Press Release
The Role of Commodity Exchanges in Anticipating the Impact of the Russia & Ukraine Conflict
The Role of Commodity Exchanges in Anticipating the Impact of the Russia & Ukraine Conflict
Thursday, 24 March 2022

Jakarta, 24 Maret 2022 - The geopolitical conflict that hit Ukraine had a huge impact on commodity markets in the world. This hot situation exacerbated the volatility of commodity prices, which even before the conflict occurred, were experiencing an increase in value in line with the recovery of the world economy after the Covid-19 pandemic. Since the end of 2021, energy commodities such as coal and oil have experienced a positive trend in line with rising energy needs when economic activity begins to gradually return to the situation before the Covid-19 pandemic.

The conflict between Russia and Ukraine pushed commodity price volatility to a more extreme level, considering that both countries are big players in energy commodities in Europe, and Russia's contribution to the world energy commodity trade is known to be very large. Russia's crude oil exports in 2019, according to the Observatory of Economic Complexity (OEC) reached USD123 billion, the second largest in the world.

Market conditions were also exacerbated by the economic sanctions imposed on Russia. NATO, which is reluctant to be directly involved in the Russia-Ukraine conflict, responded by providing economic sanctions. The implementation of these sanctions has made it difficult for Russia to export its products considering that many western countries refuse to buy any products from Russia so Russia's options for trading are more limited and even then it is carried out in currencies other than USD.

Energy is a basic need in a production process, if producers have difficulty obtaining energy, the production process will automatically be disrupted, if the production process is disrupted, the product produced will decrease and with a reduced supply of a product, the price will increase. Sanctions imposed by many western countries disrupt the supply of energy commodities from Russia, this disruption has a tremendous impact on the production of goods around the world so that the increase in commodity prices, including agricultural commodities, is inevitable.

Indonesia itself has a very large trade value with Russia. Based on data from COMTRADE, in 2020 Indonesia imported products worth USD957 million from Russia, the largest of which were iron and steel products, fertilizers, and energy commodities. Meanwhile, Russia imports products worth USD973 million from Indonesia, the largest of which are CPO products and their derivatives.

Meanwhile, with Ukraine, Indonesia has an import value of USD963 million with the largest imported products being Cereals, and Iron and Steel Products. On the other hand, Indonesia exports products worth USD223 million, with the largest portion being palm oil and its derivatives.

Prolonged conflict has the potential to disrupt the economy. Indonesia's trade, both with Russia and Ukraine, is of enormous value, if the conflict drags on, Indonesia is in danger of losing its huge potential export destination. Not to mention the occurrence of conflicts, the supply chain of goods production will be disrupted. Indonesia has great needs from these two countries. With Ukraine, Indonesia needs a very large supply of cereals to meet domestic demand. Without Ukraine, the price of domestic cereal products has the potential to increase. On the other hand, Indonesia imports a lot of fertilizers and raw materials from Russia. It is also known that Russia is the number three fertilizer exporter to Indonesia. If the supply of fertilizer from Russia is disrupted due to a conflict, automatically crop production, especially food crops, will be disrupted so that food price increases are unavoidable.

“ICDX as a commodity exchange in Indonesia has the potential to play a role in anticipating spikes in food commodity prices that could potentially occur due to conflicts in Eastern Europe. With the commodity exchange, market participants or food producers can carry out hedging transactions to reduce the risk of future losses caused by changes in the prices of their products. In addition, with derivative transactions, producers can also make sales at the beginning to be handed over at a later date which serves to lock in the potential profits that will be obtained when selling their products," explained ICDX Research & Development, Revandra Aritama.

Hedging is a transaction mechanism that is carried out to reduce the risk that could potentially occur in trading a product. With the availability of a futures exchange, market participants can take advantage of futures contracts to carry out a hedging mechanism to reduce potential losses in trading a commodity.

ICDX has functions for Price Discovery and Price Risk Management. Hedging transactions and derivative transactions available on ICDX are very important to maintain food price stability. With this function, Commodity Exchanges such as ICDX can be a solution in dealing with a potential food price crisis as a result of the conflict between Russia and Ukraine.

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