Giraffe & Co

The implications of Putin’s war in Ukraine for us – Part 2

Our managing director’s thoughts

The first of our MD’s Insights was released two weeks ago when Putin’s war in Ukraine was completing its 3rd week. In Putin’s planner’s minds, this was to be a quick, lightning war, which would create a Belarus-like Ukraine, a puppet state subject to Putin’s wishes.

Now, well into the second month of this conflict, Putin’s forces stand stalled amid fierce Ukrainian resistance and the Russian forces have engaged in a war of attrition in the cities surrounded by them. The implications of a longer conflict are materially more severe than a short-term conflict for the world, quite apart from the horrors being visited upon the Ukrainian civilians caught in this brutality.

The UN’s UNCTAD, in relation to the effect of the war on trade and growth, voiced concern over “the two fundamental ‘Fs’ of commodity markets: food and fuels.”

This conflict has increased food prices in international markets – which, before the invasion, were already at their highest levels since the mid-1970s per the Food and Agriculture Organization of the United Nations (“FAO”).

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

The longer the war continues, the greater the economic fallout. Fuel will continue to escalate materially as the shortage increases.

Agriculture absorbs high amounts of energy directly, through the use of fuel, gas, and electricity, and indirectly, through the use of Agri-chemicals such as fertilizers, pesticides, and lubricants. Many of the core inputs for fertilizer originate in Russia and Belarus – 25 March FAO. As such the fuel-food equation is overwhelming in its effects.

Should Putin drag the war on for months, global inflation rate increases will be exacerbated and correspondingly interest rates will rise and the value of currencies will depreciate. Certain food, oil/gas, and other commodity shortages (semi-conductors!) will arise on a material scale.

South Africa, as stated previously, is partially sheltered from some of the shortages due to its maize production and commodity resources. But as the Reserve Bank increases the repo rate and the surrounding discussions thereto this past Thursday indicate, interest rates will continue to rise, with a further .5% increase expected at the next MPC meeting.

This war demands our attention for numerous reasons since its effects are so potentially disastrous. For our partners, it must be repeated: Increases in exchange, inflation, and interest rates increase the costs of products and the costs of borrowing. Make use of the stronger Rand whilst it is available to you before inflationary pressures take their toll via energy and food prices and order today – waiting can only have a negative outcome!

Peter Gees
Chartered Accountant (SA)
An advocate of the High Court of South Africa

 

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