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Russia and Ukraine are key exporters of food and energy. Will global prices spike?

Here’s what the research tells us

- March 2, 2022

The Russian invasion of Ukraine is a grave humanitarian and global security crisis, for many reasons. One that’s gotten less attention: Because Russia and Ukraine are pivotal sources exporters of energy and food globally, the world may soon face crises in fuel and food prices. Even before the invasion, global food prices were at near record highs since the U.N.’s Food and Agriculture Organization began keeping track in 1960, and oil prices were well above their 30-year average.

Will the conflict drive fuel and food prices even higher, and for how long? The answer is complicated. Oil and gas prices are likely to rise and fall often in the coming days and weeks, but with little change to prices over the long term. The world’s supply of food, on the other hand, may tighten. Ukraine supplies 8 percent of the world’s exported wheat and 13 percent of its maize — and that harvest will be disrupted. Russia supplies 18 percent of exported wheat and 39 percent of rapeseed oil, but if Russia restricts exports or nations around the world refuse to transport or import its products, that too may exacerbate hunger worldwide.

Russia is about to plunge into financial crisis. How will its citizens react?

Russia’s invasion and global energy markets

Oil and gas are the two most widely traded commodities in global markets. Those markets — and the speculators who make money off bets on prices going up or down — respond skittishly to political crises in major exporting countries. Consider the 1973 Arab oil embargo, during which major oil exporters deliberately slashed exports to punish Western importers like the United States and Great Britain for supporting Israel during the Yom Kippur War. Gasoline prices skyrocketed.

Today, Russia is the world’s second-largest oil and gas exporter and Ukraine is a major transit route for the Russian gas that heats homes and fuels economies across Central and Western Europe. Prices for Brent crude, the most widely traded oil benchmark, shot up from $96 to $97 per barrel on Feb. 23 to over $105 by midday on Feb. 24 as the breadth of the Russian offensive became clear. Several days on, oil prices are trading in a narrow but volatile band of $97 to $107 a barrel.

Despite these recent price increases and volatility, the conflict’s effect on oil prices is likely to be short-lived. Economists Massimo Guidolin and Eliana La Ferrara analyzed the effects of conflict on oil spot prices (i.e., price per barrel right now) and futures prices (for delivery months from now). They looked both at conflicts within one country, as in the Syrian civil war, and between countries, as with Russia’s invasion of Ukraine. They didn’t find much evidence that conflicts in oil-exporting nations sent up prices; when it did, effects lasted only for a few weeks.

In my own work, I have found no evidence that conflict in oil-producing countries systematically drives up prices. While there are several reasons, what’s key is that other major oil producers respond to price spikes by increasing supply both to reap short-term windfall profits and to avert sending the global economy into recession. Since economies are just emerging from the coronavirus pandemic recession, other major exporters may be especially focused on this.

It’s hard for Russia to invade Ukraine when its soldiers don’t want to be there

Russia’s invasion and food prices — more lasting effects

But this war will hit Ukraine’s food exports harder, both immediately and for some time. Ukraine has already halted grain exports and closed its ports until the war ends. The goal is to ensure adequate food supplies, to stop rampant panic buying that has left grocery shelves bare. Whether shipments will be disrupted over the longer term depends on whether the war will continue into the summer harvest season, when Ukraine’s winter crops — winter wheat, barley, rye and rapeseed, planted in the late fall — are harvested.

War could disrupt these crops in one of several ways. First, militaries often intentionally destroy crops as part of a strategy to starve and coerce occupied peoples — like the Ukrainians — into submission. Second, war’s violence can destroy or divert resources like tractors, combines, processing facilities and food transport infrastructure. Already a Russia attack in the Black Sea destroyed a Cargill-chartered cargo ship; Ukraine has also reported that Russians destroyed the world’s largest cargo plane, the Antonov AN-225 Mirya, which for decades has handled emergency food and medical supply airlifts. Third, farmers and agricultural workers may leave their fields to join the armed forces, seek shelter or flee fighting.

While Russian agriculture won’t be disrupted by fighting, Russia has intentionally banned its own exports in the past with the goal of keeping food prices lower at home. This time, however, Russia is unlikely to cut off bulk grain exports. It’s one of the few products — along with energy — exempted from Western sanctions, in large part due to the disastrous effects such sanctions would have for global hunger.

But Russia also produces a large proportion of another major agricultural product: fertilizer. It has already moved to ban exports of ammonium nitrate, one of the world’s most widely used fertilizers. That will hurt crop growth in Argentina, Brazil and other major food exporting countries. And since fossil fuels are still critical part to moving food from farm to market and table, increases in fuel prices will be passed to food consumers.

Unlike oil production, which can be ramped up quickly, farms can’t go back in time and plant extra crops to make up for Ukraine’s lost production. The spike in global hunger could be a disaster — and may have grave political consequences as well. Food price protests have hit developing and middle-income countries in the past, notably during price spikes in the Great Recession of 2007-08 and 2010-11. That can especially hurt stability in democracies and semi-democracies, especially at a time when democracy is in retreat in so many parts of the world.

In other words, the ripple effects of Russia’s anti-democratic invasion may be more anti-democratic still.

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Cullen S. Hendrix is a professor of international studies at the Korbel School of International Studies at the University of Denver and a nonresident senior fellow at the Peterson Institute for International Economics. @cullenhendrix