Watch palladium, gold and silver prices as the West sanctions Russia in response to the Ukraine crisis

(Kitco News) With sanctions mounting on Russia in response to the escalating situation in Ukraine, BMO reports that investors should keep an eye on precious metals prices as commodity supplies could be derailed.

Tensions escalated on Tuesday as the West responded to Russia’s Vladimir Putin’s announcement that it would recognize two self-proclaimed republics in eastern Ukraine and order troops to be sent there as “peacekeeping forces”.

In response, US President Joe Biden said he was releasing the first tranche of sanctions against Russia, targeting two Russian banks (VEB Bank and Russia’s military bank Promsvyazbank) and sovereign debt.

“We are imposing full lockdown sanctions on two major Russian financial institutions… We are imposing sweeping sanctions on Russia’s sovereign debt. That means we have cut off the Russian government from Western funding,” Biden told the press on Tuesday. “Starting tomorrow, we will also impose sanctions on Russia’s elites and family members… We will continue to escalate sanctions as Russia escalates.”

Biden described Russia’s actions as “the start of the Russian invasion of Ukraine.”

Earlier in the day, Germany announced it was halting the certification process for the Nord Stream 2 gas pipeline from Russia. In addition, the EU has imposed sanctions on most members of the Russian Duma and banned the purchase of Russian government bonds.

This could be just the beginning of sanctions against Russia, which is why the BMO report decided to examine the potential impact on commodity trade flows.

“Ultimately, we expect a reallocation of Russian commodity exports away from Europe and North America and towards China. Russia has already committed to ship 100Mt of coal per year to China for the coming years, which will help China offset its Australian coal ban,” said Colin Hamilton, commodities analyst at BMO Capital Markets.

Rerouting existing trade routes would show up as temporary dislocations in market fundamentals, Hamilton said in the report. And the commodities that will be hit hardest by supply shortages are precious metals, according to BMO.

Palladium stands out the most of all the precious metals, with Russia accounting for 39% of the world’s refined supply. Palladium prices are already up 24% year-to-date. And any further supply disruption from Russia could lead to an even more significant increase, Hamilton warned.

“Supply uncertainty, complemented by the rebound in auto production, has caused palladium prices to surge…while Russia is expected to account for 9%, 6%, 11% and 8% of gold, silver, platinum and rhodium supply, respectively.” the report said.

Adding to supply concerns, the safe haven appeal of precious metals is attracting a growing number of investors looking for safety amid a global equity sell-off.

“Demand for safe haven assets is also driving prices, with gold rallying back to ~$1,900/oz,” Hamilton added.

Commodities like aluminum and nickel should also be watched, particularly in Europe and North America, Hamilton added.

“Russian supply is not necessarily that significant on a global scale, but it is well established in developed markets. And perhaps more importantly, these markets already have low inventory availability,” he said. “Shifting trade flows should support inventory coverage in China, which is now a net importer of primary aluminum. However, concerns from European buyers will continue to grow and we expect premiums above the LME price to both Europe and North America will push higher in the short-term.”