Following Russia’s invasion of Ukraine on 24 February 2022, international governments have implemented a range of sanctions to bring economic isolation to Russia. These measures include exclusion from financial markets and a reduction in dependence on Russian goods and services.
A prolonged period of rising global economic dependence on Russia dictates that efforts made by governments and individual companies to detach themselves from Putin’s regime come with significant economic consequences. As a result, expectations of a return to a degree of global economic stability have been bought to an abrupt end.
IBISWorld has identified a number of industries most exposed to the events that continue to unfold. These industry reports have been prioritised to include in-depth analysis into the effects of the conflict.
This article draws on the industry expertise of IBISWorld analysts to examine the main implications of the conflict on various economies so far.
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United Kingdom
Gas Supply in the UK
The UK’s direct reliance on Russian gas is low, with gas imported from Russia accounting for approximately 6% of UK gas imports and less than 4% of UK gas supply. However, UK energy markets remain exposed to potential fluctuations in Russian gas supplies, with both domestic and foreign supplies of gas purchased at market prices.
Expectations of disruption to the supply of gas from Russia to Europe caused European gas prices to increase from already record highs following Russia’s initial invasion of Ukraine. In turn, UK spot prices increased, with prices in early March reaching around 10 times their level from 12 months earlier. Prices have since cooled, but remain significantly above seasonal averages.
Due to the time lag in energy regulator Ofgem’s price cap, current gas prices won’t be reflected in UK retail energy prices until October 2022. As a result, high wholesale prices are expected to continue to exacerbate pressures on profit margins in the Gas Supply industry in 2022-23, despite significant growth in suppliers’ revenue following a 54% increase to the price cap in April 2022. Based on current data, the Office for Budget and Responsibility anticipates a further rise of 40% in the price cap in October 2022, followed by a cut of approximately 30% in April 2023 and a further 5% in October 2023.
Petrol Stations in the UK
Following Russia’s invasion of Ukraine, the UK has announced plans to phase out Russian oil imports by the end of 2022. Similar measures undertaken by other nations, such as the United States, in addition to sanctions imposed by buyers sent oil prices soaring in early March. Price increases have since eased, though Brent Crude remains almost 70% higher than it was a year ago. The effects of these price rises are far-reaching, with the Petrol Stations industry one of the most acutely exposed industries.
Fuel prices were already on a steep upward trend in the six months leading up to Russia’s invasion of Ukraine, as supply constraints and renewed growth in demand led to a consistent rise in oil prices. This trend has accelerated following Russia’s invasion of Ukraine, with the price of petrol and diesel repeatedly hitting record highs. As of 29 March 2022, the price of petrol and diesel stood at 163.5 pence per litre and 176.1 pence per litre respectively, according to the RAC. This is significantly above the annual averages of133.4 pence per litre for petrol and 136.1 pence per litre for diesel for 2021.
A 5p cut to fuel duty is expected to help to ease the rise in fuel prices, as well as alleviating some of the pressure on average industry profit margins. Between 23 and 30 March, average petrol prices declined by 3.7 pence per litre, while diesel prices fell by 2.8 pence per litre. This indicates that some operators haven’t passed on the full tax cut, with smaller operators stating that it would take time to pass on the cost reduction. Wholesale fuel prices have started to fall back going into 2022-23, though IBISWorld expects them to remain high, spurring revenue growth and increasing pressure on profit margins for operators in the Petrol Stations industry.
Stock & Commodity Exchanges in the UK
Russia’s invasion of Ukraine has spurred significant volatility in financial markets. The FTSE 100 fell below 7,000 in early March, posting its largest decline since March 2020 on the back of the initial escalation of the conflict. Global stock indices followed suit as traders sought to reduce their exposure to Russian markets, with European markets worst affected.
Major oil companies recorded significant falls during this period amid uncertainty surrounding the security of Russian oil and gas supply, while the threat to economic growth prospects caused financial stocks to drop. In contrast, global mining and energy stocks increased significantly, benefiting from a boom in commodity prices.
Investor sentiment has since improved, with traders encouraged by peace talks between Russia and Ukraine. This has supported an uptick in the stock market, with the FTSE 100 recording significant gains to stabilise around levels seen prior to the invasion. Nevertheless, financial markets are expected to remain volatile as the conflict rages on. This is expected to support demand for the Stock and Commodity Exchanges industry in the United Kingdom.
