Reed Smith In-depth

Each day, the world is increasingly feeling the shockwaves caused by Russian President Putin’s war on Ukraine. The human suffering and economic destruction caused by Russia’s military aggression in Ukraine have prompted the global community to impose unprecedented economic sanctions, among a variety of other tactics, to pressure Russia to deescalate. In the face of these potent measures, financial and commodity markets around the world, including those in the United States, are bracing for what could be significant disruptions in the form of price spikes of certain commodities1 supply shortages, and other volatility. The Commodity Futures Trading Commission (“CFTC”), as the U.S. regulator with exclusive jurisdiction over futures and swaps markets, is among the federal agencies evaluating the tools at their disposal to address and alleviate these market disruptions. As discussed below, the CFTC has certain emergency powers that authorize it to engage in significant market intervention. Although the agency has not exercised these emergency powers in many decades, the CFTC’s doing so under the current, rapidly changing circumstances cannot be ruled out.
Map of Eastern Europe with focus on Ukraine and Russia

In addition to crude oil and natural gas, Russia is a major exporter of lumber, wheat, and metals critical for many high-tech components, including those used in semiconductors.2 With Russia and Ukraine being the world’s largest and fifth-largest wheat and agricultural exporters, respectively,3 traditionally referred to as the “Breadbaskets of Europe,” wheat prices recently surged to record highs, according to a measure provided by a futures contract listed on the Chicago Board of Trade, up 70% over the month of February 20224 Similarly, the price of coal has doubled since Russia’s invasion.5

The disruption in the nickel market, including the price of nickel quadrupling in the course of a week, has caused major problems for the London Metals Exchange (“LME”), which has resorted to a variety of measures to restore stability to its nickel contracts.6 Further, because LME commodity prices are used as reference prices in over-the-counter derivative contracts, the International Swaps and Derivatives Association (“ISDA”) has been working on a coordinated response for substitute reference fallback prices. The prices of oil, liquefied natural gas, aluminum, and gold have also increased sharply in the wake of Russia’s invasion and the ensuing global response. The United States’ ban on Russian crude oil on March 8 created further uncertainty in the oil markets given Europe’s heavy reliance on Russian crude oil and gas. Since the Russian sanctions were initially imposed, both the CME Group and the Intercontinental Exchange have substantially increased initial margin requirements for a number of energy futures contracts.7

The sanctions’ financial impact on Russia have been significant. The value of the Russian ruble dropped over 40% against the U.S. dollar8 and the Russian government halted all trading on Moscow’s stock exchange on February 25, with the nation’s primary stock exchange now remaining mostly shuttered for its third week.9 In the United States, the New York Stock Exchange and NASDAQ suspended the trading of stocks of eight Russian-related companies listed on their exchanges.10 Further, the recent decision to block certain Russian banks from accessing the Society for Worldwide Interbank Financial Telecommunication (“SWIFT”) international payment system will likely also have a tangible impact on commodities markets. While officials have indicated that there will be some exemptions for energy-related transactions, energy trading will likely still be disrupted, as will trading related to other, non-energy commodities.11