Russia’s invasion of Ukraine a year ago reverberated through global markets. With no end in sight to Europe’s most intense conflict since the second world war, the effects are still being felt.
Financial Times reporters look at what has occurred in key markets and what might happen next.
Putin’s energy war backfires
Running almost in parallel to Russia’s invasion of Ukraine has been the energy war President Vladimir Putin unleashed against Europe. The squeeze on gas supplies started earlier, in what many industry commentators now believe was an attempt to weaken Europe’s resolve before the first shots were even fired.
But Moscow’s weaponisation of gas supplies ramped up dramatically as western powers threw their support behind Kyiv.
Russian gas exports, which once met about 40 per cent of Europe’s demand, have been cut by more than three-quarters to EU countries in the past year, stoking an energy crisis across the continent.
But Putin’s energy war is no longer going to plan. Senior figures in the industry believe that for all Russia’s undoubted sway in oil and gas markets, the president is now staring at defeat in markets he once thought he could dominate.
“Russia played the energy card and it did not win,” Fatih Birol, head of the International Energy Agency, told the Financial Times this week.
“It wasn’t just meant to cause pain in Europe for its own sake it was designed to change European policy,” said Laurent Ruseckas, executive director at S&P Global Commodity Insights. “If anything, it made Europe more determined not to be bullied into changing positions.”
European gas prices have fallen by 85 per cent from their August peak, bolstering the wider economy, which now looks likely to avoid a deep recession.
The continent has also avoided the worst potential outcomes such as outright gas shortages or rolling blackouts, which once seemed a distinct possibility.
Indeed, there are signs that Europe is now better placed to tackle next winter too.
Relatively mild weather and Europe’s success in tapping alternative supplies such as seaborne liquefied natural gas mean that storage facilities across the continent are far fuller than normal for the time of year.
Gas in storage stood just below 65 per cent of capacity as of Wednesday, according to trade body Gas Infrastructure Europe, with only a month of winter still to run. On the day of Russia’s invasion, gas storage stood at just 29 per cent.
“The storage refill issue for next winter is no longer a big burden,” said Ruseckas.
Longer-term traders including Pierre Andurand, who has run one of the world’s most successful energy funds for more than 15 years, think Putin has already lost as he has obliterated his relationship with Russia’s main gas customer.
While Russia wants to sell more gas to Asia, it could take a decade to reorient its pipelines east, with the gasfields that once supplied Europe not connected to the line it uses to feed China.
Andurand this month argued that China would also be in a position to force a hard bargain with Moscow on price, and would not want to repeat Europe’s mistake of becoming too reliant on any one supplier.
“Once Russia can only sell gas to China, Beijing will be in a position to decide the price,” Andurand said.
Europe still faces challenges. While gas prices have plummeted from the near $500 a barrel level (in oil terms) they reached in August, they remain two-to-three times higher than historical norms.
Russia still supplies about 10 per cent of the continent’s gas along pipelines running through Ukraine and Turkey. Should Moscow decide to cut those supplies it is likely to push prices higher again, although it may be wary of alienating Turkey.
Europe will also potentially face stiffer competition for LNG supplies with Asia this year as China’s economy reopens after the end of zero-Covid, though there is some initial evidence that Beijing is more price sensitive than feared.
Traders look to extension of grain export deal
International traders are focused on the extension of the Black Sea grain export deal between Kyiv and Moscow that is due to expire next month, amid Ukrainian accusations that Russian inspectors were deliberately delaying the transit of grain ships in the port of Istanbul.
The agreement, brokered by Turkey and the UN last July, allowed Ukrainian grain shipments to flow through the Black Sea, bringing prices down from their post-invasion peaks. Grain prices have since fallen to prewar levels although they remain historically high.
Ukraine had been a leading player in the food commodity markets prior to the war, accounting for about 10 per cent of the global wheat export market, just under half of the sunflower oil market and 16 per cent of the corn market.
Last November, the deal was extended despite Putin’s threats to terminate it, and there is heightened uncertainty over how Moscow will act at the negotiation table.
“If [the deal] is renewed — that’s great news, but if it’s not done, then immediately you’re going to have an issue there with supplies,” warned John Baffes, senior agricultural economist at the World Bank. “Those issues are going to affect mostly countries in north Africa and the Middle East.”
High inflation ensures interest rates remain elevated
Inflation was already elevated in February 2022, as prices were pressured higher by snarls in supply chains and the enormous fiscal stimulus unleashed to temper the worst effects of the Covid-19 pandemic.
But those forces had been understood by central banks as transitory. The sanctions placed on Russia at the start of the war drove up the prices of oil, gas and coal — among other commodities — adding to inflation and rendering it more persistent.
Even as supply chains were unblocked and pandemic cash was spent, inflation continued to rise.
The persistence of that inflation has forced central banks to raise interest rates higher and higher, lifting yields on sovereign debt. Two-year sovereign bond yields, which move with interest rates, have risen more than 2 percentage points in Germany, the UK, the US and Australia, among others, in the last year alone.
As the cost to borrow has risen for sovereign nations, so it has for companies, pushing corporate bond yields higher and stock prices lower.
There’s little chance they will fall soon. Although inflation globally has begun to slow, the pace remains far above target for many central banks, which have vowed to continue their fight.
Rouble set to depreciate after recovering from post-invasion low
One year on from Russia’s invasion of Ukraine and the rouble’s value against the dollar is close to where it was at the start of the conflict — although there have been plenty of twists along the way.
The Russian currency halved in value to a record low of 150 to the dollar in the month after Putin ordered troops into Ukraine, despite Russia’s central bank more than doubling interest rates to 20 per cent in late February in an attempt to calm the country’s increasingly strained financial system.
European and US sanctions — designed to cut Russia out of the global payments system and freeze the hundreds of billions of dollars of reserves amassed by the Bank of Russia — swiftly followed. In late March, an emboldened US president Joe Biden declared that the rouble had been “almost immediately reduced to rubble” as a result.
Then came the rebound. Moscow’s imposition of capital controls meant the rouble had recovered almost all of its losses by the start of April. The currency was also helped by the continued flow of oil and gas exports.
It has gradually weakened since July, however, when it touched 51 against the dollar, a level last seen in 2015. Today it trades at 75.
With Russia’s capital account all but closed for major hard currencies, “the exchange rate does not perform its forward-looking role based on expectations, it only reflects day to day trade flows, most of which is energy trade,” said Commerzbank analyst Tatha Ghose.
Ghose expected the rouble to continue to depreciate against the greenback in 2023, dragged lower as western sanctions on Russian oil weigh on the country’s current account.