The United States, the European Union and allies have declared economic war on Russia. But they tried to avoid backfires, such as banning the purchase of Russian oil, gas and grains, which would cause the price of these commodities to explode.
It wouldn’t work in general. Some world economic turmoil there would be. But it’s not working out in the case of energy and food either.
The prices of oil, wheat, corn, for example soybeans and meats, are rising sharply, not just out of fear of the future. They are rising because “Western” companies and banks avoid doing business with Russia on their own, even without sanctions from their governments.
US, EU and allies confiscated the money that the Russians keep abroad, the international reserves that any country has. They banned their companies and finances from doing business with the biggest Russian banks. They will even buy weapons for Ukrainians to kill Russians. But they allow business in energy, agriculture, medicine, medical equipment, etc.
On account, companies stop buying energy in Russia. The barrel of the Urals, a “brand” of Russian oil, is being sold at 11% less than Brent, a “brand” traded in London and a world reference price. That means there’s plenty of Russian oil, even in a tight world market.
By the way, Brent rose more than 9% on Tuesday to $107, up 38% this year alone.
American and European companies and banks fear doing business with Russia. They fear carrying out an operation that could be considered illegal by the governments of their countries. They fear default, as Russia may run out of “hard” currency to pay the bills; suffocated, it increasingly imposes capital controls: measures to prevent the outflow of dollars, euros, etc.
Sometimes companies cannot get credit to finance their purchases. Or they cannot pay the insurance against defaults or the transport or sea freight, dearly. Ships do not even pass through the ports of Ukraine and Russia on the Black Sea, blocked by the navy; merchant ships have already been shot. The world’s biggest charterers have already said they will avoid Russian ports.
Blocked grain exports across the Black Sea, though small at this time, put pressure on prices. More importantly, there is a risk that Russian grain will go out of business, that Ukraine will not be able to grow its crops or that the world will lack fertilizer.
Russia and Ukraine sell 30% of wheat on the world market, 20% of corn. Russia is the biggest fertilizer exporter. It has almost 8% of the oil export market (December data). Russian financial asphyxia can default on foreign debt, enough to cause accidents.
Interest rates on US and European government debt fell sharply on Tuesday. That is, investors buy more than they sell these securities. They look for a safe asset, in the turmoil. They also believe the war will dampen economic growth, prompting US and EU central banks to be more restrained in their campaign to raise interest rates to fight already high inflation.
But won’t inflation rise further, given the price shock? Wouldn’t it go up more, without interest rate hikes? Will the economic slowdown caused by the war be enough to contain the famine? The arguments seem nonsensical.
In short, even dealing only with the very short term, the world turned upside down in a few days and will still be very twisted in the times to come. More immediately, what can be said is that the shots of the war against Putin are in part a boomerang against the “West”.
I have over 8 years of experience in the news industry. I have worked for various news websites and have also written for a few news agencies. I mostly cover healthcare news, but I am also interested in other topics such as politics, business, and entertainment. In my free time, I enjoy writing fiction and spending time with my family and friends.
