OPINION
Market Rating Before FOMC MeetingJan 31
Russian Invasion of Ukraine: Rising Commodity Prices and Inflation
Russia's war in Ukraine continues to shake the financial markets. As a result of the invasion and the strong sanctions implemented by the West, especially the United States and the United Kingdom rising stress levels in international markets has led to huge increases in commodity prices and consequently, in inflation forecasts.
The military operation launched by Russia on February 24 has reached its 12th day under the shadow of the negotiations, while global political tension remains quite high with sanctions directly targeting the Russian economy. The escalating financial tension of Russian banks over the freezing of their assets in America continues after their removal from the SWIFT system, the global standard for electronic funds transfer, excluding food, drug and energy payments.
After the sanctions blow of the West, internationally known credit rating agencies such as Moody's and Standard & Poor's went for a rapid downward revision in Russia's credit ratings, while Visa, Mastercard and American Express also ended their Russian operations. Reflecting the severe wave of sales in the Russian financial market, the ruble fell to an all-time low against the dollar, while expectations prevail that the economy will experience a significant contraction.
However, the fact that Russia is an important raw material deposit of the world here creates risks for the global economy, which has not yet fully recovered from the effects of the pandemic. Russian economy, which has the third largest share of trade in the European continent with 5.7 percent, thanks to the export of oil, natural gas, metals, chemical products, precious stones and agricultural products, is facing harsh sanctions, leading to an unbelievable raise in supply concerns.
At the moment, Brent oil has renewed its 14-year peak with 128.63, while natural gas futures in Europe exceeded 300 euro for the first time. On the London Metal Exchange (LME), wheat futures contracts set a record with 1 294 USD, while aluminum rose to an all-time high of 4 103 USD. In addition, steel and coal hit the highest levels with 59 910 and 435 USD respectively.
High levels in energy and food commodities, especially crude oil and natural gas, pose significant upward risks to global inflation. Inflationary risks that the global economy faces with supply bottlenecks due to the supply chains damaged by the pandemic may gain momentum as a result of the impact of the Ukrainian crisis on the markets. The tightening trend in global monetary policies, which has already begun under the leadership of the central banks of North America, may diverge in the face of supply bottlenecks and inflationary pressures that will increase more and more due to high commodity prices. In particular, the outlook for the economies of the Black Sea countries may face downside risks with the current inflation, as well as negative changes in foreign trade activities, and even the stagflation may be the case.
Russian President Vladimir Putin described sanctions imposed by Western nations over his invasion of Ukraine as "akin to a declaration of war, yet the US and its European allies plan to stop oil imports from Russia. Russian - Ukrainian delegations held the second round of negotiations in Brest located on the Belarusian border. Although the delegations agreed to a temporary ceasefire in the areas where the evacuations will take place, diplomatic tension has not yet fallen. On the other hand, NATO countries‘ steps related to a ’no-fly zone' should be closely followed.
It seems inevitable that stressful price movements will continue unless a diplomatic development ease the tensions in the markets that will significantly reduce geopolitical risks. This, in turn, could create the opportunity for the strong rise in commodities, especially in Brent oil and gold prices, as well as expose central banks to more severe inflationary pressure in near future.
The military operation launched by Russia on February 24 has reached its 12th day under the shadow of the negotiations, while global political tension remains quite high with sanctions directly targeting the Russian economy. The escalating financial tension of Russian banks over the freezing of their assets in America continues after their removal from the SWIFT system, the global standard for electronic funds transfer, excluding food, drug and energy payments.
After the sanctions blow of the West, internationally known credit rating agencies such as Moody's and Standard & Poor's went for a rapid downward revision in Russia's credit ratings, while Visa, Mastercard and American Express also ended their Russian operations. Reflecting the severe wave of sales in the Russian financial market, the ruble fell to an all-time low against the dollar, while expectations prevail that the economy will experience a significant contraction.
However, the fact that Russia is an important raw material deposit of the world here creates risks for the global economy, which has not yet fully recovered from the effects of the pandemic. Russian economy, which has the third largest share of trade in the European continent with 5.7 percent, thanks to the export of oil, natural gas, metals, chemical products, precious stones and agricultural products, is facing harsh sanctions, leading to an unbelievable raise in supply concerns.
At the moment, Brent oil has renewed its 14-year peak with 128.63, while natural gas futures in Europe exceeded 300 euro for the first time. On the London Metal Exchange (LME), wheat futures contracts set a record with 1 294 USD, while aluminum rose to an all-time high of 4 103 USD. In addition, steel and coal hit the highest levels with 59 910 and 435 USD respectively.
High levels in energy and food commodities, especially crude oil and natural gas, pose significant upward risks to global inflation. Inflationary risks that the global economy faces with supply bottlenecks due to the supply chains damaged by the pandemic may gain momentum as a result of the impact of the Ukrainian crisis on the markets. The tightening trend in global monetary policies, which has already begun under the leadership of the central banks of North America, may diverge in the face of supply bottlenecks and inflationary pressures that will increase more and more due to high commodity prices. In particular, the outlook for the economies of the Black Sea countries may face downside risks with the current inflation, as well as negative changes in foreign trade activities, and even the stagflation may be the case.
Russian President Vladimir Putin described sanctions imposed by Western nations over his invasion of Ukraine as "akin to a declaration of war, yet the US and its European allies plan to stop oil imports from Russia. Russian - Ukrainian delegations held the second round of negotiations in Brest located on the Belarusian border. Although the delegations agreed to a temporary ceasefire in the areas where the evacuations will take place, diplomatic tension has not yet fallen. On the other hand, NATO countries‘ steps related to a ’no-fly zone' should be closely followed.
It seems inevitable that stressful price movements will continue unless a diplomatic development ease the tensions in the markets that will significantly reduce geopolitical risks. This, in turn, could create the opportunity for the strong rise in commodities, especially in Brent oil and gold prices, as well as expose central banks to more severe inflationary pressure in near future.
