Ukraine & Russia
The Russian offensive in Ukraine continues to escalate as prospects of ceasefires reduce. In the south, Russian troops continue to surround Mariupol as they move closer to the strategic port of Odesa, while in the North there has been an intensification of shelling as it has become increasingly evident that much of the Kremlin’s ‘transport corridors’ out of Kharkiv, Kyiv, Sumy and Mariupol merely head to Russia and Belarus.
As we have seen, Putin’s increased military escalation has led to increased sanctions from the West and wider global community. The Kremlin have thus responded with increased rhetoric concerning their leverage on the West’s energy security with for example Alexander Novak – Russia’s deputy PM – stating that Russia could impose an embargo on their oil and gas exports which could push oil above $300dpb. It is hardly worth reminding that the EU imports some 40% of its gas supplies, and 30% of its oil supplies from Russia, and thus investors are considering the implications of relative scarcity from such a ban (which Kyiv is calling for and Johnson is weighing up on). Germany has of course already prohibited the 760-mile North Steam 2 pipeline which continues to lie idle under the Baltic Sea. However, in keeping with Novak’s wider announcement, he threatened that the majority state-owned Gazprom could terminate gas exports to continental Europe via Nord Steam 1.
Gas & Oil Prices
Hence, as gas and oil prices rise, alternative energy sources such as coal are similarly increasing. For example, given that Russia provides 70% of Europe’s thermal coal supplies, wholesale coal has increased 380% this year and 77% in the last month alone as investors speculate on the prospect of sanctions on Russian exports. Subsequently, coal markets are looking elsewhere to places including Australia where spot price for a tonne of coal leaving New South Wales has soared to $418 (up from $50 in 2020).
The worldwide implications that the conflict has on food security can also not be understated. With Russia and Ukraine exporting some 29% of the world’s supplies of wheat there are serious concerns about food security as the conflict exacerbates food scarcity. The timing of the conflict is also significant given that the optimum time for starting field work is early March and hence there is little chance of such schedules being met in Ukraine as many farmers are bearing arms or are unable to work due to the conflict.
Over in Egypt for example, the government heavily subsidises bread for the population and hence with the increase in wheat prices rising some 10% during trading yesterday, Egyptian credit default swaps have risen dramatically.
Elsewhere, in Ireland, regulators are drawing up plans for farmers to plant some of their land in grains such as wheat and barley while Germany is preparing to host a G7 meeting on ways to mitigate the impact of food scarcity.
EU Bond Issue
European markets have popped up this morning on the news that the EU is considering a massive bond issue to finance expenditure on energy and defence. Joint bond issues were a major sticking point for decades, but last year the EU issued Covid recovery debt and so there is now a mechanism in place. The issue could be larger than €1.8tn package issued last year, as the costs of overhauling a continent’s energy systems, as well as updating its defences, is not going to be cheap. The process would be similar in that the European Commission would issue the bonds and then channel the proceeds to member states in the form of loans which would then be repaid to the EC who in return pay the lender. The outline for this proposal could come as soon as this week and given that the rails for such an issue are already in place, could be rushed through.
Have a great day.