The war in Ukraine has led to a dramatic reshaping of global energy markets. Russia, one of the world’s largest producers of oil and natural gas, has seen its energy exports significantly disrupted by international sanctions and geopolitical tensions. Before the conflict, Russia accounted for more than 40% of the European Union’s (EU) natural gas supply. However, in the aftermath of the invasion, this supply was reduced drastically as Europe sought to sever its energy ties with Russia, leading to an energy crisis in the region.

This shift forced the EU to turn to alternative sources, primarily liquefied natural gas from the United States, which helped meet more than 40% of the deficit caused by reduced Russian gas supplies. This reconfiguration of supply chains has driven up energy prices globally, with European natural gas prices more than tripled at the peak of the crisis. The U.S. Energy Information Administration reported that the average Brent crude oil price (the price in Europe) increased from around $70 per barrel in 2021 to more than $100 per barrel in 2022, reflecting the broader disruptions in energy markets. Since then, prices have come down, with Brent trading at about $82 per barrel in May 2024.

The surge in energy prices contributed significantly to global inflationary pressures and hurt the global economy. While global data is not fully available, the International Monetary Fund projected that in 2023 Global GDP would decline 2.9% in part due to the Russia-Ukraine war. Global GDP growth is then projected to rebound 3.3% in 2024. On the inflation front, United States’ inflation reached levels not seen in four decades, exacerbated by the war-induced spike in commodity prices. The Consumer Price Index (CPI) rose by 6.5% annually in 2022, about 4% in 2023 and is expected to climb about 3.5% in 2024, driven largely by the costs of energy and food. Similarly, in the EU, inflation rates soared, with some countries experiencing double-digit increases. The European Central Bank has been forced to raise interest rates more aggressively than anticipated to combat these inflationary trends, leading to tighter financial conditions across the Eurozone.

The war in Ukraine also has triggered geopolitical shifts that are reshaping global economic landscapes. The conflict has underscored Europe’s vulnerability due to its reliance on Russian energy. An EU plan aims to reduce its dependency on Russian fossil fuels and accelerate the transition to renewable energy sources. Moreover, the conflict has prompted countries to rethink their geopolitical alliances and trade partnerships. For example, Russia has redirected much of its oil exports to China and India, which have become major buyers of discounted Russian crude. This realignment is indicative of a broader trend towards economic fragmentation where global trade networks are increasingly influenced by geopolitical considerations rather than economic ones.

The war also has severe implications for global food security, particularly due to the disruption of grain exports from Ukraine, one of the world’s largest grain producers. The International Monetary Fund highlighted that countries heavily reliant on Ukrainian wheat, such as Egypt, faced acute shortages, leading to higher food prices and increased risk of social unrest. The price of wheat soared by 40% in the immediate aftermath of the invasion, affecting food-importing countries in Africa and the Middle East. Food inflation has compounded existing economic challenges in these regions, where many economies are still reeling from the impacts of the COVID-19 pandemic. In Sub-Saharan Africa, for instance, food prices surged, contributing to higher overall inflation rates and exacerbating poverty and food insecurity. This has increased the likelihood of social unrest, as populations face rising living costs without corresponding increases in wages or social support.

The geopolitical uncertainties stemming from the war have led to heightened volatility in global financial markets. Investors, initially, moved towards safer assets, leading to significant capital outflows from emerging markets and increased volatility in stock and bond markets worldwide. The Federal Reserve has noted in many reports that geopolitical risks have threatened stable markets, with impacts on investor sentiment and financial stability. The ripple effects have been felt across various sectors, from commodities and energy to financial services and manufacturing. Companies with exposure to Russian markets have faced substantial losses, while those reliant on stable energy prices have struggled with increased costs and supply chain disruptions.

The war in Ukraine has disrupted energy markets, driven up inflation and reshaped geopolitical alliances to underscore the interconnected nature of global economies and the far-reaching consequences of geopolitical instability. As the world navigates these challenges, the need for coordinated policy responses and strategic adjustments in energy, trade and financial markets becomes increasingly apparent.

About the author: Michael J. Paton is a portfolio manager at Tocqueville Asset Management L.P. He can be reached at 212-698-0800 or by email at [email protected].