On February 24, 2022, a full-scale Russian invasion of Ukraine began. After two years of war, the current situation in the East seems like a daily routine for the Western countries, though, for Ukraine, it remains a challenging fight for its own territory, just like in the previous several months. What has changed in the world since February 24, 2022? What is the current state of the financial market, especially the commodities market? Does the world still willingly help Ukraine? What could a potential change of power in the USA mean for 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 offensive, has been ongoing for two years. These two years have brought a great deal of damage to the Ukrainian economy, but its impact also extends to the whole world. According to the National Institute of Economic and Social Research, Russia lost slightly over 11% of its GDP in the war in 2022 and 2023. In the case of Ukraine, these losses already amount to several tens of percent. For the world, this influence is restricted and is about 1 percentage point. For the eurozone, it is already a loss of the order of 1.2 and 1.5 percentage points over the past two years.
The conflict has led to the collapse of many trade routes, but mostly it has led to a massive increase in commodity prices. Russia is a major producer and exporter of commodities such as oil, natural gas, wheat, corn, aluminum, palladium, and artificial fertilizers. Temporary lack of access to the Russian market, provoked amongst others by sanctions, led to price increases that often exceeded several hundred percent. This only further fueled growing inflation, which reacted to a massive influx of capital from governments and central banks after the pandemic. The impact of the war between Russia and Ukraine possibly contributed around 1.8 percentage points to global inflation in 2022 and 0.9 percentage points in 2023. Due to the proximity of the conflict, the most affected were, understandably, European countries. The lack of availability of cheap energy raw materials from Russia led to massive price increases in Poland, Slovakia, Czech Republic, Hungary, and the Baltic countries. Ultimately, Russian supplies were replaced, but there are certainly no positive aspects to this situation, aside from an increase in diversification and an increase in future energy security.
The World of Commodities is Back to Normal, Along with Inflation
Commodity prices stabilized relatively quickly, considering significant general concerns regarding availability. Crude oil remained above $100 per barrel from February to June, but the lack of significant decreases in exports from Russia, which diverted its goods to the Asian market, and Europe finding other suppliers 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 wheat from Ukraine via sea route allowed other markets to be found and transport to be transferred to land route, which in turn led to significant problems for European farmers who were forced to compete with Ukrainian wheat and other agricultural goods. Because road transport is several times more expensive than sea transport, agricultural goods ended their journey in neighboring countries, which is undeniably a significant problem when trying to reconcile own interests with further support for the Ukrainian nation in its struggle against the invader.
The situation with gas was definitely more volatile. Russian gas reached Europe mainly through pipelines, so giving up this resource was not so obvious. Just a few years earlier, Germany had put pressure on changing the energy mix with its primary focus on gas, mainly Russian. Currently, Germany is stagnating, which is related to the fact that the country has rapidly developed thanks to cheap raw materials, which are lacking at the moment.
Europe however shifted to LNG gas and at the moment prices are beginning to approach pre-pandemic levels, which is related to the increase in competitiveness on the liquefied natural 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 expected to cease in the near future. Nevertheless, it is worth remembering that for Russia, the lack of accessibility to the European market for oil is the most painful, although here also workarounds have been found. Quite often there were transshipments or changes in flag, or simply the sale of petroleum products from previously non-existent directions. It is worth noting that fuels from India are currently reaching Europe. At the same time, European producers have significantly increased the export of their products to Kazakhstan and other former Soviet Union countries. It is rather hard to deny any connection to sanctions.
American Attention is Also Directed Elsewhere
However, over these two years, the world has become accustomed to the conflict. Not everyone is willing to further subsidize the conflict, even risking the possibility of it spreading to other countries. The United States was already less interested in Europe before the conflict and looked more toward Taiwan. To this now is added the situation in the Middle East, not only in connection with the conflict between Israel and Hamas, but also attacks by the Houthis, who are supported by Iran on merchant ships. Given this situation, the oil market could become even tenser than during the war between Russia and Ukraine, if further escalation occurred.
Further Sanctions, But Aid is Suspended
Russia has largely been isolated from the global financial system, and many of its foreign assets have been frozen. Works are underway to seize these assets and allocate them for the reconstruction of Ukraine, but given the complicated law, it will certainly be a difficult and lengthy process.
Meanwhile, the current situation at the front has come to a standstill, although there is also talk of major problems for Ukraine due to the lack of proper military equipment. The US Senate has passed a $95 billion bill, a large portion of which was to be allocated to aid to Ukraine, Israel, and Taiwan. However, the Speaker of the House of Representatives has decided to send the Congressmen on a two-week vacation and the funds are currently on hold, which is, of course, related to political games. These funds should be released sooner or later, which will increase the total US aid to the level of 170 billion dollars, although since Republicans took the majority in the House of Representatives in January 2023, no major aid for Ukraine has been approved. This brings us to the question of what happens if Donald Trump wins the election?
The US Elections Could Be Crucial for Ukraine
There is probably no one who has not heard Donald Trump’s recent words about wanting to withdraw from NATO or even indirectly encouraging Russia to attack countries that are not sufficiently arming themselves. For most European countries, this is not a problem. Poland has the highest proportion of defense expenditures in relation to GDP throughout NATO, even higher than Ukraine. Germany and France, who spend more than 2% of GDP, also join the group of countries. However, the armaments industry in Europe is not doing as well as it might seem. Supply from Europe to Ukraine is not adequate, which has also led to greater emphasis on its own production in Ukraine.
However, returning to Trump, not only will the situation in Europe be threatened, but primarily in Asia and the Middle East. We could probably expect another trade war, which could turn into a greater conflict. On the other hand, from a military point of view, Trump might focus on the Middle East, which could also lead to significant movements in the energy commodity market. Although Trump’s victory might bode well for tax matters for Americans or American companies (as was the case in 2016), the consequences of other activities could be lethal.
Author: XTB Analysis Department.
