Both Russia and Ukraine are key suppliers of a number of commodities, including European natural gas, crude oil, and diesel, corn, wheat, and some base metals. All these commodities and precious metals have responded to the increasing tensions in Crimea. There has been a wide condemnation of Russian actions in Ukraine, but denunciation is unlikely to result in any global commodity trade restriction, and we think the physical market impacts should be limited. If history is any guide, geopolitical risk premiums diminish without a physical disruption, with prices coming back to normal in 3-6 months.
While Russia has the potential to avoid sanctions or reach other markets, disruptions at some Ukrainian ports or with Ukrainian-specific production are a bigger risk at the moment. Although the western governments — particularly the U.S. — have threatened to impose sanctions on Russia, large-scale sanctions are not feasible and unlikely to be effective. Russia is not a small player in the international trade; it has plenty of potential trading partners. Moreover, for many commodities, Russian supply is too large to displace. Europe is heavily dependent on Russia for natural gas and the already tight oil markets are not capable of replacing 2.7 mmbd of westbound Russian exports. Even wheat and corn sanctions would mean restricting food access from a large supplier, which again is not a feasible proposition.
Among all the European commodities, natural gas is the most exposed to sanctions or Ukrainian supply disruptions. The commodity also faces a risk of potential Russian retaliation to sanctions. Europe depends heavily on Russia for its gas needs. Russian imports accounted for almost a quarter of the region’s 2012 supply. Geopolitically speaking, Europe is most at risk here. If the U.S. and Europe decides to impose sanctions on Russia, Moscow could raise gas prices for the region, resulting in higher costs for Europe. Ukrainian transit is important for Europe, but could be partly mitigated by Russia if disrupted. However, in the event of a Russian supply restriction to Europe, the region would have tolook for alternatives. This would result in increased competition for LNG and could drive up global prices. It would have negative consequences for importers including Europe, Asia, and even parts of Latin America.
As far as oil is concerned, Russia is very important to global oil markets, which makes any disruption from sanctions very costly and unlikely. Russia account for more than 13 percent of global crude production; the country is a big player in the global oil markets. The global oil markets would have to pay a big price for any Western embargo on Russian crude, which is exactly why sanctions are unlikely. In addition to the geopolitical risks, close ties between parts of Europe and Russia and already struggling economies also make sanctions or trade restrictions unlikely.
However, if the situation worsens and there is a disruption of Russian gas supply through Europe, Russia would still be able to ship some gas to Europe via the Nord Stream and the Yamal-Europe pipelines. These two pipelines has the combined capacity of 75 percent of 2012 Russia gas exports to EU-28, excluding Ukraine.
Despite of all these reasons, if Western governments still decide to impose harsh sanctions on Russia, Moscow could retaliate by withdrawing gas from Western Europe and Ukraine. In Western Europe, Germany, Poland, and Italy are particularly vulnerable to any restrictions, which should further reduce the appetite for sanctions. It is important to note here that European gas prices already average around $10 per mmbtu. The EU-28 imports 11.5 bcfd of gas from Russia with Ukraine importing another 2.9 bcfd. Therefore, as mentioned earlier in the article, geographically, Europe is most at risk, which greatly reduces the regions appetite for sanctions.