Banks in the UK
Banks have also been exposed to the global implications of the Russia-Ukraine conflict. The main direct impacts of the conflict have come in the form of sanctions implemented by the British government and the international community, which include asset freezes, restrictions on financial transactions and a block of major Russian banks from the SWIFT international payment system. The Bank of England (BoE) has stated that these sanctions are manageable for the UK financial sector, which built up significant capital buffers as provisions against potential losses in the aftermath of the COVID-19 pandemic.
The effects of the conflict on the UK’s economic recovery from the pandemic will have a significant bearing on the performance of the Banks industry. Soaring energy and commodity prices have already led the Office for Budget Responsibility to upgrade its forecast for inflation in March 2022, stating expectations for it to reach a 40-year high of 8.7% in the last three months of 2022. In response, the BoE increased the Bank Rate from 0.5% to 0.75% in March 2022. This is expected to lead to an increase in interest earned from loans, supporting growth in industry revenue in the current year. However, heightened economic uncertainty and significant inflationary pressure is expected to constrain the volume of transactions, keeping industry revenue below pre-pandemic levels in the medium term.
Freight Forwarding & Customs Agents in the UK
As an industry that is dependent on international trade flows, the Freight Forwarding and Customs Agents industry is susceptible to events in Russia and Ukraine. The UK doesn’t have significant direct trade links with either country, with Russia accounting for just 2.2% of all goods imports and 0.9% of all goods exports in 2021. As a result, the direct impact of sanctions on trade with Russia on demand for industry services is expected to be limited.
In addition to government-imposed sanctions, several companies have halted or scaled back operational links with Russia. For example, the industry’s largest company, Kuehne + Nagel, has suspended freight imports to Russia. The company has also noted the detrimental effect of the closure of air corridors above Russia on lead times. This has the potential to place pressure on industry profitability, which has already been strained by soaring fuel prices.
The largest material impacts of the conflict on the industry are likely to be felt as a result of the economic challenges posed. The conflict has led to expectations of contractions in both the UK and EU economies during the second quarter of 2022. Comparatively strong growth expectations in other major economies, such as China and the US, threaten to reduce the global competitiveness of the UK and its main trading partners. This would likely weigh on UK trade volumes, restricting demand for industry services.
Germany
Chemical Product Manufacturing in Germany
Russia was the 13th-largest export market for the German chemical sector, accounting for 2.4% of the market, while about 0.3% of the products in terms of value went to Ukraine. Germany meets approximately one-third of its crude oil and 55% of its natural gas needs through imports from Russia.
As products in the chemical sector are mainly based on crude oil and partly on natural gas, their pricing is very dependent on the world prices of these commodities. The price increase for chemicals due to higher crude oil prices is partly mitigated by hedging transactions. Nevertheless, a significant price increase is expected, partly because energy prices have also risen sharply in the wake of the Russia-Ukraine conflict and the chemical sector is very energy-intensive. Although most of the cost increases in raw materials and energy prices are expected to be passed on to customers, chemical product manufacturers’ profitability is likely to decline.
Basic Steel Processing in Germany
Germany is the largest steel producer in the European Union and the eighth-largest producer worldwide. The German steel industry consumes around 2.1 billion cubic metres of natural gas per year, most of which comes from Russia. Therefore, a possible interruption in gas supplies from Russia and an increase in gas prices pose a threat to the Basic Steel Processing industry in Germany.
On the other hand, Russia and Ukraine are among the most important producers of various metals. Accordingly, both countries are home to companies of global importance to the metals industry. As a result of the conflict, production at many Ukrainian plants came to a halt and key infrastructure, such as rail lines and ports, which are essential for transporting bulky products, were damaged. This is likely to affect Ukraine's ability to produce and export metals. Additionally, many countries have imposed sanctions on Russia, which are expected to severely limit the export capacity of the Russian economy. As a result, the many companies around the world that previously sourced their metal products from these two countries will have to turn to alternative suppliers. This provides an opportunity for German steel producers to expand their export activities.
