What's up guys and welcome back to wall street millennial on this channel, we cover everything related to stocks and investing with russia's invasion of ukraine, showing no signs of slowing down. Vladimir putin's regime is getting more and more isolated from the rest of the world, with the ruble's value free falling in their largest bank spare bank on the brink of collapse. It's pretty obvious that the sanctions will be devastating to the russian economy and while the sanctions were meant to target russia, the ripple effects have the potential to severely disrupt economic activity around the world. After years of sanctions and mismanagement by the kremlin, the russian economy has stagnated and they now make up only about two percent of global gdp.

So, on the surface, even a complete collapse of the country shouldn't have too much of an impact on the rest of the world, but while other parts of their economy are outdated, they are endowed with vast natural resources. Russia is the third largest producer of oil in the world, accounting for 10 percent of total supply. They are the largest natural gas exporter in the world, accounting for 45 of europe's total imports, and they are significant producers of various industrial metals, including aluminum, steel, cobalt, nickel and palladium, where they account for 40 of the world's total supply. Brent crude prices have skyrocketed to 118 dollars per barrel, which is the highest price we've seen in almost 10 years.

Palladium prices are also nearing record highs, but the most extreme effect we've seen so far is european natural gas. At the time of recording this video natural gas is trading for 204 euros per megawatt hour, which is roughly 10 times its historical averages for consumers all around the world. This will mean higher prices at the gas pump and higher bills for heating your home during the winter. But even if you drive an electric car and live in a tropical area, there will be no escape from the inflationary effects.

Almost every good you buy at a store was transported on a semi truck powered by petroleum or produced in a factory using natural gas. Retailers will pass those input prices into the end consumer by raising prices of almost all products. Inflation has already exploded to 40-year highs in the us, as well as the eurozone. If putin continues his invasion of ukraine and thus far he's shown no signs of slowing down we're likely to see inflation get even worse.

This will put the federal reserve between a rock and a hard place. On the one hand, the added inflationary pressures makes it all the more important to raise interest rates and prevent an inflationary spiral. On the other hand, the decrease in energy supply will already put the economy on shaky ground, raising interest rates on top of that risks causing a recession with high unemployment. In this video, we'll look at the impact of sanctions on russia's commodity exports and just how bad the inflationary effect is likely to be we'll start off with oil.

Oil prices were already uncomfortably high going into the crisis, and the western allies didn't want to make the situation any worse, so they specifically exempted energy related transactions from the sanctions. So why have oil prices been skyrocketing to over 100 per barrel anyway, even if oil is not directly sanctioned, russian exports will still be hit by so-called shadow sanctions. Many oil buyers from western countries don't want to import russian oil because they fear that some of the money will go through sanctioned russian banks. Also, many of the ports and pipelines used for picking up russian oil are located in or near ukraine.

Shipping companies, understandably, don't want to send their crews near an active war zone, and many insurance companies won't cover these voyages now, as they fear becoming victims of collateral damage. In recent days, many russian oil companies have had trouble selling their oil and have been forced to mark prices down up to 18 below the official brent crude prices. Even with western sanctions, russia is still able to freely export as much oil as they want to china, which is the world's largest importer of oil. Putin has been strategically increasing the country's ties to china over the past few years, likely in anticipation for his ukraine invasion and subsequent economic sanctions.

Russia is rapidly ramping up capacity for its pipelines to china to divert european exports eastward. Theoretically, oil is fungible, so if they can successfully divert all their exports to china, it should have no impact on global prices with china importing more oil from russia, they won't have to import as much from saudi arabia and other middle eastern countries. The middle eastern oil can then be diverted to europe, and everything would balance out. This may have been what putin hoped for and emboldened him to invade ukraine, but there's another key aspect of the sanctions that he failed to consider.

The invasion has caused western corporations and investors to start divesting from oil like rats fleeing a sinking ship. The british oil giant bp recently said that they will divest their 20 stake in rosneft, which is russia's largest state-run oil company they'll. Take a 25 billion impairment charge on the fire sale and will likely hurt rosneft as much as it hurts. Bp rosneft has relied on bp for capital, as well as technical expertise to increase oil production through joint ventures.

With these joint ventures being shut off, their ability to expand their oil wells will be greatly diminished. Other western oil majors, including royal dutch shell, france's total energy as well as exxon mobil, will also be under pressure to divest their russian oil assets and joint ventures. Oil production and exploration is extremely capital intensive. After a couple years, the wells run dry and you have to dig new wells to make up for the lost capacity without access to western investment.

