Russia’s invasion of Ukraine a year ago hit global markets. The end of the most intense European conflict since the Second World War is in sight, and we are still feeling the consequences.
Financial Times reporters look at what has happened in key markets and what could happen next.
Putin’s energy war is making a comeback
Almost simultaneously with the Russian invasion of Ukraine, there was an energy war launched by President Vladimir Putin against Europe. The squeeze on gas supplies began earlier in what many industry commentators now believe was an attempt to weaken Europe’s resolve before the first shots were fired.
But Moscow’s weaponization of gas supplies increased dramatically as Western powers threw their support behind Kiev.
Russian gas exports, which once covered about 40 percent of European demand, have fallen by more than three-quarters to EU countries over the past year, sparking a continent-wide energy crisis.
But Putin’s energy war will no longer plan. Senior industry figures believe that despite Russia’s undoubted influence in the oil and gas markets, the president is now staring down defeat in markets he once thought he could dominate.
“Russia played the energy card and did not win,” Fatih Birol, head of the International Energy Agencyhe told the Financial Times this week.
“It wasn’t just designed to cause pain in Europe per se, it was designed to change European politics,” said Laurent Ruseckas, managing director of S&P Global Commodity Insights. “If anything, it has made Europe more determined not to be bullied into changing positions.”
European gas prices have fallen 85 percent from their August peak, boosting the broader economy, which now looks set to avoid a deep recession.
The continent has also avoided the worst potential consequences, such as outright gas shortages or rolling blackouts, which once seemed like a distinct possibility.
Indeed, there are signs that Europe is now in a better position to deal with next winter.
Relatively mild weather and Europe’s success in tapping alternative supplies such as sea-borne liquefied natural gas mean storage facilities across the continent are much fuller than usual for the time of year.
According to trade body Gas Infrastructure Europe, gas stocks were just below 65 percent of capacity on Wednesday, with just a month of winter left. On the day of the Russian invasion, gas reserves were only 29 percent.
“The problem of replenishing warehouses for next winter is no longer a big burden,” Ruseckas said.
Longer-term traders including Pierre Andurand, who has run one of the world’s most successful energy funds for more than 15 years, think Putin has already lost because he wiped out his relationship with Russia’s main gas buyer.
While Russia wants to sell more gas to Asia, it could take a decade to reorient its pipelines east, with gas fields that once supplied Europe not connected to the line it uses to supply China.
Andurand argued this month that China would also be in a position to force a hard deal with Moscow on price and would not want to repeat Europe’s mistake of becoming too dependent on one supplier.
“Once Russia can only sell gas to China, Beijing will be able to decide the price,” Andurand said.
Europe still faces challenges. While gas prices have fallen from the nearly $500-a-barrel level (in oil terms) they 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 running through Ukraine and Turkey. If Moscow decided to cut those supplies, it would likely push prices higher again, although it may fear alienating Turkey.
Europe will also potentially face tougher competition for LNG supplies with Asia this year as China’s economy reopens after zero Covid, although there is some initial evidence that Beijing is more price-sensitive than expected.
Traders expect an extension of the grain export agreement
International traders are eyeing an extension of the Black Sea grain export deal between Kyiv and Moscow, which expires next month, amid Ukraine’s charge that Russian inspectors were deliberately delaying the transit of grain ships in the port of Istanbul.
A deal brokered by Turkey and the United Nations last July allowed Ukrainian grain shipments to flow through the Black Sea, knocking prices off their post-invasion peaks. Grain prices have since fallen to pre-war levels, although they remain historically high.
Ukraine was a leading player in food commodity markets before the war, accounting for about 10 percent of the global wheat export market, less than half of the sunflower oil market, and 16 percent of the corn market.
The deal was extended last November despite Putin’s threats to end it, and there is heightened uncertainty about how Moscow will act at the negotiating table.
“If [the deal] is restored – that’s great news, but if it doesn’t happen, you’ll immediately have a supply problem there,” warned John Baffes, the World Bank’s chief agricultural economist. “These issues will mostly affect countries in North Africa and the Middle East.”
High inflation ensures that interest rates remain high
Inflation was raised as early as February 2022 as prices were pushed higher by snarling supply chains and massive fiscal stimulus unleashed to cushion the worst of the Covid-19 pandemic.
But these forces were seen by central banks as transitory. Sanctions imposed on Russia at the start of the war raised the prices of oil, gas and coal – among other commodities – contributing to inflation and making it more persistent.
Even as supply chains were unblocked and pandemic cash was spent, inflation continued to rise.
The persistence of this inflation has forced central banks to raise interest rates higher and higher, thus raising yields on government debt. Yields on two-year government bonds, which move with interest rates, have risen by more than 2 percentage points in the past year alone in Germany, the UK, the US and Australia, among others.
As borrowing costs have risen for sovereigns, they have risen for companies, pushing corporate bond yields higher and stock prices lower.
There is little chance that they will fall soon. Although inflation has begun to slow globally, its pace remains well above the target of many central banks, which have vowed to continue their fight.
Ruble set to depreciate after recovery from post-invasion lows
A year on from Russia’s invasion of Ukraine, and the ruble’s value against the dollar is close to where it was at the beginning of the conflict – although there have been many twists and turns along the way.
The Russian currency halved to a record low of 150 to the dollar in the month after Putin ordered troops into Ukraine, even as Russia’s central bank more than doubled interest rates to 20 percent in late February in an effort to calm the increasingly tense situation in the country. financial system.
European and US sanctions – designed to cut Russia out of the global payments system and freeze hundreds of billions of dollars in reserves accumulated by the Bank of Russia – quickly followed. In late March, an encouraging US President Joe Biden declared that the ruble was “almost immediately reduced to rubble” as a result.
Then came the rebound. The imposition of capital controls by Moscow meant that the ruble had recouped almost all of its losses by early April. The continued flow of oil and gas exports also helped the currency.
However, it has gradually weakened since July, touching 51 against the dollar, a level last seen in 2015. It is trading at 75 today.
With Russia’s capital account almost closed to major hard currencies, “the exchange rate is not playing its forward-looking role based on expectations, it just reflects daily trade flows, most of which is energy trade,” Commerzbank analyst Tatha Ghose said. .
Ghose expected the ruble to continue weakening against the dollar in 2023, which will fall as Western sanctions on Russian oil weigh on the country’s current account.