Exactly two years ago, on February 24, 2022, Russia launched a full-scale invasion of Ukraine. After two years of war, the current situation in the east seems like a daily occurrence in Western countries, although for Ukraine, it is still a difficult fight for its own territory, just as it has been for the past few months. What has changed in the world since February 24, 2022? What is the current state of the financial market, particularly the commodities market? Is the world still willing to help Ukraine? How could a change in power in the US affect military aid to Ukraine?
Everyone has lost
The armed conflict, which according to Russia was supposed to end with Ukraine's surrender within the first few dozen hours of the attack, has been going on for two years now. During these two years, the Ukrainian economy has suffered significant damage, but its impact has also spread to the rest of the world. According to research by the National Institute of Economic and Social Research, Russia lost slightly over 11% of its GDP due to the war in 2022 and 2023. In the case of Ukraine, these losses amount to several dozen percent. The global impact, however, is limited and amounts to about 1 percentage point. In the eurozone, the impact is even greater, with losses of 1.2 and 1.5 percentage points in the previous two years.
The conflict has led to the disruption of many trade routes, but most importantly, it has caused a significant increase in commodity prices. Russia is a major producer and exporter of commodities such as oil, natural gas, wheat, corn, aluminum, palladium, and fertilizers. The temporary lack of access to the Russian market, caused in part by sanctions, has led to prices skyrocketing by several hundred percent in many cases. This has, of course, fueled inflation, which was already responding to a significant influx of capital from governments and central banks after the pandemic. The impact of the war between Russia and Ukraine could have added about 1.8 percentage points to global inflation in 2022 and 0.9 percentage points in 2023. Given the proximity of the conflict, European countries were the most vulnerable. The lack of access to cheap energy resources from Russia led to significant price increases in Poland, Slovakia, the Czech Republic, Hungary, and the Baltic countries. Eventually, Russian supplies were replaced, but there can be no positive aspects of this situation other than increased diversification and enhanced energy security for the future.
The commodities market has returned to normal, along with inflation
Commodity prices have normalized relatively quickly, considering the concerns about availability. Crude oil remained above $100 per barrel from February to June, but the lack of major declines in exports from Russia, which redirected its resources to the Asian market, and the finding of alternative suppliers by Europe, led to a 50% drop in oil prices from the 2022 peaks to the 2023 lows. A very similar situation occurred with wheat. An agreement with Russia regarding the export of Ukrainian wheat by sea allowed for the exploration of other markets and the shift to land transport, although this led to significant problems for European farmers who were forced to compete with Ukrainian wheat and other agricultural products. Due to the fact that road transport is several times more expensive than maritime transport, agricultural goods ended their journey in neighboring countries, which is a significant problem when trying to reconcile one's own interests with further support for the Ukrainian state in its fight against the invader.
The situation was much more turbulent in the case of natural gas. Russian gas reached Europe primarily through pipelines, so giving up this resource was not so obvious. Just a few years earlier, Germany was pushing for a change in its energy mix, with a focus on gas, especially Russian gas. At this point, Germany is experiencing stagnation, which is related to the fact that the country developed dynamically thanks to cheap commodities, which are currently in short supply.
Natural gas prices in Europe are returning to pre-pandemic levels. However, it is worth noting that they were already rising in 2021 when Russia threatened to suspend supplies to Europe. Now, the lack of Russian gas in Europe is no longer a problem. Source: Bloomberg Finance LP, XTB
However, Europe has shifted to LNG gas, and prices are starting to approach pre-pandemic levels, which is related to increased competitiveness in the liquefied gas market. Europe still imports gas from Russia in the form of LNG, but from private companies and to a minimal extent, although this import is also expected to end in the near future. Nevertheless, it is worth noting that the lack of access to the European market for oil is most detrimental to Russia, although in this case, alternative routes have also been found. There have often been transshipments or changes in flags or simply the sale of petroleum products from previously non-existent destinations. It is worth noting that fuel from India is currently reaching Europe. At the same time, European producers have significantly increased their exports to Kazakhstan and other countries of the former Soviet Union. It is difficult to talk about any lack of connection with sanctions in this case.
Attention of the US also directed elsewhere
Over these two years, the world has become accustomed to the conflict. Not everyone is willing to continue contributing to the conflict, even at the risk of its spread to other countries. The United States was already less interested in Europe before the conflict and was looking more towards Taiwan. In addition, the situation in the Middle East is now a concern, not only in relation to the conflict between Israel and Hamas but also due to attacks by the Houthis, who are supported by Iran, on merchant ships. Considering this situation, the oil market could become even more tense than in the case of the war between Russia and Ukraine if further escalation were to occur.
Further sanctions, but aid suspended
Russia has been largely isolated from the global financial system, and many foreign assets have been frozen. Efforts are underway to seize these funds and allocate them to the reconstruction of Ukraine, but given the complex legal situation, this will undoubtedly be a difficult and lengthy process.
Meanwhile, the current situation on the frontlines has reached a stalemate, although there are also reports of significant problems for Ukraine due to a lack of sufficient military equipment. The US Senate passed a $95 billion bill, with a large portion intended for aid to Ukraine, Israel, and Taiwan. However, the Speaker of the House of Representatives decided to send Congressmen on a two-week vacation, and the funds are currently on hold, which is, of course, related to political maneuvering. These funds should eventually be released, leading to an increase in overall US aid to $170 billion, although since the Republicans took the majority in the House of Representatives in January 2023, no major aid has been approved for Ukraine. This leads us to the question of what if Donald Trump wins the elections?
US elections could be crucial for Ukraine
There is probably no one who hasn't heard about Donald Trump's recent remarks about his desire to withdraw from NATO or even indirectly encouraging Russia to attack countries that are not sufficiently armed. For most European countries, this is not a problem. Poland has the highest defense spending as a percentage of GDP in all of NATO, even higher than Ukraine. Germany and France also join the group of countries spending more than 2% of GDP. However, the defense industry in Europe is not as strong as it might seem. Deliveries from Europe to Ukraine are insufficient, which has also led to an even greater focus on domestic production by Ukraine.
Returning to Trump, not only would the situation in Europe be threatened, but primarily in Asia and the Middle East. Most likely, we could expect another trade war, which could escalate into a larger conflict. Trump, on the other hand, could focus on the Middle East militarily, which could also lead to significant movements in the energy commodities market. Although Trump's victory could bode well for Americans or American companies in terms of taxes (as was the case in 2016), the consequences of other actions could be devastating.
XTB Research Department
