March 19, 2022
Russia invaded Ukraine on February 24 and the West, led by the US, reacted immediately with sanctions against Russia. The US imposed a series of primary sanctions against Russia in general and against specific Russian targets. Probably the most important of the sanctions was removing Russian banks from access to SWIFT, an international funds transfer arrangement which allows firms to pay and receive funds from international trading partners. The US and Europe also froze assets of the Russian central bank, effectively freezing any means the Russian government might have had of circumventing the sanctions. These sanctions are so far limited to primary sanctions: a country’s government instructs its domestic firms not to do business with the target country or firms of the target country.
Trump’s sanctions against Iran included secondary sanctions: a country’s government instructs its domestic firms not to do business with the target country or firms of the target country, and to not do business with other country’s firms that are doing business with the target country or firms of the target country. Secondary sanctions by the US against Iran essentially forced firms worldwide to choose between doing business with the US or Iran. Most chose to do business with the US, crushing the Iranian economy.
The question for Israelis is what are the implications of the war for Israel? Setting diplomatic and political implications aside for the moment, what are the economic implications? Russia is under economic sanctions from the US and Europe, while Ukraine is unable to function economically due to the assault on her by Russia.
To understand the implications for Israel one must first look at the exports and imports of the two countries. Russia is mainly an exporter of agriculture products such as wheat (world’s leading exporter) and corn, and natural resources such oil and natural gas, and is the world’s largest exporter of semi-finished iron, coal tar oil, raw nickel and nitrogenous fertilizers. She imports finished goods such as cars, packaged medicaments, car parts, broadcasting equipment, planes and helicopters. More importantly she is the world’s leading importer of refractory cements, wall paper, precipitated copper and hydraulic turbines.
Together, Russia and Ukraine account for 30% of wheat exports and 19% of corn exports. Even if the war ends soon and sanctions against Russia are lifted, Ukraine exports are not likely to pick up again the coming year as their fields and farming equipment have been destroyed and won’t be up and running again for at least another year.
So, what does this mean for Israel?
As we’ve already seen, sanctions against Russia sent the price of oil over the $100 a barrel barrier and gasoline prices in Israel are up at self-service pumps. We can assume that if the war continues gasoline prices will rise across the board. At present about a third of Israel’s electricity is generated by petroleum, which means that if the war continues and with it sanctions, Israeli electricity prices will likely rise as well.
Similarly, Israel imports most of its wheat and corn. At the Chicago Mercantile Exchange, The prices for the May Soft Red Winter (SRW Wheat)contract jumped 7.62% on March 10 and again 7.08% the next day. This marked the third day in a row that the SRW contracts have risen to the daily limit, the first time this has happened since 2008. The loss of these exports is pushing wheat prices higher, with wheat futures at the Exchange jumping past $10 a bushel for the first time in ten years and currently at $11.95. Corn prices have risen less, 6.6% since the start of the war but we can expect them to continue to rise as the war progresses. Both of these, particularly corn, are important foods not only for the humans among us in Israel but also for sheep and cattle. Price increases in feed may impact prices in downstream products such as milk and meat.
On the positive side for Israel, the sanctions against Russia have also pushed up the price of natural gas, by 9.6% the first few days of the war but they have since dropped and risen again. Israel is today a major producer of natural gas. Europe is Russia’s largest consumer of natural gas and has imposed a range of sanctions reducing her consumption of Russian natural gas. Expectations are that even if the war ends soon Europe will be reluctant to return to her earlier levels of Russian gas imports, offering Israel new markets for her natural gas exports. This is important as this offers Israel long-term prospects for her natural gas exports.
Similarly with potash, a major Israeli export. Canada is the world’s largest exporter of potash, which is used for fertilizer. Next are Russia and Belarus, both targets of sanctions by the West. Israel is the world’s sixth largest exporter (Jordan is seventh). Prices were already at historically high levels, breaking $650 a metric ton in December 2021, a thirteen year high. Belarus was already under sanctions by the US, and now other countries are sanctioning Belarus due to the Ukraine war and its role in the war. With sanctions now imposed on Russia, potash prices can be expected to rise further.
For Israeli investors, this has offered some upsides. Israel’s Delek Corporation and her partner Chevron are the main producers of natural gas in Israel’s offshore gas fields. Delek’s share price spiked 8.1% before dropping back down, and Chevron’s has risen 23.3%. If the war continues and Europe turns to these two for natural gas supplies, we can expect their share prices to continue to rise. Similarly with future prices for wheat and corn, which offer investor’s upside opportunities.
For Israeli consumers, the more important question is whether the above price increases will push up our rate of inflation in 2022? In January the Bank of Israel’s inflation expectations were 1.6% in 2022 and peaking at 2% in 2023. However, if price increases in oil, wheat and corn impact price levels as suggested above we can expect a higher rate of inflation for the coming two years. That said, inflation has already been strong in other countries, such as the US and Europe (7.5% and 5% respectively before the war), while weak in Israel. The reason for the lower inflation rate in Israel has been the strong shekel, which has kept dollar inflation low. If prices for Israeli natural gas and potash rise as expected this will strengthen the shekel further and may reduce the local impact of dollar price increases in international markets.
Conclusions? We won’t know for another couple of months but I think the long-term economic prospects are good for Israel.
By: Michael Humphries.
Michael Humphries teaches marketing and management at the Jerusalem College of Technology and is deputy chairman of the Business Administration Department at Touro College Israel, where he teaches finance.