Finding the reserves

5 min read 15 Mar 22

Summary: Equity markets plummeted and commodities rallied in February after Russia sent troops into Ukraine and investors scrambled to digest the news. As sanctions on Russia begin to bite, how secure is Europe’s energy supply? Investment Specialist, Kirsty Clark reviews recent market performance and the potential alternatives to Russian oil and gas. 

Few areas of the market provided a safe harbour for investors in February amid the escalating Russia-Ukraine conflict. The MSCI AC World Index ended the month down 2.6% (total returns in US dollar terms), compounding the losses in January. Value widened its outperformance versus Growth and, with the exception of the UK market, small caps performed better than their large cap counterparts.

UK and Japanese equities were the relative winners on a regional basis, along with Chinese A shares. Latin America and Asia Pacific ex Japan (propped up by Australian equities) were also relatively resilient – housing beneficiaries of the spike in commodity prices and increased demand. Unsurprisingly, the German DAX and wider Eurostoxx indices took the brunt of deteriorating investor sentiment. Emerging markets also lagged as Russian equities fell by more than 50%, while weaker performance among US large cap tech names weighed on the NASDAQ indices in the particular. 

At a sector level, materials and energy gained ground, and more defensive sectors such as healthcare and consumer staples outperformed. Consumer discretionary and information technology were among the laggards in February.

In commodities, Brent crude rallied more than 10% to close the month above $100/barrel. Gold also finished up around 6% as investors sought safety amid the market volatility. The Dollar index was broadly flat over the month. In fixed income markets, government bonds finished in negative territory despite yields falling in the second half of the month. Italian government bonds and UK gilts led the sell off. Emerging market hard currency debt also lost ground, as well as investment grade and global high yield bonds.

Russia may account for only 2% of global GDP, but the country is the world’s largest net exporter of oil and gas combined1 – it is the second largest gas and third largest oil producer (behind the US and Saudi Arabia)2

As countries strengthen sanctions against Russia in response to the continued encroachment into Ukrainian territory, concerns about the impact on the global supply of raw materials for which Russia and Ukraine are key exporters have been growing, and commodity prices – from oil and gas to wheat, corn, potash and nickel – have soared.

While a potential shortage of grains and fertiliser products may not be felt as broadly or immediately as an acute global shortfall in oil and gas supply, the impact could be enduring if planting and harvesting schedules are disrupted, transportation logistics are compromised and protectionism rises. In 2019, ten countries3 imported nearly $21 billion in grains, almost 44% of which came from Russia and Ukraine. For wheat imports alone in Egypt and Turkey, 71% came from Russia and Ukraine in 2019 and this amount has grown since. 

Currently, the imposition of embargoes on Russian oil and gas imports, as the conflict in Ukraine intensifies, is creating future supply dilemmas – for some importing countries more than others. As nations look to wind down dependency on Russian energy supplies, how can they plug the gap?

The US has banned the import of Russian oil, gas, coal and refined petroleum products, while the UK has committed to phasing out Russian oil imports within a year. To date, the European Union (EU) has stopped short of banning Russian oil imports, but it plans to reduce its dependence on Russian gas by cutting imports by two-thirds this year – the equivalent of around 100 billion cubic metres (bcm) of natural gas4

With Russian supply accounting for around 8% of total demand for oil in both the UK5 and the US6 (the latter includes additional petroleum products) and ca 4% of total gas demand in the UK7, finding alternative sources of energy is challenging but a less onerous task than the one facing the EU – a region heavily reliant on Russian oil and gas supply, which accounts for around 25% and 45% of total EU oil and gas imports respectively8

To address the immediate oil price spike, countries globally have taken collective action to release strategic oil reserves. Agreeing to release a combined 61.7 million barrels (equivalent to 3% of total emergency reserves) – with the lion’s share coming from the US, Japan, South Korea and Germany9. The US has also been urging the OPEC-member Gulf states to increase oil production to reduce price volatility, and has met with Venezuela in the hopes of replacing a shortfall in US domestic supply due to Russian sanctions.

