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August 8, 2022
EDITORIALOP-EDOPINIONPOINTS OF VIEW

Money, Oil, Gold and the Russians

Macro commentary by eToro analyst for Romania, Bogdan Maioreanu

 

The uncertainty brought by the Russian military actions in Ukraine is expanding into corporate boardrooms and Government offices. Western countries sanctions for Russia and Russian entities have the potential to affect large corporations with operations in Ukraine and Russia and to lead to a steep increase in prices for the commodities coming from the conflict areas. The exclusion of selected Russian banks from SWIFT while hurting Russia by blocking its imports and exports is also hurting some European banks. In the longer term these measures may lead to increased inflation and decreasing economic growth.

Russians are rushing to ATMs to take out money. Banks are selling one dollar for over 100 rubles. The panic has the potential to launch a Bank run destabilizing the commercial banking system. The National Bank of Russia doubled the interest rate to 20% in an attempt to make the ruble more attractive. In order to increase liquidity on the market, it is preparing to force exporters to convert 80% of their foreign exchange resources. But these sanctions will also impact the European Union and US Banks. According to the Bank for International Settlements The most exposed banks to Russia are from France and Italy with over 23 Billion dollars, followed by Austria with over 17 Billion dollars, and the United States with 14 Billion dollars. Germany and the Netherlands have only around 5 Billion USD exposure to Russia.

Russia is the second largest exporter of Oil in the World with over 10% of the production. The markets are looking with fear at the conflict and the potential that the oil supply that is already stretched, will become even more scarce. According to OPEC Plus delegates, the war risk premium on the oil price is 10-15 dollars. So, it is possible to see the prices even lower in the next months if the conflict is resolved. But for now, the SWIFT decoupling of Russian banks will create issues for oil traders to buy stocks. The OPEC + meeting this week is not likely to decide an increase of production due to production constraints. Natural gas prices rose over 50% on the day of the invasion on fears that Russia will stop deliveries but further reports that the gas deliveries are not affected by the conflict made the prices decrease.

Wheat prices were also put under pressure by the invasion. Ukraine and Russia together account for roughly 29% of the global wheat export market. Markets are very attentive to the conflict trying to guess how the supply will be affected.

Sanctions hit the electronics chips industry. AMD, NVidia and Taiwan Semiconductor Manufacturing Company already announced that they will stop selling microchips to Russia. The extent of the halted sales isn’t currently clear. The new restrictions apply to the export of new chips intended specifically to use for military purposes or for double-use both civilian and military purposes.

On the day of invasion Gold prices increased sharply to over 1970 dollars per ounce signaling a risk-off attitude in the market just to decrease to levels seen before the attack under the pressure of sellers that moved their money into protecting other assets. Russia is also a large producer of gold with 9% of the world’s production. But beside gold, Russia is the largest producer of Palladium, with a whopping 45% of world’s production. Palladium is used in catalytic converters to cut pollution. So this conflict has the potential to create headwinds for the automotive industry.

The fear of sanctions from the Western countries started to impact Russian companies listed in the United States like the Russian internet giant Yandex N.V. (YNDX) which lost almost half its value, while other companies with operations in Russia such as payment services provider QIWI plc (QIWI) and e-commerce platform Ozon Holdings (OZON) slumped with two digits also. Gazprom (OGZPY) also lost 40% of its share price.

The conflict in Ukraine is not only about share prices. Multinationals closed or reduced their activities in Ukraine. In order to protect the workers, Carlsberg, one of the world’s largest brewers, said it had suspended operations at two factories in eastern Ukraine and in Kyiv, in order to protect workers. ArcelorMittal, which operates one of Europe’s biggest steel mills in central Ukraine, will keep production at “a technical minimum” and was stopping work at its underground mines. The company employs 29,000 workers and contractors in Ukraine. FedEx and UPS suspended shipments into Ukraine until further notice and extended this ban to Russia during the weekend.

The sanctions might have an impact also on the European companies that are exposed to business in the region. Oil companies Shell, Total, BP, Equinor and OMV have different degrees of exposure or participation to Russian companies. BP already announced that it will renounce its 20% part in Rosneft taking a financial hit of as much as 25 Billion dollars to support Russia sanctions. London-listed miners Polymetal (POLY.L) and Evraz (EVR.L) were also affected. Renault has 6% of its revenue from the ownership of AvtoVAZ, automobile manufacturing company, Alstom has a 20% stake in the Russian rail manufacturer Transmaholdings. There are also companies that have revenue of more than 20% from the Russian markets. Maybe the best known is Nokian, the tyre manufacturer.

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Bogdan Maioreanu, eToro analyst and markets commentator, has over 20 years of experience in financial services and investments and a strong background in journalism. He held different Corporate Banking management positions in both Raiffeisen Bank and OTP Bank, before moving to business consultancy roles working for IBM Romania among others. Bogdan is an Executive MBA from Asebuss and Washington University.

 

About eToro Group

 

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