Current geopolitical divisions are causing global markets to stop functioning normally. Markets themselves have become fragmented, supply chains are more risky, and incentives to invest and expand production have weakened, writes Marsel Salikhov, President of the Institute for Energy and Finance Foundation, for the 19th Annual Valdai Club Meeting.
Such concerns apply to many goods, but the most important are the energy and food markets, which are absolutely critical for all countries. Food and energy are linked. For example, the production of fertilizers, a necessary aspect of modern agriculture, is an energy-intensive process. Therefore, fertilizer prices are largely dependent on the cost of energy products. In turn, food in many countries is the largest component of consumer spending. On the other hand, the general acceleration of inflation increases production costs, including those for the mining industry. In this way, a feedback loop is created between these markets, and inflationary pressure increases.
Since the beginning of 2022, the total cost of energy resources in the world has increased by almost 40%. The growth in the cost of raw agricultural materials reached 20% in May-June. Since then, prices have declined, but how sustainable this decline is remains a big question.
Apparently, amid the current geopolitical and economic shocks, the global economy has entered a period of turbulence and structural transformation. To some extent, this period is similar to the 1970s, but the current possibilities for an anti-crisis policy in most countries are much more limited. The high level of accumulated debt and the need to tighten monetary policy complicate the use of traditional economic policy instruments.
All this means that in the coming years, energy and food prices will be quite high - higher than what we have become accustomed to in recent years. This means that food and energy security will objectively decline, and poverty will increase.
Usually, in such a discussion, the point is raised that it is necessary to provide social support and protect vulnerable segments of the population, as well as to support poor countries. However, this is only a temporary solution to the problem. Long-term solutions are related to the fact that it is necessary to increase the offer - to invest in the expansion of production, ensure efficient logistics and reduce costs. For example, investments in the global oil industry halved from 2014 to 2021 amid the stigmatisation of the commodity sectors and the growing popularity of the ESG agenda. To some extent, this created the preconditions for the current energy crisis.
However, it is important not only to make a “diagnosis” and determine the causes of the “illness”, but also to understand what each side can do amid the current conditions to solve global problems.
Last year, Russia exported hydrocarbons worth over $210 billion and food worth more than $30 billion. This year, Russia has faced unprecedented sanctions pressure from Western countries. Attempts to limit supplies from Russia in the absence of alternative sources of supply, which were not invested in previous years, have led to an increase in world prices.
For Russia, rising prices have compensated for the decline in energy exports, but this situation is not sustainable in the long term. Without the restoration of supplies, including new markets, export earnings will decline. The imposed sanctions and restrictions will most likely lead to a surplus in oil and gas production in the coming years, primarily due to logistics restrictions.
Petroleum and gas chemistry, the processing of raw materials and production of more complex products, can be used as one of the elements of a strategy to overcome these limitations. Iran has used this strategy with relative success. Another example is LNG. Big LNG projects are likely be reviewed and postponed due to sanctions. A possible alternative is the development of new production facilities for ammonia and methanol. Technologically, these are more simple production facilities; there are more opportunities to replace Western technology. The transportation of ammonia is easier than LNG. It is also important to support the construction of new infrastructure that will support the reorientation of raw materials exports to alternative markets.
Food exports from the Russian Federation remain rather strongly concentrated in the countries of the former USSR, as well as in individual national markets (China, Turkey, etc.). At the same time, there is significant potential for expanding exports to the countries of the African continent, as well as exports of halal products to the countries of the Islamic world. This will have a positive impact on food and energy security around the world.