/ 22 February 2022

Russia-Ukraine crisis sends oil prices soaring as South Africans face record fuel prices

A further increase in the petrol price of 30 cents per litre is expected in February due to the weak exchange rate.
Motorists can expect an increase at the petrol pumps from next Wednesday

Russia has deployed troops into Ukraine after its president, Vladimir Putin, recognised the independence of two separatist regions.

The crisis in Ukraine, which the West fears could escalate into a major war, has sent global stocks tumbling and crude oil surging. This comes as South African consumers already face record high fuel prices.

Crude futures surged more than 4% to around $96 per barrel on Tuesday — a level not seen since September 2014 — on worries about possible supply disruptions after Putin ordered Russian troops into Ukraine. Russia is the world’s leading oil producer.

The tensions between Russia and the Ukraine have kept markets on tenterhooks for some time now, as fears of military conflict spooked investors. But this seemed to change early on Monday after Putin agreed to talks with US President Joe Biden.

Alex Kuptsikevich, the FxPro senior market analyst, noted that the Russian rouble strengthened at the beginning of Monday after the announcement of Russia-US talks.

However, Kuptsikevich said, the situation deteriorated sharply after the heads of Ukrainian breakaway states, the Donetsk People’s Republic (DPR) and the Luhansk People’s Republic (LPR), turned to Putin with a request to recognise their independence.

Later on Monday, Putin delivered a speech in which he recognised the sovereignty of the two nations and seemingly laid claim to Ukraine. “So, I will start with the fact that modern Ukraine was entirely created by Russia or, to be more precise, by Bolshevik, Communist Russia,” he said.

Ukraine, Putin claimed, has never developed a stable statehood: “Its electoral and other political procedures just serve as a cover, a screen for the redistribution of power and property between various oligarchic clans.”

Putin ordered a “peace-keeping operation” in the Donetsk and Luhansk regions.

On Monday, Biden signed an order imposing sanctions on the two regions. The order noted that finding Russia’s recognition of the republics contradicts its commitments under the Minsk agreements — peace talks between Kyiv and Moscow that were brokered by France and Germany — “and further threatens the peace, stability, sovereignty, and territorial integrity of Ukraine”.

Putin’s decision to recognise the separatists, the order added, “thereby constitutes an unusual and extraordinary threat to the national security and foreign policy of the United States”.

On Tuesday, the presidents of the European Commission and the European Council said the European Union would table a package of sanctions against Russia on Tuesday afternoon. 

“The decision of the Russian Federation to recognise as independent entities and send Russian troops to certain areas of Ukraine’s Donetsk and Luhansk oblasts is illegal and unacceptable,” they said in a statement. 

“It violates international law, Ukraine’s territorial integrity and sovereignty, Russia’s own international commitments and it further escalates the crisis.”

The package of sanctions contains proposals to target those who were involved in the decision, banks that are financing the Russian military, the ability of the Russian state and government to access the EU’s capital and financial markets and services, as well as trade from the two breakaway regions to and from the EU.

“The EU has prepared and stands ready to adopt additional measures at a later stage if needed in the light of further developments,” the statement said.

The current situation, Kuptsikevich said, “is tightening financial conditions for Russian companies, destabilising markets and reducing business predictability”. 

“The volatility of the ruble and the closure of the Russian market for global capital will hurt the economy, probably sending it into decline in the coming quarters. In the long term, this threatens to reduce growth potential, which is already lower than that of many developed countries.”

The effect of the conflict will also be felt in South Africa, where consumers are already being squeezed amid prohibitive oil prices.

Hugo Pienaar, chief economist at the Bureau for Economic Research, said the most direct effect of the crisis on South Africa will be the oil price. If the US imposes sanctions of Russia and if exports are disrupted because of a military conflict, the oil price could surge even higher, Pienaar said.

Last week, the Automobile Association warned that South Africans would face record high fuel prices in March. The outlook — which was forecast before Russia sent troops to Ukraine — suggested that petrol prices in South Africa will skyrocket above R21 for the first time.

But the conflict could also have a positive effect for South Africa, Pienaar said, noting that heightened tensions tend to send the gold price up. 

Russia is also the largest producer of palladium, with South Africa coming in as the second-largest producer. “If that production is disrupted, or if sanctions mean that the global supply no longer comes from Russia, that could benefit South Africa from the export side.”

If there is an all-out conflict, investors may take money out of riskier emerging markets like South Africa, putting pressure on the rand, Pienaar added. However, commodity tailwinds may limit the rand’s weakness.

“Under normal circumstances one would think that a significant war in Europe would be very detrimental for the rand. But it is actually not that obvious that it will play out that way,” Pienaar said.