The turmoil sparked in commodity markets by Russia’s invasion of Ukraine deepened on Monday as LNG orders were halted, commodity trade funding dried up and Black Sea wheat sales froze.
As tougher US and EU sanctions threaten to partially cut Russia off from the global financial system, disruptions to shipments of commodities from palladium to wheat have escalated. Buyers also suspended purchases of Russian liquefied natural gas pending clarification on restrictions on banks and businesses. The cost of shipping commodities from the country is skyrocketing, while the fallout reverberates from London to Hong Kong as international investors dump Russian commodity assets.
The immediate focus is on disrupting Black Sea trade, which includes millions of barrels of oil a day and about a quarter of global grain exports. While Russian commodities have so far been exempt from sanctions, the threat of a serious disruption to flows will increase as the conflict escalates.
“The unintended consequential risk, i.e. a pipeline failure or something, is extraordinarily high, and that adds to the difficulty of setting up and running maritime commerce,” Jeff Currie , head of commodities research at Goldman Sachs Group Inc., said in an interview with Bloomberg TV. “This is a huge amount of oil that has the potential to be disrupted for weeks.”
Even before the expulsion of some Russian banks from the SWIFT messaging system – used for billions of dollars in transactions worldwide – a number of lenders were cutting off commodity trade financing from Russia.
Societe Generale SA and Credit Suisse Group AG have stopped financing trade in Russian commodity flows, according to people familiar with the matter. Dutch banking giants ING Groep NV and Rabobank are limiting lending to transactions involving the movement of goods from Russia and Ukraine, and Chinese banks are also pulling out.
This means that even without sanctions, many commodity markets in which Russian exports play an important role are at risk of being blocked. As the war escalates – with ships bombed last week – the risk of logistical unrest also increases. Insurers either refuse to offer cover for ships sailing in the Black Sea or demand huge premiums to do so.
Grain loading in Ukraine has been interrupted and ports closed. More than two dozen vessels being loaded have been held up in Ukrainian ports, according to Nabil Mseddi, managing director of AgFlow.
Egypt, the top wheat importer, has been forced to once again abandon efforts to buy the grain it needs to subsidize the bread of its people, underscoring the threat the Russian-Ukrainian war poses to global food needs. There were no bids from Black Sea shippers and the Egyptian public buyer quoted higher prices for the cancellation of the tender.
However, there are signs that oil traders are beginning to overcome an initial distrust of Russian supply that emerged immediately after the invasion.
Poland’s PKN Orlen has bought a batch of flagship Urals crude, while Trafigura Group has tentatively hired a tanker to take the same grade. Traders said there was an increase in buying activity. This does not mean that the market has completely returned to normal, with a tender to sell the Urals not having taken place a second time.
Vladimir Putin’s attack on his neighbor also threatens to make Russian commodities toxic to international investors. Norway said it was starting to withdraw Russian assets from its $1.3 trillion sovereign wealth fund, while BP Plc dropped out after announcing it would shed its stake in state oil company Rosneft PJSC.
As stock trading was halted in Moscow, MMC Norilsk Nickel PJSC, Russia’s largest metals and mining company, fell 58% in London. In Hong Kong, aluminum giant United Co. Rusal International PJSC fell 15%.
Rusal halted shipments to a Ukrainian alumina refinery which is a key source of raw material for its smelters in Russia. Ukrainian iron ore miner Ferrexpo Plc said Monday that the availability of rail capacity to ship its pellets to customers in Europe was unclear. The London-listed company, which operates three mines in central Ukraine, said it was delaying the publication of its annual results.
There are sanctions exclusions for Russian commodities, but traders, banks and shippers fear these exemptions will not last.
“Commodity markets must reflect not only these difficulties in paying for Russian exports, but, with few sanctions, the risk that Russian commodities will eventually fall under Western restrictions,” said Goldman analysts, including Damien Courvalin and Currie, in a note dated February 27. .
The White House does not rule out a further extension of the sanctions.
“Energy sanctions are definitely on the table,” White House press secretary Jen Psaki said, speaking on ABC’s “This Week” Sunday.
European natural gas jumped 36% as the new round of sanctions raised concerns about energy shortages. With Russian markets paralyzed and heavy fighting reported around major cities in Ukraine, Putin’s invasion looks set to sustain many commodities for some time to come.
“It reinforces this longer-term structural bull market in commodities,” Currie said.
(Updates with grain ships detained in Ukrainian ports in eighth paragraph, oil trade in 10th)
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