Motor Vehicle Manufacturing in Germany
In 2021, German motor vehicle manufacturers produced 170,000 passenger cars in Russia, mainly for the local market, with German brands accounting for about 20% of total production within Russian borders. In 2021, Russia imported around 36,000 passenger cars from Germany, making Russia the 18th most important export market for German manufacturers. For the German automotive industry, however, the impact of Russia's military invasion of Ukraine goes far beyond export figures. The industry expects new disruptions to supply chains due to a lack of deliveries from Ukraine and Russia; restrictions on shipping, air traffic and rail connections; and employees of supplier companies in Ukraine joining the armed forces. The supply of wiring harnesses has been particularly affected. Therefore, to prevent bottlenecks in the production process, automotive manufacturers are actively looking for alternative suppliers.
Fertiliser & Nitrogen Compound Manufacturing in Germany
Natural gas is used as a feedstock for nitrogen fertilisers and accounts for around 80% of a typical industry manufacturer's costs. Accordingly, the pricing of fertilisers is very dependent on world prices of crude oil and natural gas. These are already at a high level due to the COVID-19 pandemic. Since the start of the Ukraine war, prices have once again risen significantly. Rising production costs are compelling fertiliser manufacturers to pass on prices to buyers. This affects production costs in agriculture and livestock industries and results in a significant increase in consumer prices. To a certain extent, high prices also lower demand for fertilisers.
Certain fertiliser ingredients, especially potash salts, come mainly from Russia and Belarus, which are affected by sanctions. Substitutes from other countries are difficult to find, which leads to a shortage of raw materials in for fertiliser manufacturers. The Ukraine war is also likely to cause disruption on the buyer side, as Russia and Ukraine are important wheat-growing regions. However, this is likely to have only a limited impact on the export revenue of German fertiliser manufacturers, as Russia and Ukraine aren’t important export markets for the industry.
Electric Power in Germany
The Electric Power industry in Germany has been heavily affected by the Russia-Ukraine conflict. The conflict is driving up energy prices, which have already been rising for several months, putting both electricity suppliers and their customers under increasing pressure. According to the German Association of Energy and Water Industries, about 50% of German electricity is generated with the help of Russian hard coal, while in the European Union this share is approximately 40%. In the event of a reduction in Russian hard coal supplies, the raw material can instead be sourced from countries such as Australia, Indonesia, the US, Colombia, South Africa and Canada. In mid-March 2022, Ukraine connected to the European electricity grid and the EU electricity market, ending its electricity dependence on Russia. This poses technical and regulatory challenges for both Ukraine and Europe.
North America
Stock & Commodity Exchanges in the US
The Stock and Commodity Exchanges industry in the United States is largely dominated by four players: the Intercontinental Exchange (ICE), which owns the New York Stock Exchange (NYSE); NASDAQ Inc. (NASDAQ); CME Group Inc.; and Cboe Holdings Inc. In reaction to Russia’s invasion of Ukraine, both NASDAQ and the NYSE halted trading of shares in Russia-based companies. In the immediate aftermath of the invasion, markets dipped, but have since trended upward due to other market forces and possibilities of peace talks. As market uncertainty rises, industry operators benefit from increasing volatility causing higher trading volumes.
Guns & Ammunition Manufacturing in the US
The Guns and Ammunition Manufacturing industry in the United States has yet to experience a substantial effect from the ongoing conflict in Ukraine. However, the conflict has the potential to affect the industry significantly. For instance, many of the industry’s largest operators rely on government contracts for a substantial portion of revenue. An increase in geopolitical tensions involving the United States has the potential to affect industry revenue, as the deployment of US armed forces would result in increased demand for many industry goods. Furthermore, a rise in perceived threats, particularly on a global scale, generally increases demand from consumers. In fact, many smaller operators have reported increased demand from the consumer market amid the conflict. While IBISWorld expects rising consumer demand will contribute to revenue growth, overall growth is estimated to remain moderate.
Petroleum Refining in the US
The Petroleum Refining industry in the United States is reliant on crude oil inputs to produce petroleum products for use as fuels for transportation, heating, generating electricity and as feedstocks for making chemicals. Russia is the second-largest exporter of crude oil globally and therefore the Russia-Ukraine conflict will have rippling effects on the world price of crude oil. Although US-based petroleum refining accounts for a minimal share of Russia’s total crude oil exports, the commodities market is highly interconnected, raising the price of crude oil in the United States. Additionally, under President Biden’s ban on Russian energy imports on March 8, 2022, US petroleum refiners that import Russian oil must switch to new suppliers. While US petroleum refiners are expected to benefit from rising crude oil prices as these costs are passed downstream, the future performance of the world price of crude oil, as well as the Petroleum Refining industry, is highly contingent on the course and duration of the Russia-Ukraine conflict, the pace at which US oil producers increase production and the ongoing release of US oil reserves.
