Blog

WASHINGTON, DC, US — War in Ukraine has had immediate impacts on the commodity market through higher prices and pronounced volatility, which will lead to secondary effects of inflation and worsening food insecurity, according to the report “War in the Region,” by the World Bank.

The report examines the humanitarian and economic impacts of the war, noting that it has threatened the stability of geopolitical relations. Economic output in Europe and Central Asia is forecast to contract 4.1% in 2022, making it the second major shock and reginal recession in two years.

The economic impact of the war has been felt through multiple global channels, including commodity and financial markets, trade and migration links and confidence, the World Bank said.

Wheat prices have increased 40% since the start of the war in February. The war has disrupted Ukraine’s planting and harvest seasons, including other crops such as corn, barley and sunflowers; destroyed critical fields, infrastructure and production; and halted shipping from the Black Sea.

Russia and Ukraine account for a quarter of global wheat exports with multiple countries importing 75% or more of their wheat from Russia and Ukraine.

Russian ports are operating but insurance prices have soared and inhibited cargoes from leaving, the World Bank said.

Agricultural production inputs are also experiencing shortages and increasing prices. Russia and Belarus, which are under international sanctions, supply 38% of the world market in value terms for potassic fertilizer, 15% of nitrogenous fertilizers, and about 17% of compound fertilizers. Russia is the world’s largest exporter of fertilizer, accounting for 13% of global exports.

Russia is also a major supplier of natural gas, a key input to the production of nitrogenous fertilizers — higher natural gas prices already have doubled the price of fertilizer.

The world’s second largest fertilizer firm has announced a 50% production cut in Europe due to these constraints.

Higher commodity prices are anticipated to have secondary effects, passing through to inflation and worsening food insecurity, the World Bank said. Global food prices already were approaching record high levels leading up to the war. Trade restrictions on agricultural products, including tighter licensing quotas introduced by Russia prior to the war and export bans, announced in March, are expected to put further pressure on food prices.

Additional export restrictions could slow trade in food and fertilizers, worsening food crises and further fueling inflation. Although Russia and Ukraine account for less than 3% of global exports and less than 2% of global imports, the war and subsequent sanctions have frayed trade connectivity by disrupting transit routes, particularly for maritime container shipping and air freight traffic, while higher fuel prices and insurance premiums have pushed up shipping costs, the report noted.

Physical and logistical disruptions associated with the invasion, sanctions, and higher commodity prices are likely to cascade through global value chains, exacerbating the ongoing strains and adding to prolonged delivery times and high production costs for manufacturers across the world.

These disruptions come at a time when global value chains are already under pressure from the pandemic and shortages of semiconductors and other industrial parts, the World Bank said.

Source: World Grain