Commodity prices, supply chain pressures to drive new wave of unrest

Control Risks has been recording an increase in protests related to a rise in food and energy prices and supply shortages, with more protest incidents registered in March than in almost any individual month in recent years. We look at how this situation is likely to evolve in the coming months.

  • The conflict in Ukraine is exacerbating existing distortions in global food and energy markets.
  • Countries in parts of the Middle East, North Africa and Sub-Saharan Africa will be directly exposed to a loss of food imports from Ukraine, increasing the likelihood of social unrest.
  • Rising fuel prices and power shortages will increase the likelihood of protests in lower-income countries where energy makes up a larger proportion of consumer spending, as well as in Europe, which is uniquely vulnerable given its energy reliance on Russia.
  • Most protests will pose incidental security threats and operational challenges to businesses, but desperation is likely to fuel violence in countries hit hardest by high costs and supply disruption.

Commodity prices

Over the last two years, restrictions and requirements relating to COVID-19 have been a significant catalyst for protest action globally. However, the lifting of most measures in many countries has not led to a significant reduction in unrest. Instead, Control Risks in March recorded more protest incidents than in almost any individual month in recent years. Rates of civil unrest continue to snake upwards at a global level.

The prices of key commodities including energy and food have been rising since 2021. 

 

The rapid economic recovery from COVID-19 – fuelled by fiscal stimulus and a gradual easing of restrictions – drove a surge in demand for energy. Pandemic-related supply chain disruption and labour market dislocation have created supply-side challenges, while underinvestment following the plunge in prices at the start of the pandemic also contributed to a supply-demand imbalance.

Rising energy prices have in turn pushed up food prices – the FAO food price index reached its highest level since June 2011 by the end of 2021 – a trend that was exacerbated by supply chain issues and unfavourable weather conditions in parts of Africa, the Middle East and Central Asia. The conflict in Ukraine is pushing commodity prices higher still, increasing the prospects of further unrest. 

Feeding unrest

Ukraine is a major exporter of cereals and edible oils, and much of its wheat is grown in southern and eastern regions of the country where Russia is increasingly focusing its military operations. Meanwhile, Russia and Belarus (both targets of significant sanctions) are key exporters of agricultural goods and inputs – crucially, fertiliser. Concern is mounting about the effects that the conflict will have on global food supply – UN chief Antonio Guterres on 18 May highlighted that the number of severely food insecure people globally had doubled in two years and warned of years of famine if a global food crisis is not resolved. 

Surging staple food prices increase the likelihood of food-related unrest in parts of the Middle East, North Africa and Sub-Saharan Africa over the coming months. Food price spikes in 2007-08 and 2010-11 prompted food riots across several regions, precipitating political instability and conflict across the Middle East and North Africa. Countries across these regions and parts of Asia – including some with recent histories of elevated social unrest – are heavily reliant on both Russian and Ukrainian grain.

Furthermore, rising global food prices increase the likelihood that governments will restrict food and fertiliser exports as they seek to ensure domestic food supplies and control prices. Global wheat prices jumped by an additional 6% after India – the second largest global producer of the cereal – imposed a ban on exports amid surging inflation. Some two dozen other countries have announced restrictions on food exports since the start of the conflict. Additional restrictions could increase the hardship in other countries and further fan the flames of unrest.

Fuelling unrest

In 2021, Russia was the largest global exporter of natural gas, the second largest exporter of crude oil after Saudi Arabia (and third largest producer overall behind the US and Saudi Arabia), and the third largest exporter of thermal coal after Indonesia and Australia. However, since the start of the conflict in Ukraine, some buyers have announced voluntary boycotts of Russian oil, and Western powers have announced a series of restrictions and sanctions on Russian energy imports. The US and Canada have banned Russian oil, gas and coal imports, and the UK has pledged to wind down oil imports from Russia during 2022. The EU has announced a ban on Russian coal imports (starting in August 2022) and seeks to reduce gas imports by two-thirds by the end of 2022 through a combination of demand reduction, stock building and alternative supplies. The EU is also considering a ban on Russian oil, though the decision on this has been delayed because some bloc members oppose it. As Western countries seek alternative supplies to replace their historical reliance on Russian fossil fuels, there is increasing global competition for oil, coal and liquified natural gas (LNG), which in turn is likely to drive up prices and lead to shortages in other regions.

Rising energy prices have long been a key driver of civil unrest across the globe, and the number of energy-related protests rose in 2021 as prices ticked upwards. Since the conflict in Ukraine began on 24 February, the increase in civil unrest has accelerated, and Control Risks has recorded incidents in dozens of countries globally. Protests are likely to continue to be sparked by disruptions to power supply (including power cuts) and rising fuel costs (which are particularly likely to lead to unrest in lower income countries where energy makes up a large proportion of the consumption basket).
Patchy power supply has prompted protests in some regions of India since April amid shortages of coal at most of the country’s power plants and a heatwave that has pushed up electricity demand for cooling. In Peru, transport drivers in March began demonstrations against rising fuel prices. These expanded throughout the country and turned violent in some departments. And in Paraguay, rising fuel costs have sparked protests since March. In Brazil, truck drivers have announced strikes against high fuel costs. 

The perception that governments are taking actions to remove protections from rising fuel costs has also long acted as a particular catalyst for protest action. A state-led increase in the price of liquified petroleum gas (LPG) led to unprecedented large-scale protests in Kazakhstan in January 2022 that were quickly hijacked by actors involved in a political power struggle. As prices at the pump climb, citizens will be watching the response of their governments globally. In the coming weeks and months, policy announcements such as the removal of subsidies for fuel and power are likely to be key drivers for additional unrest.

Europe uniquely vulnerable

Although some commodity exporters may benefit from high energy prices, countries across the Middle East, Africa and Latin America will be impacted by the rising cost of energy. Meanwhile, Europe is uniquely and directly vulnerable to any disruption to energy supply from Russia specifically. The region is highly reliant on Moscow for hydrocarbon imports, and approximately half of countries in the EU (mostly in Central and Eastern Europe) import more than 50% of their gas from Russia. Protests against rising energy prices will become more likely should the EU move to adopt more draconian energy sector sanctions (banning oil imports) and if Moscow in turn retaliates by cutting off gas supplies. It has already cut off gas supply to Poland and Bulgaria, and gas transiting via Ukraine is likely to be further disrupted. 

Civil unrest over energy security and related price spikes also has the potential to erupt in Hungary. The government extended to 16 November price caps on fuel and electricity that had been set to expire on 15 May. Currently, the price for one litre of petrol is fixed at HUF 480 (EUR 1.25), with Hungarian fuel price comparison provider Holtankoljak in late April estimating that free market prices would likely be around HUF 591 (EUR 1.54). This policy holds a twofold potential for riots. First, lifting the price caps would have a detrimental impact on living expenses, causing public discontent. Second, price caps on foodstuffs have reportedly already resulted in supply shortages, which are likely to extend to fuel. A representative of an association that represents petrol (gas) stations stated that a significant share of petrol stations would be unable to continue operations throughout June due to insufficient margins and government support.

Desperation

Operational disruption will be the primary impact of unrest for businesses, with protesters relying on a combination of rallies and blockades to target roads and other transport infrastructure. However, desperate citizens with little to lose are less likely to exercise self-restraint. Food and energy protests have led to riots and looting in some countries in recent weeks. Further acts of violence are likely as fuel and energy disruption looks set to intensify in the coming weeks and months.