Specific to the EU, the International Energy Agency (IEA) has put forward a 10-point plan10 outlining a path for the region to reduce its Russian gas dependency by more than 50 bcm over the coming year. It believes the path is consistent with the EU’s climate ambitions and the European Green Deal, and with additional steps that could see the EU completely eliminate the need for Russian gas imports by 2030. 

In looking to increasing regional security and self-sufficiency in the near-term while also remaining committed to investing in green energy, one of the key challenges for the EU will be in ramping up the pace at which the bloc can install the infrastructure needed to create sustainable alternatives to the status quo. 

Proposed solutions by the IEA include:

  • Diversifying gas supply with pipeline imports from Norway or Azerbaijan, for example, when Russian import contracts expire (a portion is set to expire by the end of 2022), 
  • Ramping up LNG (liquified natural gas) imports given the EU’s access to spare regasification capacity (although current supply is also subject to demand from other gas importers, especially across Asia – putting upward pressure on prices),  
  • Scaling up biogas and biomethane supply, and low-carbon hydrogen via electrolysis (but these options offer limited potential in the near term given the lead times for new projects),
  • Introducing minimum gas storage obligations to improve resilience; increasing the use of working storage capacity prior to the winter ‘heating’ season to provide a buffer to cover surges in demand or supply shortfalls (although this also has the potential to push up gas prices, while regional coordination and a harmonised approach are needed to ensure optimal use of available storage capacity in the EU),
  • Accelerating the deployment of new wind and solar projects. Investment in solar PV (photovoltaics) and wind power in 2022 are already expected to increase EU output from renewable energy sources by 15% compared to 2021. Faster deployment of these technologies through a concerted policy effort can reduce consumer bills and further reduce gas demand.
  • Maximising output from existing low emissions sources including bioenergy and nuclear – returning nuclear reactors to safe operations and increasing capacity at bioenergy power plants can help to reduce gas use for electricity,
  • Enacting near-term taxes on windfall profits to soften the impact of price hikes on the most vulnerable consumers, 
  • Speeding up the replacement of gas boilers with heat pumps – with the IEA forecasting the potential to cut gas use by ca 2 bcm within a year,
  • Accelerating energy efficiency improvements in buildings and industry, reducing gas use by another 2 bcm within a year,
  • Encouraging consumers to reduce heating temperature – by 1 °C, if only temporarily, to help reduces gas use by up to 10 bcm within a year,
  • Innovation and policies to create a more flexible power system, that improves energy efficiency and helps to loosens the strong links between gas supply and Europe’s electricity security.

On the efforts to ramp up LNG imports for regasification, Spain has the largest port and operational capacity to do this, but the cost of creating viable gas pipe connections to other EU countries, remains a challenge. Spain has called on countries to share the cost of the infrastructure build-out, but even with cooperation, installing the necessary piping could take years to construct and would also need to be ‘future-proofed’, for example, to carry lower-emission or mixed gases such as biomethane or green hydrogen11. There is also a fuel-switching option, replacing gas with coal-fired power or alternative liquid fuels within the existing gas-fired power plants, but this approach risks derailing the EU’s emissions targets, certainly in the near term.

More generally, for countries within and beyond the borders of Europe to sustainably reduce their dependence on Russian oil and gas, any ramp up in fossil-fuel generated power in the near term, or redirection of existing global oil and gas supply, will need to be accompanied by policies to improve renewable technologies and alternative solutions to guarantee local societal security and global climate security.

2 IEA, March 2022
Countries include: Egypt, Turkey, Iran, Bangladesh, Nigeria, Morocco, Yemen, Tunisia, Azerbaijan, and Sudan. Source:
4 Source: IEA, March 2022
5 Source:
6 Source:
7 Source:
8 Source: IEA, March 2022
9 Source: IEA, March 2022
10 Source: IEA, March 2022

By Kirsty Clark

The value of investments will fluctuate, which will cause prices to fall as well as rise and you may not get back the original amount you invested. Past performance is not a guide to future performance.

Related insights