Global markets ride Ukraine’s war roller coaster

The Russian invasion of Ukraine a year ago reverberated through global markets. With no end to Europe’s worst conflict since World War II, the effects are still being felt.

Financial Times journalists look at what has happened in key markets and what could happen next.

Putin’s energy war backfires

The energy war unleashed against Europe by President Vladimir Putin ran almost parallel to the Russian invasion of Ukraine. The tightening of gas supplies began earlier, and many industry commentators believe it was an attempt to weaken Europe’s resolve before the first shots were fired.

But arming Moscow with gas has increased dramatically as Western powers have thrown their support behind Kiev.

Russian gas exports, which once satisfied around 40 percent of Europe’s demand, fell by more than three quarters to EU member states last year, fueling an energy crisis across the continent.

But Putin’s energy war will no longer plan. Industry leaders believe that Russia has undoubtedly influenced the oil and gas markets, and the president is now staring at the defeat of markets he once thought he could dominate.

“Russia played the energy card and didn’t win,” Fatih Birol, head of the International Energy Agency, told the Financial Times this week.

“It wasn’t just aimed at causing pain in Europe, it was aimed at changing European politics,” said Laurent Ruseckas, managing director of S&P Global Commodity Insights. “If anything, it has made Europe more determined not to be forced to change positions.”

European gas prices have fallen 85 percent from their August peak, boosting the broader economy, which is now likely to avoid a deep recession.

Line chart of TTF contract (€/MWh) showing European gas prices down 85 percent from last year's peak

The continent has also avoided the worst possible outcomes, such as outright gas shortages or continuous blackouts, which once seemed a distinct possibility.

In fact, there are signs that Europe is now in a better position to weather the coming winter.

Relatively mild weather and Europe’s success in tapping alternative sources such as offshore liquefied natural gas means that storage on the continent is much more saturated than usual for this time of year.

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Gas in storage was below 65 percent of capacity on Wednesday, with only a month of winter left, according to trade body Gas Infrastructure Europe. On the day of the Russian invasion, gas storage was only at 29 percent.

“Next winter’s storage refilling is no longer a big burden,” said Ruseckas.

Longer-term traders, including Pierre Andurand, who has run one of the world’s most successful energy funds for more than 15 years, believe Putin has already lost by cutting ties with Russia’s main gas consumer.

While Russia wants to sell more gas to Asia, it could take a decade to route its pipelines east because the gas fields that once supplied Europe don’t connect to the pipeline it uses to feed China.

Andurand argued this month that China would also be in a position to drive a hard bargain with Moscow on price and would not want to repeat Europe’s mistake of relying too heavily on a single supplier.

“Once Russia can only sell gas to China, Beijing will be able to decide the price,” Andurand said.

Europe continues to face challenges. While gas prices have fallen from near $500 per barrel (in terms of oil) reached in August, they remain two to three times higher than historical norms.

Russia still supplies about 10 percent of the continent’s gas through pipelines that pass through Ukraine and Turkey. If Moscow were to decide to cut those supplies, it would likely push prices higher again, although it may be wary of alienating Turkey.

Europe will also face increased competition for LNG shipments with Asia this year as China’s economy reopens after zero Covid-19, although there is initial evidence that Beijing is more price-sensitive than feared.

Traders are expecting an extension of the grain export deal

International traders are focusing on extending the Black Sea grain export agreement between Kiev and Moscow, which expires next month in Ukraine. accusations that Russian inspectors are deliberately delaying the transit of grain ships in the port of Istanbul.

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An agreement brokered by Turkey and the United Nations last July allowed Ukrainian grain shipments to flow through the Black Sea and reduced prices from post-invasion peaks. Grain prices have since fallen to pre-war levels, although they remain historically high.

Bushel dollar line chart showing that wheat prices have returned to pre-war levels

Before the war, Ukraine played a leading role in food commodity markets, accounting for about 10 percent of the global wheat export market, just under half of the sunflower oil market, and 16 percent of the corn market.

Last November, the deal was extended despite Putin’s threat to quit and growing uncertainty about how Moscow will behave at the negotiating table.

“If [the deal] will be renewed – that’s great news, but if that doesn’t happen, there will be immediate problems with supply,” warned John Baffes, the World Bank’s chief agricultural economist. “These problems will mostly affect countries in North Africa and the Middle East.”

High inflation ensures high interest rates

Inflation was already on the rise in February 2022 as prices were pushed higher by rumbling supply chains and massive fiscal stimulus to mitigate the worst effects of the Covid-19 pandemic.

But these forces were seen by central banks as temporary. Sanctions imposed on Russia at the start of the war raised the price of oil, gas and coal, among other commodities, further increasing and making inflation more persistent.

Even as supply chains were unwound and pandemic cash was spent, inflation continued to rise.

Line chart of two-year sovereign bond yields (%) showing bond yields have jumped since the invasion

The persistence of inflation forced central banks to raise interest rates higher and higher, thereby increasing the yield on public debt. Two-year sovereign bond yields, which move with interest rates, have risen by more than 2 percentage points in Germany, the United Kingdom, the United States and Australia, among others, in the past year alone.

As the cost of borrowing for sovereign nations rose, so did that for corporations, with corporate bond yields higher and stock prices lower.

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There is little chance that they will fall any time soon. Although inflation has started to slow around the world, the pace remains well above target for many central banks, which have vowed to keep fighting.

The ruble depreciates after recovering from post-invasion lows

A year on from Russia’s invasion of Ukraine, the ruble’s value against the dollar is close to where it was when the conflict began — though there have been plenty of twists and turns along the way.

The value of the Russian currency has halved to a record low of $150 in the month since Putin sent troops into Ukraine, despite the Russian central bank more than doubling interest rates to 20 percent in late February in an attempt to calm the country increasingly tense situation. financial system.

They were quickly followed by European and American sanctions – aimed at cutting Russia out of the global payments system and freezing hundreds of billions of dollars in reserves amassed by the Bank of Russia. In late March, an emboldened US president, Joe Biden, declared that the ruble had “turned to rubble almost immediately” as a result.

A line chart of the ruble per US dollar showing the Russian currency's rapid recovery from post-invasion lows

Then came the rebound. Moscow’s capital controls meant that the ruble had recovered almost all of its losses by early April. The currency was also helped by the steady flow of oil and gas exports.

However, it has gradually weakened since July when it reached 51 against the dollar, a level last seen in 2015. It’s running at 75 today.

As Russia’s capital account is completely closed to major hard currencies, “the exchange rate is not fulfilling its forward-looking role based on expectations, it just reflects daily trade flows, most of which are energy trades,” said Commerzbank analyst Tatha Ghose. .

Ghose expected the ruble to weaken further against the greenback in 2023, which has pulled lower as Western sanctions against Russian oil weigh on the country’s current account.