The russian oil companies will have to come up with a lot more money on their own to make up the difference. This will be very difficult for them, because the russian central bank just doubled their benchmark interest rate to 20 percent. Many russian commercial banks also find themselves on the brink of bankruptcy with spare bank already having lost almost 100 percent of its market valuation. The austrian bank refisan, which has a significant operation in russia, said that they are pausing issuance of new russian loans.

In light of the heightened geopolitical and economic risks in the country, as we've seen over the past year, when you cut interest rates to zero and turn the money printer on, you make it easier for businesses to raise capital and can save the economy even from a One in a hundred year pandemic. Needless to say, when you hike interest rates to twenty percent and inhibit the ability of commercial banks to lend, this will have an equally dramatic effect in the opposite direction. So, even if we don't see sanctions directly targeting the energy sector, russia's production capacity will likely diminish going forward. That's why we're seeing oil prices explode to the upside.

A few days ago, the buying administration coordinated with a few other nations to release 60 million barrels of oil from their strategic petroleum reserves in an effort to reduce prices. But that's only one and a half days worth of global oil demand and it will have to be refilled at some point. Oil prices actually went up when the release was announced. As such, a small injection of oil is simply not enough to matter, given how desperate the situation is.

Everything we just talked about that will put pressure on oil supplies will also affect the natural gas market, and the effect may be even worse. Domestic natural gas production in the european union has fallen by more than 75 over the past 20 years. Most of their supply came from a massive deposit in the netherlands called the groningen gas field. Unfortunately, the extraction of the gas caused earthquakes in local communities, so they've been rapidly reducing production in recent years to make matters even worse, many european countries have been phasing out their nuclear power plants under pressure from environmental activists.

The idea was to invest in renewable energy. Such as wind and solar to completely eliminate the need for fossil fuels or nuclear power, unfortunately, building out wind and solar farms takes a long time to fill the gap during the energy transition. The european union became increasingly reliant on russia, which now accounts for 45 percent of europe's natural gas and boards. European natural gas prices were already skyrocketing before the invasion, as stockpiles were already tight and unusually weak.

Wind speeds reduced energy output from the wind farms. This caused prices to increase 5-fold from normal levels. One way to solve the problem was the nordstream 2 pipeline, which would massively increase russian natural gas flows into europe. Construction of the pipeline was already complete, but now german chancellor olaf schultz has indefinitely suspended its operation.

Thus far, they have not yet cut imports from existing pipelines, but even without explicit bans on natural gas imports, russian production will probably fall anyway, as their companies are starved of capital. Gazprom is the largest natural gas company in russia. By far, their stock price has fallen by 90 since fears around the invasion began. While all this is happening, china's demand for natural gas is also skyrocketing, as they struggle to reduce their dependence on coal.

As you can see, asian natural gas demand has been increasing exponentially in recent years. Russia has played an important role in meeting this demand. If russian supply capacity decreases, it's unclear how the rest of the world would make up the shortfall on top of energy. Russia is also a major exporter of industrial metals, including aluminum, steel and importantly, palladium, which account for 40 of global supply.

Palladium is used in catalytic converters, which detoxify exhaust from internal combustion engine cars prices have already increased to record highs, because metal relay transactions were not exempt from the swift transactions. Prices could end up going a lot higher. So what does this all mean for the global economy? While the effects will be felt around the globe? Some regions will be hurt far more than others. The biggest loser will be the european union, as they will continue to see elevated oil and natural gas prices.

Low-Income families will struggle to heat their homes in the winter, and energy-intensive industries such as manufacturing will suffer. Asian countries like china and japan will also be negatively impacted as they're both large energy importers. However, china may actually end up benefiting as they are one of the only major countries not participating in the sanctions. This could allow them to buy russian oil.

Add discount to world prices, the u.s will be much less impacted than europe. Thanks to the fracking revolution in texas and north dakota, the u.s produces just about as much oil as it consumes and is a major exporter of natural gas. The negative effect of higher oil prices on consumers will be offset by windfall for u.s energy companies, and the aggregate effect will be about zero and, needless to say, middle eastern countries like saudi arabia, will be massive beneficiaries. One positive aspect of the current disaster is that it could accelerate the shift to electric vehicles with gas prices set to rise.

Consumers could see a savings of more than 100 per month by owning an electric car. Also, the increase in palladium prices will increase the cost of catalytic converters, which are used in internal combustion engine cars, but not evs, alright, guys that wraps it up for this video. What do you think about putin's invasion of ukraine? How high will oil prices go? Let us know in the comments section below as always. Thank you so much for watching and we'll see you in the next one wall, street millennial, signing out.

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