Oil Drilling & Gas Extraction in Canada
The Canadian Oil Drilling and Gas Extraction industry is dependent on the conditions of the larger global energy market. In fact, product prices are directly linked to global supply and demand conditions, which can be very volatile from year to year. Recently, the Russian invasion of Ukraine has resulted in many sanctions and bans being placed on Russian oil and gas by various countries, which has effectively reduced global oil and gas supplies. Decreased supply has resulted in oil and gas prices growing further, after both grew considerably in 2021. While this may benefit industry operators in the short term, it is also expected to increase investment in alternative forms of energy and increase the level of external competition in the industry. Moving forward, global oil and gas prices are expected to stabilize at a slightly lower price, but remain elevated as the conflict continues due to the diminished global supply of these products amid strong demand from consumers and businesses.
Long-Distance Freight Trucking in Canada
The nature of the Canadian Long-Distance Freight Trucking industry means that its performance is directly related to oil and gas prices. However, operators are also somewhat insulated from volatile oil and gas prices through their use of fuel surcharges, which are used to modify the rates charged for freight trucking to account for fuel prices. For example, when fuel prices are high, operators increase fuel surcharges to charge a higher price to transport freight. As a result, many freight trucking companies benefit from increased fuel costs because they can bill their customers more to accommodate for higher input costs. Still, rapid price increases, including the jump caused by the Russian invasion of Ukraine, can make it difficult for operators to adjust their prices quickly enough without lowering demand from some downstream markets. IBISWorld doesn’t expect the degree of price growth to negatively affect industry performance in 2022 as consumers and businesses will likely continue to demand freight trucking to transport vital goods.
Australia and New Zealand
Grain Growing in Australia
The Russia-Ukraine conflict is anticipated to have a significant effect on the Grain Growing industry. Russia and Ukraine collectively account for almost 30% of global wheat exports. Global wheat and coarse grain prices have risen sharply following the outbreak of conflict. Supply disruptions from these markets could threaten global food security, placing further upward pressure on wheat and grain prices.
Higher prices, combined with rising output, are expected to boost revenue for operators in the Grain Growing industry in the current year. However, rising fertiliser and fuel costs due to the conflict are expected to drive purchase costs higher for grain growers. This is expected to constrain industry profitability.
Coal Mining in Australia
The Russia-Ukraine conflict is anticipated to have a significant effect on the Coal Mining industry, placing upwards pressure on global coal prices. Russia accounts for approximately 18% of global coking coal exports and 9% of global thermal coal exports. Coal prices have increased sharply since the conflict broke out. The Newcastle benchmark price for seaborne thermal coal has more than doubled in the first quarter of 2022. Higher coal prices are expected to boost industry revenue and profitability for operators in the current year.
Oil and Gas Extraction in Australia
The Oil and Gas Extraction industry is expected to be significantly affected by the Russia-Ukraine conflict. Global oil and gas prices increased sharply in early March 2022. The increase in prices is likely to boost revenue and profitability for industry firms that participate in export activity. Russia accounts for approximately 12% of global oil production and 17% of natural gas production. If sanctions are placed on Russian oil and gas exports, European markets would need to source LNG from other countries. As such, this could support an increase in demand for LNG from European markets.
Fuel Retailing in Australia
The Russia-Ukraine conflict is expected to have a significant effect on the Fuel Retailing industry. Following the outbreak of the conflict, global oil prices surged. This increase is expected to flow through to higher retail petrol and diesel prices. Transport operators and consumers are then charged higher prices. While demand for fuel is typically inelastic, prolonged high prices may lead to a decline in discretionary travel. Higher oil prices are also expected to place upward pressure on purchase costs for fuel retailers, weakening profitability.
