The turmoil unleashed in commodity markets by Russias invasion of Ukraine worsened on Monday as LNG orders were paused, finance for trade in raw materials dried up and Black Sea wheat sales froze.
As tougher U.S. and European sanctions threaten to partly cut Russia off from the global financial system, disruptions to shipments of raw materials from
palladium to wheat mounted. Buyers also paused purchases of Russian
liquefied natural gas as they awaited clarity on restrictions against banks and companies. The cost of shipping the nations raw materials is soaring, while the fallout is reverberating from London to Hong Kong as international investors ditch Russian commodities assets.
The immediate focus is on disruption to Black Sea trade, which includes millions of barrels of oil a day and about a quarter of the worlds grain exports. While Russian raw materials were so far exempted from sanctions, the threat of a severe dislocation to flows will increase as the conflict escalates.
Unintended consequent risk, meaning a pipeline outage or something like that, is extraordinarily high, and this is on top of the difficulty of getting the seaborne trade up and running, Jeff Currie, head of commodities research at
Goldman Sachs Group Inc., said in an interview with Bloomberg TV. This is an enormous amount of oil that has the potential to be disrupted for weeks.
Read: Oil Soars as More Sanctions on Russia Spur Energy Crisis Fears
Even before the expulsion of some Russian banks from the SWIFT messaging system — used for trillions of dollars worth of transactions around the world — a number of lenders were halting the finance of commodities trading from Russia.
Societe Generale SA and
Credit Suisse Group AG have stopped providing trade finance for Russian raw materials flows, according to people familiar with the matter. Dutch banking giants
ING Groep NV and
Rabobank are restricting lending to deals involving movement of commodities from Russia and Ukraine, and Chinese banks are also pulling back.
That means that even without sanctions, many of the commodity markets in which Russian exports play a significant role at are risk of seizing up. As the war intensifies — with ships bombarded last week — the risk of logistical turmoil is also increasing. Insurers are either refusing to offer cover for vessels sailing into the Black Sea, or demanding huge premiums to do so.
Read: Top Buyer Egypt Struggles to Find Wheat as War Roils Grain Trade
Grain loading in Ukraine has been halted with ports closed, and Black Sea shippers are expected to be absent from Mondays wheat tender in Egypt. The repercussions are building through logistical chains as buyers seek alternative supplies.
Vladimir Putins attack on his neighbor is also threatening to make Russian commodities toxic for international investors. Norway said it was starting to remove Russian assets from its $1.3 trillion sovereign wealth fund, while
BP Plc dropped after saying it would offload its stake in state-owned oil company
While equity trading was halted in Moscow,
MMC Norilsk Nickel PJSC, Russias biggest metals and mining company, slumped as much as 58% in London. In Hong Kong, aluminum giant United Co. Rusal International PJSC fell 15%.
Rusal halted shipments at a Ukraine alumina refinery thats a key source of raw material for its smelters in Russia. Ukrainian iron-ore miner Ferrexpo Plc said Monday 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 its delaying the publication of its full-year results.
There are sanctions carve outs for Russian raw materials, but traders, banks and shippers fear those exemptions may not last.
Commodity markets need to reflect not only these difficulties in paying for Russias exports but, with little left to sanction, the risk that Russian commodities eventually fall under Western restrictions, Goldman
analysts including Damien Courvalin and Currie said in a note dated Feb. 27.
The White House isnt ruling out a further extension of sanctions.
Energy sanctions are certainly on the table, said White House Press Secretary Jen Psaki, speaking on ABCs This Week on Sunday.
European natural gas surged as much as 36% as the new round of sanctions spurred concerns about energy shortages. With Russian markets paralyzed and heavy fighting reported around key cities in Ukraine, Putins invasion looks set to underpin many commodities for some time.
This reinforces that longer-term structural bull market in commodities, said Currie.
With assistance by Eddie Spence, Alex Longley, Mark Burton, Salma El Wardany, Aine Quinn, Sharon Cho, Megan Durisin, Isis Almeida, and Archie Hunter
(Adds Rusal and Ferrexpo in 11th paragraph)