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Commodity prices could soar if the Russia-Ukraine crisis escalates

As tensions between Russia and Ukraine grow, so does the risk that it spills over into global commodity markets. Russia is a commodities powerhouse, with it being a key supplier of energy, metals and agri. A conflict against the two nations and/or tough sanctions against Russia has the potential to significantly tighten commodity markets

US Secretary of State and Russian Foreign MinisterUS Secretary of State Antony Blinken (L) and Russian Foreign Minister Sergey Lavrov (R)

Tough sanctions would rattle commodity markets

It appears that a number of commodity markets are starting to at least price in some geopolitical risk around the growing tension between Russia and Ukraine. There is still plenty of uncertainty over how the situation will evolve, but it is still worthwhile to look at what the potential impact could be should tensions boil over to a conflict.

A scenario where the West fails to react with tough sanctions against Russia if it were to invade Ukraine means that the potential impact for commodity markets would be more limited,  although the uncertainty would still likely be bullish in the short term. There would still be a risk to Russian gas flows via Ukraine to Europe. While, depending on the scale of any invasion, it could also potentially have an impact on the production and export of Ukrainian agricultural commodities, including corn and wheat. 

Reaction to any aggression could have far-reaching consequences for commodities

However, in a scenario where the West reacts strongly with sanctions that target key Russian industries, this could have a far-reaching impact on the commodities complex. It would affect more than commodity flows that go through or originate from Ukraine. It could potentially lead to a significant tightening in energy, metal, and agri markets, which would provide only a further boost to an asset class which already has an abundance of positive sentiment in it.

Even if sanctions are not imposed on certain industries, financial sanctions could still make trade difficult, as it would be an obstacle for making payments.

Read full article on Think