The Russian invasion of Ukraine and the sanctions imposed in an attempt to weaken its military effort is starting to show in the global economy.
The financial impact is touching everything from the availability of food, supply chain to the cost of energy and petrol.
Inflation
Samuel Tombs, chief UK economist at Pantheon Macroeconomics, said if the jumps in oil, gas and electricity products seen on the first day of the Ukraine invasion are sustained, it could push inflation to 8.2% in April.
It would only fall back to 6.5% by the end of the year, reported the Press Association.
Inflation hit 5.5% in January and the Bank of England believes it will peak at more than 7% in April when huge 50% increases in domestic energy bills when the new price cap hits.
Mr Tombs said: “Today’s surge in oil, natural gas and electricity prices, if sustained, points to an extra 1.5pp boost to the UK CPI.
“CPI inflation now likely to peak at circa 8.2% in April and only come down to 6.5% by the end of the year.
“Hard to see how households’ real spending keeps rising.”
Thomas Pugh, an economist at RSM UK added: “Looking beyond the immediate humanitarian impact, the effect on the UK economy will depend on what happens next and how long commodity prices remain elevated for.
“But inflation in the UK will now probably rise beyond the 7.5% peak we had expected in April and will remain higher for longer.”
“A good general guideline is that a 10 dollar increase in a barrel of oil increases inflation over the next year by about 0.15 percentage points."
The price of a barrel of Brent Crude oil hit above $111 US dollars a barrel on Wednesday.
No sanctions are currently imposed on oil and gas due to Europe's reliance on the supply.
Russia and Ukraine also export a quarter of the world’s wheat. Global wheat prices had already been rising prior to the invasion and are are up nearly 40% this year, hitting levels not seen since 2013.
Futures contracts for the grain, along with corn, surging to maximum allowed levels on the Chicago exchange on Wednesday, February 23.
In Paris, milling wheat hit record highs, along with rising oilseed prices, Ukraine is a major producer of sunflowers.
He also warned that prices could rise as associated costs, such as shipping insurance, could rise.
The UK has become the first country to pass a law banning ships with “any Russian connection” from entering its ports, according to Transport Secretary Grant Shapps.
He made the announcement after concern about a Russian oil tanker scheduled to dock in Orkney on Tuesday.
Share prices
Oil giant Shell announced plans to sell its stake in all joint ventures with Russian partner Gazprom, calling Russia’s invasion of the country “senseless” and a threat to European security on Monday.
The company said it will sell its 27.5% stake in a Russian liquefied natural gas facility, a 50% stake in an oilfield project in Siberia and an energy joint venture.
It will also end its involvement in the Nord Stream 2 pipeline between Russia and Germany, which has been put on hold by ministers in Berlin.
The news came despite shares dropping in oil giant BP after it confirmed on Monday that it was sell its near 20% stake in Russian oil business Rosneft.
Shares dropped by as much as 7% at the start of trading on Monday after the news - but that is expected to recover as oil prices rise.
BP will sell its 14 billion dollar (£10.4 billion) stake in the oil producer it co-owns with the Kremlin after facing pressure from the Government, the company confirmed on Sunday afternoon.
The oil firm’s chief executive Bernard Looney is also resigning from the Rosneft board with “immediate effect”.
The move happened after Russian President Vladimir Putin attacked Ukraine last week in what BP’s chairman called an “act of aggression” with “tragic consequences”.
BP said plans to potentially find a buyer for its Rosneft stake will not harm its ability to increase payouts for shareholders.
Norway's Equinor has also announced plans to sever its ties with Russia.
Meanwhile, share prices in defence manufacturer BAE Systems surged when the markets opened on Monday. The group, which has operations across the country, has seen a rise in its share price of more than 14% so far this morning (Monday, February 28).
Shares were trading at over 747p each as of 9.10am after closing on Friday, February 25, at 653p.
Shares in BAE Systems, which manufactures the likes of combat ships, submarines and fighter jets started to rise towards the end of last week after the group announced its full-year results.
The business reported a revenue of £19.5bn for 2021, up from the £19.2bn it posted in the prior year.
Business cuts ties
As Russia's invasion of Ukraine intensifies, sanctions are being tightened and many UK businesses are vowing to sell their stakes in Russian companies.
Here are some stances made by prominent businesses.
Jaguar Land Rover
Vehicle manufacturer Jaguar Land Rover (JLR) has suspended sales to Russia. The firm announced that it made the decision due to the “wellbeing” of its workforce and those “within our extended network”. Sanctions imposed on Russia have heavily restricted the ability of companies to sell goods there. JLR, based in Whitley, Coventry, produces Jaguar cars and Land Rover and Range Rover sport utility vehicles. It said: "The current global context also presents us with trading challenges."
Compare the Market
Insurance comparison site Compare the Market has pulled its ‘Compare the meerkat’ television advertising campaign from appearing around news sections following Russia’s invasion of Ukraine.
