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The Dutch multinational banking business Rabobank have been making predictions about what would happen in the event of a conflict in Ukraine and the fallout from sanctions upon Russia.

Rabobank’s global strategist Michael Every has stated “We are in the unusual position of global headlines and politicians warning of the risk of a major war, and yet markets — until very recently — remain mostly unconcerned. “Where they are falling, it is out of fear of rates going up, not bombs going off.”

To some extent it seems there is truth in this statement, with even Ukrainian President Volodymyr Zelensky saying that the Western media and certain politicians had exaggerated the risk of war, at the same time that US President Biden had talked it up.

Rabobank’s Every however has gone several steps further, by analyzing what would happen if a conflict broke out – useful financial and operational risk analysis. Every states that “The Ukraine crisis represents a tipping point in a larger metacrisis: the fracturing of the current world order. This obviously has huge market implications.”

So, what are these?

Oil and Gas: Price Rises Of 50-150%

In the short term, a Russia-Ukraine war, even a limited one, would spark a further massive rise in oil and gas prices, especially in Europe. Russia supplies about 30% of Europe’s oil and 35% of its natural gas, which would be cut off in the event of conflict. Rabobank believes this could push oil prices up from already-elevated levels of about US$90 a barrel to US$125, with gas prices following higher. The Brent crude oil price has already increased by more than 60% over the twelve months.

While countries such as Saudi Arabia could step in to assist with shortfalls from Russian supplies, the delivery infrastructure is not complete. But if longer term, more serious sanctions are imposed, the “the potential price impact would be huge, with oil rising to US$175 and gas to US$250.”

Food and Fertilizer

Other key commodities would also be hit, as Russia is the world’s biggest wheat grower and Ukraine fifth. Production of barley, corn, sunflower, and rapeseed would also be seriously affected. While some countries, including Australia, might be able to compensate for some of the loss in supply, they might be facing a handicap: Fertilizers.

Rabobank estimates that globally, 23% of ammonia, 17% of potash, 14% of urea and 10% of phosphates are shipped from Russia. While China is also a major global supplier, it has earmarked much of its production for domestic use, leading to global shortages and rising prices for key fertilizer ingredients, affecting crop production.

Metals and Manufacturing

Manufacturing supply chains would also be impacted by a conflict or sanctions against Russia. Russia’s share of global nickel exports is estimated to be about 49%, palladium 42%, aluminium 26%, platinum 13%, steel 7% and copper 4%. “That immediately removes half of all global nickel exports for kitchenware, mobile phones, medical equipment, transport, buildings, and power; palladium for catalytic converters, electrodes, and electronics; and a quarter of aluminium for vehicles, construction, machinery, and packaging and would result in huge upside pressure on prices.” Rabobank have stated.

Financial markets

Rabobank predicts that either war or heavy sanctions could see a flight to safety on financial markets, pushing bond prices up, and interest rates lower. This might be an interesting counterweight to the current trend towards rising interest rates across many advanced economies.

However, the picture would be complicated by even higher inflation driven by the potential commodity shortages outlined above.

Just how much central banks are willing to look through inflation caused by foreign sources outside of their control is yet to be truly tested in the current period. The US Fed is preparing to raise US interest rates in March, a position that has come in for significant criticism from smaller countries whose economies have still not recovered from Covid as this will raise the cost of borrowing. Beijing has called the move ”irresponsible”.

Rabobank expects that the US dollar, Japanese yen, Swiss franc and gold would be the obvious go-tos in the event of a conflict. The Russian Ruble would slump in the event of war or sanctions, as would the Euro.

Further Consequences

Even if conflict is avoided, Rabobank still forecast longer-term consequences, as ”This will still have major policy implications given this was a very near-miss. It will accelerate some of the global trends already underway, many of which had been sparked by the COVID crisis and increasingly aggressive foreign and trade policies”.

Key Changes

• From long supply chains to shorter ones
• From free trade to onshoring — as in semiconductors — increasingly tied to the defence sector
• To tighter controls on technology exports
• To more calls for decoupling from Russia and China so US capital does not pay for China’s military (as EU capital does via Russian oil and gas)
• Towards rapid rearmament, with new platforms
• To demands for access to and control of key raw materials
• To seeing energy as about more than just the green transition (eg, the EU shift to green nuclear power); and
• For central banks to be part of the solution by keeping rates low and acting more geopolitically.

Rabobanks’ report stated that it was hard to see how the US could impose crippling sanctions on Russia without also crippling large parts of the global economy and financial system.