Energy, Food Supply Issues to Haunt the World in the Long Haul

The Western sanctions in response to Russia’s invasion of Ukraine has failed to stop the military assault and with a prolonged conflict appears more likely, the determination to punish Moscow suggest that the sanctions will be prolonged as well. It means that the disruption to food and energy supplies will remain and trigger a search for long-term alternatives to Russian imports.

While the price shocks to energy and food is felt globally, the European Union feels them the most. The bloc imports a quarter of its oil and 40% of its natural gas from Russia.

The EU has announced plans to ban oil imports from Russia by the end of the year in its sixth round of sanctions against Moscow.

In her speech outlining the proposal to ban Russian oil imports, President of the European Commission von der Leyen acknowledged that it will not be easy because some member states are strongly dependent on Russian oil but added that they have to work on it.

If banning Russian oil proves difficult for Europe, it creates a much bigger problem for the continent to ban natural gas. The bloc has so far excluded natural gas from sanctions, but it has aired proposals to cut demand for Russian imports by two-thirds by the end of 2022.

It is expected that the EU’s plan to phase out Russian imports will have a profound impact on prices.

The bloc has invested billions of euros for pipeline projects and looking for alternatives will be costly.

While Europe has been looking at Africa as a potential source of gas to replace Russian supplies, the lack of infrastructure between the continents is a serious problem. Moreover, LNG imports from other nations have limited potential to help make up the shortfall.

That leaves the EU without a quick fix and, while it might sponsor a more rapid shift to cleaner, more sustainable energy sources, it suggests that countries will have to absorb a higher price for some time to come.

On the food supply side, Ukraine is the world’s largest producer of sunflower oil, and combined with Russia, it is responsible for more than half of global exports of sunflower oil. Russia, on the other hand, is the world’s largest exporter of wheat, with 36% of world’s exports.

The United Nations has warned earlier this month that millions of tons of grain are stranded in Ukraine as Russia’s assault prevents safe transit from the country’s ports.

Development of new supply channels could ensure a long term shift away from Russian natural gas, trade in oil, refined products and agricultural goods but heavy investment is required. A reversion to previous trade routes, meanwhile will certainly depend on peae in Ukraine.

One unintended consequence of sanctions could be the consolidation of Russo-Chinese rapprochement. The two countries have become in sync to reject the U.S. political and economic order and want to regain territories they believe were separated unjustly from them. They also see democracy as a threat.

Under these circumstances, businesses must plan for the possibility and consequences of the imposition of sanctions, and the impact on supply chains.

This means that both businesses and governments would need to plan ahead, adapting plans and policies according to sanctions.

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