The popular advertising campaign features a Russian meerkat called Aleksandr Orlov, along with his companion Sergei. It has taken the decision to make sure the adverts do not appear close to news sections to be ‘sensitive to the current situation’.
Total
French oil giant Total has agreed to make no further investments in Russian projects but fell short of announcing it is severing ties in the country.
The company is one of the biggest investors in Russia, with a 19.4% stake in Novateck, the largest producer of liquefied natural gas in the country, a 20% holding in the Yamal LNG joint venture, and interests in oil fields, refineries and renewables projects.
Aviva
The insurance giant is to slash its exposure to Russia as it revealed plans to sell off its Russian equity investments in response to the crisis in Ukraine.
The group’s chief executive, Amanda Blanc, said it has “very minimal exposure”, with just 0.1% of its Aviva Investor funds invested in Russian equities, but has decided to divest its holdings “as soon as we practically can”.
It comes as pension schemes across the UK are looking at the levels of any direct or indirect holdings they have in their investment portfolios and taking action to comply with UK sanctions.
Aviva said its Russian holdings, which are made via its fund management arm Aviva Investors, are not affected by the sanctions, but the company made the decision in light of the situation in Ukraine.
Money managers Man Group and Abrdn revealed on Tuesday that they have been slashing their positions in Russia, with the latter declaring it uninvestable for the foreseeable future.
Energy bills
The invasion and accompanying sanctions are casting a shadow over longstanding energy ties, for the coming weeks and the longer term, writes David McHugh of Associated Press
Russia’s attack on Ukraine has rocked energy markets, not least because Europe depends on Russian supplies of natural gas. Natural gas prices soared on news of the invasion on Thursday even as gas flowed normally, according to pipeline operators. Prices fell sharply on Friday after US and European officials said sanctions against Russia would not interrupt energy supplies or, almost as important, payments through banks for shipments of oil and gas.
But fears of an interruption in gas supplies have rattled markets. Russia accounts for more than 30% of Europe’s gas for home heating, industry and generating electricity, and other potential supply sources are inadequately prepared to bridge the gap if Russian gas is cut off, analysts at Rystad Energy said.
Supplies of liquefied natural gas brought by ship from the US have helped relieve some of Europe’s gas shortage this winter, but it is expensive and export terminals are running at capacity.
In response to the invasion, the German government has frozen the approval process for the already-completed Nord Stream 2 pipeline that would bring gas direct from Russia under the Baltic Sea. Russia’s state-owned Gazprom could still use other pipelines through Poland and Ukraine, so Nord Stream 2 is not needed for additional supply but to keep gas affordable and avoid interruptions like the pricing disputes.
The conflict is adding to the surging energy prices in Europe and the US. If oil prices rise to 120 dollars per barrel and gas prices remain elevated, inflation would rise by a full percentage point and slow economic growth this year, analysts at Berenberg bank said.
Finding new energy supplies will take years. Europe continues to need natural gas to fire its electricity plants until renewables are built up to provide enough energy and to make up for falling domestic production. Analysts at Energy Intelligence say tight supply is likely to keep prices high through the mid-2020s.
The cost of food
Some heavy users of gas have halted or reduced production, such as producers of fertiliser, which has become more expensive in turn.
Consider September’s price rise in beer, meat, fizzy drinks, said Peter McGahan, chief executive of Worldwide Financial Planning. The cause? The big fertiliser plants are fuelled by natural gas. They stopped production because of the cost of gas. When you make fertiliser, a by-product of the production is carbon dioxide which is used to carbonate drinks, so with few fertiliser plants functioning, no drinks supply.
Farmers have seen higher costs to fuel their equipment and those costs will turn up in food prices as well. Some people who switched to discount providers — who rely on energy from wholesale markets — have faced sharply higher bills or had their contracts cancelled when the supplier faced losses from high prices.
On top of this, Russia and Ukraine export a quarter of the world’s wheat, with Ukraine a major corn exporter. A squeeze on supply will impact on food prices.
Petrol prices
Average UK petrol prices exceeded £1.51 for the first time on February 27, reports Neil Lancefield, PA Transport Correspondent.
The typical cost of a litre of petrol at UK forecourts was 150.65p on Saturday and 151.25p on Sunday, according to figures from data firm Experian Catalist.
The average cost of a litre of diesel is also at a record high, reaching 154.69p on Saturday and 154.72p on Sunday.
Despite the wholesale market calming slightly at the end of last week as oil fell back under 100 US dollars per barrel, prices at the pump will continue to go up as retailers buy in new stock at much higher prices, said RAC spokesman Simon Williams.
He said: “This week will be an important one in terms of the oil price as it’s likely to reveal the speed of the inevitable upward trend or the extent of the volatility in the market.”
Russia’s invasion of Ukraine led to oil prices reaching an eight-year high last week due to concerns over the reliability of supplies.
This affected wholesale prices paid by fuel retailers.
