Australia is Russia’s closest competitor in global markets and is the obvious winner as Russia loses sales under the impact of international sanctions.

Since the beginning of the year, the average price of Australia’s biggest exports has soared by more than 50% as major manufacturing centres, led by China and Europe, scramble to secure supplies of mineral and energy resources.

Despite vast demographic and geographic differences, the trade profiles of Australia and Russia are remarkably similar. Both export a diverse range of mineral and energy resources and are also major exporters of agricultural produce.

Both have relatively underdeveloped advanced manufacturing with a heavy reliance on imports, particularly from China. Russia has a much larger basic manufacturing sector and exports steel and other processed metals as well as chemical products including fertilisers. Australia sells more unprocessed mineral ores.

Russia is the world’s largest exporter of gas, while Australia is the second largest. In coal, Australia ranks first and Russia third. Australia is the dominant exporter of iron ore, but Russia is also a significant producer. Russia is a much larger exporter of oil than Australia, and both countries are important sources of nickel, aluminium, copper, lead, zinc and gold.

In agriculture, the two nations compete in the wheat and barley markets. Russia (and Ukraine) are bigger in oilseeds, while Australia is much larger in beef, wool, dairy products and wine.

Because they are so similar, Russia and Australia do little trade with each other.

Australian and Russian trade

Source: UN Comtrade (2020 data for goods, 2018 for services).

Commodity prices were already rising by February when Russia invaded Ukraine. The years of ultra-low interest rates helped a speedy economic recovery from the pandemic in much of the advanced world, with rising demand pushing up commodity market price-setters like oil and copper.

China’s economy softened through 2021, but both government-funded infrastructure spending and the boom in Chinese export industries caused by the Western recovery meant China’s demand for resources remained strong.

The sanctions imposed by the US and Europe and followed by many other countries including Japan and Australia initially sought to exempt Russia’s energy and agricultural exports. They did include iron, steel and other processed metals.

However, the extreme financial sanctions have made buyers of all Russia’s exports wary of transacting. The Russian banks they would make payments to have been banned from the SWIFT global financial network and Western banks don’t want to intermediate Russian sales. Russian oil is selling at a 30% discount to the general market, including China, and Russian wheat sales are at discounts of at least 10%.

Sanctions have spread to Russian coal. As a result, coal markets have experienced some of the most extreme impacts, with prices rising to levels that, to any longstanding observer, are simply surreal. Coal for power generation, which had dropped to just US$50 a tonne after China banned Australia’s exports in 2020, has recently reached records above US$400. Coal for steelmaking has risen above US$660 a tonne, or roughly double the peaks reached during the resources boom.

China must surely be regretting its ban on Australian coal and it wouldn’t be surprising to see it reversed if there’s a change of Australian government next month.

Prices for liquefied natural gas have also soared, as Europe looks for alternatives to Russian piped gas supplies. The Department of Industry predicts that Australia’s LNG exports will reap $82 billion in 2022–23, up from $30 billion in 2020–21.

Wheat and barley are also trading for as much as double their pre-war prices. Ukraine was an important exporter of both grains, particularly to China, but now, even if crops could be harvested they wouldn’t be able to get to ports in the Black Sea to be shipped. China must also be regretting its punitive tariffs on Australian barley.

Urban Australians tend to disregard the nation’s commodity riches as remote from their lives, but the wealth flows to them through increased government tax and royalty revenue, greater employment and a higher exchange rate. The boost in the exchange rate means that imported goods are all much cheaper, raising consumer living standards.

A key economic metric is the terms of trade, which compares the average prices Australia pays for its imports and the prices it gets for its exports. It is measured as an index, which has bounced between a score of 50 and 80 points for most of Australia’s history, rarely deviating more than five points from its long-term average of 63 points for more than a few quarters. Since the resources boom got underway in 2005, it has averaged 100 points and it could rise to as high as 140 points over coming months.

This means that every tonne of goods that Australia exports is buying around twice as many imports than has been the case throughout most of our history. In the 1990s, many thought resource prices were on an inevitable long-term downward slide that would take the Australian economy with it.

For much of the rest of the world, the impact of the Russian invasion on commodity prices means lower living standards.

This is particularly the case for the poorest nations, especially those dependent on imported grain. The United Nations Food and Agriculture Organization counts 20 countries dependent on Russia and Ukraine for at least half their wheat.

The FAO’s index of traded food prices has risen by almost 20% since February and is a third higher than a year ago. Oilseed prices have doubled, while wheat is up by around 40%.

The supply shortage from Russia and Ukraine is being made worse by major consuming nations, led by China, building their reserve food stocks.

More generally, Russia’s war is pushing inflation higher globally while incomes are lagging. This increases the risks to the world economy, with the potential for rising interest rates to generate debt crises and recession. The International Monetary Fund has cut its forecast for global growth this year from 4.4% to 3.6% because of the war, but warns that uncertainty is high and ‘downside risks to the global outlook dominate—including from a possible worsening of the war’.

Australia was one of the few countries to have its growth outlook upgraded by the IMF in its half-yearly global review; however, Australia’s burst of prosperity in the wake of Russia’s war on Ukraine would not survive a global downturn.