Commodities prices will remain elevated for months

As the global impact of sanctions will be limited, EIU expects that the most serious effect of
the Russia-Ukraine conflict for the world economy will come in the form of higher
commodities prices. Commodities prices could jump owing to three factors: concerns around
supplies, the destruction of physical infrastructure and sanctions. Our core assumption is that
neither the EU nor the US will impose a ban on Russia’s hydrocarbons exports. Even in the
absence of an embargo, prices for oil, gas, base metals and grains will jump:

• Oil prices will remain above US$100/b as long as conflict rages in Ukraine. The threat of
sanctions on Russian hydrocarbon exports and uncertainty surrounding supplies will
exacerbate existing market tightness. Some oil traders are also avoiding Russian oil out of
concern about US secondary sanctions on financial transactions with Russian entities. 

• Gas prices will rise by at least 50% this year, on top of a fivefold rise last year. Europe has
limited gas stockpiles, and there are concerns about gas supplies for the 2022/23 northern
hemisphere winter season. 

• Russia is also a major producer of several base metals (aluminium, titanium, palladium
and nickel), all of which will register price jumps. Following spikes in all of these markets
last year, prices will remain at peak levels as long as the conflict continues. This will have a
substantial impact on industrial sectors (such as the automotive industry) across the
globe. 

• Prices of agricultural commodities (wheat, maize, barley and rapeseed) will soar. Taken
together, Ukraine and Russia account for more than a quarter of the global wheat trade
and produce 12% of calories consumed globally. Disruptions to trade routes in the Black
Sea would increase pressure on grains prices.

Supply chains will be disrupted

Financial sanctions will have an impact on supply chains and trade, as companies will struggle
to find financial channels through which to conduct trade with Russia. In addition, the
possible destruction of some transport infrastructure (notably ports in Ukraine) will
compound existing supply-chain issues. 
Disruption to supply chains will come from three sources: difficulties affecting land-based
routes; restrictions on air links; and the cancellation of sea freight routes from Ukraine:

• Land-based trade routes between Asia and Europe will be disrupted as transit through
Russia becomes more difficult (or impossible from a compliance, reputational or safety
perspective). This will particularly affect some Chinese companies, which had increased
their traffic over land-based routes through Russia (en route to Europe) as an alternative
to sea and air freight during the coronavirus pandemic. 

• Air ties between Russia and Europe (and, in turn, Asia and Europe) will be severely
hampered following the decision of EU countries to close their airspace to Russian aircraft
and cargo (and Russia’s reciprocal measure to close its own airspace to European planes).
About 35% of global freight was being transported by air prior to the pandemic, about
half of which was carried on passenger planes. 

• Sea freight routes through the Black Sea will be cancelled for several weeks following
Ukraine’s decision to shut down commercial shipping and Turkey’s move to restrict transit
through the Bosphorus. This situation will have a notable impact on grain shipments
transiting through Ukrainian, Russian, and possibly Bulgarian and Romanian ports. 

Global inflation will jump above 6% this year

Higher commodities prices will fuel global inflation this year and possibly in 2023. EIU was
already forecasting global inflation of nearly 6% this year, but now that mark is expected to
be exceeded, given the huge spikes in commodities prices. The rise in inflation will offset the
positive impact of higher commodities prices for producers. 

Higher prices will also raise tricky questions for central banks. They had embarked on a
course of monetary tightening to curb inflation but may now be concerned about the impact
of the Russia-Ukraine conflict on the post-coronavirus recovery. 

“Our view is that the Federal Reserve (Fed, the US

central bank) and the European Central Bank will not
change their monetary-tightening plans. However, we
expect that the pace of the Fed’s balance-sheet run-off
will be less aggressive than it is currently suggesting and
ld b di h f i ifi k
 would be postponed in the event of significant market
turmoil”.
AGATHE DEMARAIS, GLOBAL FORECASTING DIRECTOR, EIU.

Global growth will take a hit

The economic impact of the conflict will be felt mostly in Ukraine and Russia, which will both
experience sharp recessions this year. Those eastern European countries that are most
exposed to trade with Russia, such as Lithuania and Latvia, will also take a hit from the
conflict. Elsewhere in Europe, the EU will suffer from an energy, supply-chain and trade
shock. 

“In view of this situation, EIU will be revising down the

growth forecast for Europe in 2022, to about 2% from
our previous projection of 3.9%. Growth in the euro
zone is now expected to stand at 3.7% this year, from
EIU’s previous forecast of 4%. Downward revisions to
Europe’s growth outlook will also prompt a revision of
the global growth forecast by 0.5 percentage points to
about 3.4%, from 3.9% previously”.
AGATHE DEMARAIS, GLOBAL FORECASTING DIRECTOR, EIU.

The analysis and forecasts featured in this piece can be found in EIU Viewpoint, our new
country analysis solution. EIU Viewpoint provides unmatched global insights covering the
political and economic outlook for nearly 200 countries, helping organisations identify
prospective opportunities and potential risks.

Thu, 03rd Mar 2022

Article tags

Commodity Economy Forecasting Supply chains Ukraine crisis

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