Fertiliser Manufacturing in Australia
The Russian Federation is expected to account for only 2.8% of the Fertiliser Manufacturing industry's imports in 2021-22. However, the nation is a key global producer of fertiliser, as well as the materials required for fertiliser production. The imposition economic sanctions by a large number of countries on Russia is likely to subdue the country's international trade, including fertilisers and related input material exports. Projected limited export activity by Russia is likely to provide Australian fertiliser producers with an opportunity to capitalise on gaps in the global market.
The Australian Fertiliser Manufacturing industry is highly globalised, with many participants importing considerable amounts of necessary raw input materials. Disruptions to Russia's ability to export input materials is likely to create shortages in the global market, driving up purchase costs and placing downward pressure on profitability for Australian fertiliser manufacturers.
Fuel Retailing in New Zealand
The Russia-Ukraine conflict has contributed to rising fuel prices in New Zealand. This has placed upwards pressure on purchase costs. However, retailers have been able to pass on the increase in costs onto consumers, limiting the effect on profitability. Nonetheless, rising prices may reduce discretionary spending on fuel by consumers, constraining revenue for fuel retailers.
In response to the increase in prices, the New Zealand Government has announced a cut in fuel excise duties and road user charges by 25c a litre. Public transport fares have also been cut to ease pressures on the cost of living. However, this may further deter discretionary spending on fuel.
Wine Production in New Zealand
The Russia-Ukraine conflict presents adversity to the global economy by ways of detaining growth and increasing commodity prices. The conflict is expected to have a moderate effect on the Wine Production industry. Ukraine accounts for a marginal share of New Zealand’s total wine exports (less than 1.0%). While projected to deteriorate, this amount has been trending downwards regardless of the conflict.
Total wine exports to Russia were $15.2 million for the year ending June 2021, comprising 0.7% of New Zealand’s total for this commodity. This amount has grown significantly over the past five years, making Russia an attractive export market. However, in solidarity with Ukraine, the New Zealand government is imposing increasingly tougher sanctions on Russia, and if enacted on the shipping movements of wine, could require industry players to divert trade to other markets to avoid revenue losses.
Apple, Citrus and Other Fruit and Nut Growing in New Zealand
The Russia-Ukraine conflict is expected to have a moderate effect on the Apple, Citrus and Other Fruit and Nut Growing industry. Russia has become an increasingly attractive export market for apples, citrus fruits and other fruits and nuts, comprising almost 3.0% of New Zealand’s total for these commodities in 2020-21. Growth opportunities have been expanding for the industry’s apple growers, with apples making up more than 9% of New Zealand’s total exports to Russia in the year through June 2021. However, the conflict is expected to clout these positive trends. The New Zealand government is imposing increasingly tougher sanctions on Russia and if enacted on the movements of industry goods, industry players could be required to divert trade to other markets to avoid revenue losses.
Cheese, Butter and Milk Powder Manufacturing in New Zealand
The Russia-Ukraine conflict is anticipated to have a moderate impact on the Cheese, Butter and Milk Powder Manufacturing industry. Russia was the fifth-largest export destination for New Zealand butter by value in 2020-21. New Zealand exported $146.2 million worth of butter to Russia during the year. In February 2022, following the start of the conflict, Fonterra, which is New Zealand’s largest dairy product exporter, announced it would cease exports to Russia and exit its Unifood joint venture with Russia-based Foodline. Other exports to Russia included milk powder, lactose and casein, though these accounted for less than 1% of industry exports. While Ukraine is a net importer, dairy products exports to Ukraine from New Zealand are immaterial. However, Ukraine is a significant exporter of butter and milk powder, particularly to countries in the Eurasian region, including Azerbaijan and Moldova, as well as other destinations such as China and Bangladesh. Disruption to production in Ukraine caused by the conflict may provide an opportunity for greater exports from New Zealand to these countries.
Milk and Cream Processing in New Zealand
The Russia-Ukraine conflict is expected to have a low impact on New Zealand’s Milk and Cream Processing industry. Trade hasn’t been directly affected, as the industry doesn’t export any products to either Russia or Ukraine. Furthermore, Ukraine isn’t a substantial exporter of milk and cream. According to data compiled by the Ukrainian Business & Trade Association, Ukraine exported US$15 million in 2020, compared with US$605 million worth by New Zealand. This means any loss in world supply from Ukraine won’t provide a substantial opportunity for New Zealand’s milk and cream processors to grow exports.
