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Why the Ukraine conflict could affect us all

An impact on the UK economy could be imminent

A lot has changed in the past decade with regards to financial relations between Britain and Russia. Oligarchs have fuelled the London property market, with Knight Frank data showing that Russians were the biggest foreign buyers of £1m–plus houses in the capital last year, with estimated spending reaching the £500m mark.

In 2012, an estimated 227,000 Russians who visited Britain in 2012 spent a total of £240m. Their average £676 per transaction places them in the top five of foreign shoppers. Russia is also Britain’s fastest-growing export market, with sales to Russia increasing at an average 21% a year, rising 15% to £5.5bn in 2012, according to UK Trade & Investment.

One of the main trades coming back is energy, with 6% of the UK’s natural gas being provided by Russia. Being the world’s biggest oil producer, with most of its five million barrels of oil exports a day heading for Europe, it also drives the Brent crude price, which is now at a 2014 high. As such, a full blown war between Russia and Ukraine could mean a significant jump in energy prices.

Significant price spikes

Oil and gas prices recently increased amid warnings that an escalation of conflict between Russia and Ukraine could have severe consequences for gas supplies across Europe. Russia supplies 30% of Europe’s gas demand, with around half of it flowing through Ukraine, increasing fears of shortages and significant price spikes.

The RAC have warned that petrol prices could go up as much as 5p per litre as traders start to buy in bulk due to the uncertainty. Brent crude oil prices recently hit 2014 highs, topping $112 a barrel in intra-day trading, while UK day-ahead gas prices increased more than 8%.

European gas prices spiked in 2006 and again in 2009 when Russia cut off supplies to Ukraine amid price disputes. Russia has already raised the spectre of another gas war by threatening to revoke a discount to Kiev on gas prices, citing unpaid debts. It had cut prices for Ukraine by a third after ex–president Viktor Yanukovich forged closer ties with Moscow in December. Europe has become less dependent on imports via Ukraine since a major new gas pipeline from Russia to Germany, Nordstream, opened in 2011.

If Russia and Ukraine do end up going to war, the consequences for the EU could be very severe indeed. Sanctions on gas exports are likely to be placed on Russia if the conflict continues, which would place considerable strain on the UK, France and Germany.

Agricultural production

Concerns over Russian and Ukrainian grain supplies sent prices rocketing for wheat on international markets. The majority of Ukraine’s wheat and corn is shipped from Odessa on the Black Sea, or Sevastapol in Crimea. Disruption caused by the current stand-off would put pressure on supplies from the US, Canada and Australia to make up for any shortfall.

Agricultural production is of vital importance to Ukraine, accounting for 24% of the country’s total exports and bringing in more than 5% of gross domestic product annually

Investors’ concerns

Russian billionaires could potentially suffer the greatest losses from the market rout prompted by investors’ concerns over the military foray into Ukraine. Alisher Usmanov, Russia’s richest man and a major shareholder in Arsenal Football Club, is likely to have seen his $19bn fortune shrink as shares in local mobile phone operator Megafon recently fell 11.5%. The country’s second richest man, Leonid Mikhelson, who is estimated to be worth $17bn by Bloomberg, will also have seen his wealth fall as shares in Novatek, Russia’s second largest natural gas producer, of which he owns 25%, fell 15.3%.

The near 11% fall in the value of shares in X5, Russia’s largest food retailer, will have put a dent in the $15.4bn fortune of Mikhail Fridman, the country’s third richest man, while Viktor Vekselberg, the fourth richest, will have seen a decrease in the value of his publicly listed holdings, such as telecoms company Vimpelcom.

The global economy

The dollar has reached record highs against the Russian ruble, as investors sought refuge in the US currency as a safe haven from the unpredictable goings-on in Eastern Europe. The greenback was also buoyed by figures which showed an increase in Americans’ personal incomes and spending in January, despite a bitter US winter. With the deteriorating situation in Ukraine posing a fresh threat to the global economy, investors turned to classic safe havens amid heightened tensions.

The ruble also fell to a new low against the euro. However, the boost to the dollar came at the expense of the US, which suffered as a result of myriads of investors pulling their money out of companies that could potentially be impacted as a result of the volatile situation in Ukraine and Russia.

 

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