected after an announcement from the UK government stating that the US, UK, Japan and Canada will ban new gold imports from Russia.
The move is anticipated to have a serious effect on Russia’s ability to fund the war in Ukraine.
Against this backdrop, AsianInvestor asked fund managers and financial experts how these new sanctions could affect the commodity markets?
The following responses have been edited for brevity and clarity.
Tai Hui, Asia chief market strategist
JP Morgan Asset Management
The latest signals from G7 would probably have limited impact on commodity prices since the US and European governments have either already banned, or been looking to rapidly reduce imports of Russian energy products in the coming months and years. Russia’s reaction, including additional limitation on supply of gas and oil due to “maintenance work” on pipelines, could be potentially more impactful. The move could force European buyers to seek alternatives in the global market with greater urgency in order to stockpile ahead of the winter demand peak.
Apart from this week’s G7 announcement, the ongoing conflict in Ukraine could put more pressure on food prices in the next 3-6 months. Russia and Ukraine are key suppliers of food stuff and fertilisers and the geopolitical conflict between the two nations does not look to be returning to normality anytime soon. Given that food demand is rather inelastic, supply disruptions could pose a greater challenge to higher prices in months ahead.
Robert Howell, portfolio manager and chief research strategist
Gresham Investment Management
Regarding the recent market interventions in the wake of the Ukraine war, it is difficult to conceptualise them as being anything but bullish for commodities. Except for the 2005-2014 era (when Chinese demand for commodities surged), the last thirty years have seen the forces of globalisation exert downward disinflationary pressure on commodity prices as trade frictions between nations decreased. However, since 2016, when tariffs were first introduced between China and the United States and ESG constricted flow of investment capital to commodity supply, everything has changed.
We have witnessed ever greater intervention by governments in commodity markets. This has introduced a new form of risk premium –(geo)political risk- into commodity prices. A key aim of the Russian military action in Ukraine was to weaponise the supply of commodities (globalisation and ESG has made Western nations overly dependent on Russian oil & gas, metals and grains) by withholding/disrupting supply from those who did not accede to Russian territorial claims in Ukraine.
G7 sanctions are the latest stage of increased friction on commodity prices (previously we had tariffs and war) which is bullish commodity prices, and therefore directly inflationary for most of the world’s economies.
Noah Barrett, energy research analyst
Janus Henderson Investors
My view is that G7 sanctions and an oil price cap could be effective in reducing the price of Russian oil for buyers and in turn, reducing the amount of oil revenue received by Russia. The main factor in determining whether or not sanctions are effective will be Russia's production response to price caps. If they reduce exports in response to price caps/sanctions, this will take supply off the market and drive global prices higher.
If Russia determines that they need oil revenue to support their economy, even if that per-barrel revenue is capped, they may keep production flat or even increase supply, which would help alleviate pressure on global prices.
Finally, I believe that Europe is still planning to phase out imports of Russian crude and products over the next six to 12 months, but a successful price cap may change the timeline of those plans and give Europe more time to implement a strategy to displace Russian oil. If Europe can find a way to successfully implement price caps on Russian natural gas, this would also help alleviate concerns over security of supply as we enter winter.
Robin Tsui, Asia Pacific gold strategist
State Street SPDR ETFs
While the ban is viewed as symbolic as it formalises the current restriction of Russian gold flows from economic sanctions, we expect the G7 sanctions on Russia should have limited impact on the gold market.
Firstly, the London Bullion Market Association (LBMA) in March suspended the acceptance of London Good Delivery Bars from major Russian gold refiners, and market reaction was quite muted and some investors might have already expected further sanctions. Secondly, despite Russia being the world’s second largest gold producer, the country’s gold exports in 2021 only represented 4% of the world’s gold exports. Thirdly, gold mining operations are located on every continent except Antarctica, and the inability for Russia to export gold to other countries should have limited impact on global supply.
Moreover, recycled gold continues to contribute around 25% to global supply on an annual basis, hence recycled gold should be able to cover any potential export shortfalls from Russia to other countries. Gold prices, in our view, will continue to be driven by market demand dynamics such as investment demand and macroeconomic factors such as interest rates, currencies and inflation.