Russia’s invasion of Ukraine will not only affect the eastern European nation but the UK will also feel repercussions.
Boris Johnson said the invasion is a “catastrophe for our continent” after Russian tanks rolled into Ukraine on Thursday morning.
The attacks may be in a country more than 1,000 miles away from the UK but the ramifications will be felt here as global commodity prices jumped towards multi-year highs over fears of sanctions and supply disruption.
These are the ways the invasion could affect the UK:
Oil and gas
Less than 5% of the UK’s gas comes from Russia, with the rest coming from the North Sea and Norway as well as liquified natural gas from countries such as Qatar and the US.
But as the rest of Europe is more reliant on Russian gas, which comes through Ukraine, if its pipelines are cut off other countries could be scrambling for gas which could cause a knock-on effect for UK supplies. Up to 50% of Germany’s gas is Russian.
UK gas prices rose by more than 30% as Russia invaded while oil prices rose above $100 a barrel for the first time since 2014.
Energy bills are already rising in the UK and across Europe and if less gas is available, that could push prices up even further.
Samuel Tombs, chief UK economist at Pantheon Macroeconomics forecaster, said if the surge in oil, natural gas and electricity prices is sustained there could be an extra 1.5 percentage points boost to the UK’s consumer price inflation.
“CPI inflation is now likely to peak at around 8.2% in April and only come down to 6.5% by the end of the year. It’s hard to see how households’ real spending keeps rising,” he said.
A rise in gas prices could also push up the price of packaging, transport, manufacturing and processing costs as they all rely on oil and gas.
UK food prices could see an almost immediate hike as Ukraine and Russia export much of the world’s grain – and most of their ports have been shut down.
Russia, the world’s largest wheat exporter, has put all ships on “stop” in the Azov Sea, where most grain is shipped from, a grain industry source said.
Wheat and soybeans hit their highest prices since 2012 in the hours after Russia invaded, while corn jumped to an eight-month peak.
The two countries were due to account for 29% of global wheat exports, 19% of world corn supplies and 80% of world sunflower oil exports this year.
Wheat prices went up £15 a tonne in the hours after Russia invaded and are likely to increase even further to possible record highs.
This will put up the price of flour and bread, as well as meat, dairy and eggs because wheat and corn used for animal feed have also increased.
The UK and Europe are highly reliant on Russia for fertiliser for food and animal feed crops.
While the UK mainly imports liquified natural gas (LNG) for energy from Russia, nitrogen fertiliser uses natural gas so with the rise in gas prices comes a rise in fertiliser prices.
Belarus and Russia account for 38% of the world’s supply of potash – the mined and manufactured salts used in fertiliser – so if the UK cannot physically get fertiliser there could be fewer crops to harvest, which could push food prices up.
Farmers already experienced a more than 260% price rise by the end of last year so many have put off buying enough fertiliser to maintain crop yields this year.
Metals and diamonds
Russia is a major gold, aluminium, nickel, platinum, palladium, uranium and titanium producer, with prices of precious metals rising on the morning Russia invaded.
“A protracted escalation could see gold rising to or above $2,000 per ounce in the short-term,” UBS analyst Giovanni Staunovo said.
Russia is the world’s largest producer of nickel, used in the production of electric vehicle batteries, the world’s second largest producer of platinum and the world’s sixth-biggest producer of copper.
Copper, which saw a price rise on Thursday morning, is used in a vast number of industrial applications, including building and construction, car manufacturing and electrical goods.
Concerns about aluminium supplies from Russia propelled prices to a record high of $3,449 a tonne – an increase of 21% so far this year – with the country being the world’s sixth-largest producer.
One of the world’s biggest diamond producers, Russia’s state-owned Alrosa accounts for 27% of global diamond extraction, with prices set to rise if embargoes are placed on Russian exports.
Russia also exports a large amount of coal and timber, the prices of which have already gone up in recent months.
If Russia is cut off from the UK through sanctions, this could have an effect on trade between Russia and the UK.
The latest Office for National Statistics (ONS) data from 18 February shows Russia was the UK’s 19th largest trading partner in the 12 months up to October 2021 – accounting for 1.3% of total UK trade.
In that same period, the UK exported £4.3bn of goods and services and imported £11.6bn from Russia.
In 2020, the latest data shows there was £681 million of foreign direct investment in the UK from Russia.
The top five goods exported from the UK to Russia in the past year were cars (£386m), medicinal and pharmaceutical products (£272.2m), specialised machinery (£199.2m), mechanical power generators (£175.9m) and general industrial machinery (£131.5m).
And the top five goods imported to the UK from Russia were “unspecified goods” (£4.2bn), refined oil (£2.6bn), non-ferrous metals (£1.3bn), crude oil (£1bn) and gas (£558.7m).
Airlines are already avoiding Ukraine airspace which could push up the cost of flying, including air cargo, as they are forced to take longer routes.
Shipping routes could also be subject to disruption which will add costs. Some companies are already charging a danger premium for sailing near Russia and Ukraine.
Moscow has been hitting Ukraine with cyber attacks over the past couple of weeks and now it has invaded there are heightened fears Russia could expand that to the rest of the world.
Lloyds, Britain’s largest domestic bank, warned it is on top alert for cyber attacks on Thursday.
Ukraine’s foreign ministry said one in five Fortune 500 companies rely on Ukraine’s IT outsourcing sector – a substantial part of Ukraine’s economy.
Hours before Russia invaded, intelligence agencies in the US and UK published a cyber report warning a Russian state-backed hacker group had developed a new type of malware that targets firewall devices made by Watchguard to protect computers against hacks.
With all the hits Russia and Ukraine will be taking on commodities and trade, it is likely inflation will remain higher for longer than previously expected.
Capital Economics now expects inflation in advanced economies, such as the UK, to still be at an average of 4% by December – twice the level of the Bank of England’s target rate.
That raises the risk central banks will have to raise interest rates further to keep inflation at bay – which will impact global growth.