Russian stocks slip to 2-week lows, crude pares gains: How Ukraine dam breach stirred global markets

  • Chicago wheat climbed more than two per cent on June 6 nearing three-week highs as a result of the dam breach in Ukraine, which heightened worries about an escalation in the war between major grain exporters Ukraine and Russia, according to Nasdaq.

Nikita Prasad
Published6 Jun 2023, 09:43 PM IST
Although it is not yet clear as to what caused the breach, Ukraine military and Nato have accused Russia for being responsible while Russia is pointing the finger at Ukraine.
Although it is not yet clear as to what caused the breach, Ukraine military and Nato have accused Russia for being responsible while Russia is pointing the finger at Ukraine.(twitter )

Russian stocks declined to around two-week lows on June 6 after a major Soviet-era dam in the Russian-controlled part of southern Ukraine was breached and crude oil prices pared their gains from previous session. Millions of litres of water burst through a gaping hole in the Nova Kakhovka dam, flooding a swathe of the war zone in southern Ukraine, according to reports.

The breach threatened several villages and cutting off water supplies, however, it is still not clear what caused the the breach in the Kakhovka dam, which was already damaged. Ukraine accused Russian forces of blowing up the facility, while Russian officials blamed Ukrainian military strikes.

Catch live updates on the Nova Kakhovka Dam breach here

Here's how the Ukraine dam breach affected global markets:


Crude oil:
Brent crude oil, a global benchmark for Russia’s main export had hit a more than one-month high in the previous session, supporting the rouble. On June 6, it was down 2.1 per cent at $75.10 a barrel, while US West Texas Intermediate crude fell $1.47, or 2.04 per cent, to $70.68 a barrel.

The decline in oil prices by more than $1 per barrel on Tuesday was also led by global growth concerns. The fall in prices came after a strong rally in the previous session when the market took cues from Saudi Arabia's decision to cut oil output to 9 million barrels per day (bpd) in July from around 10 million bpd in May - the biggest reduction in years.

OPEC+, which groups the Organization of the Petroleum Exporting Countries and allies led by Russia, pumps around 40 per cent of the world's crude. Saudi Arabia is the only member of OPEC+ with sufficient spare capacity and storage to be able to easily reduce and increase output.

 

Russian Rouble:
The rouble too weakened, and was down 0.5 per cent against the dollar at 81.33 and had lost 0.3 per cent to trade at 87.08 versus the euro. It had lost 0.3 per cent to 11.41 against the yuan. Further, the rouble steadied near 81 per dollar showing limited reaction to the Ukraine dam breach.

The rouble drew also support from higher FX sales by Russian firms that are accumulating cash for dividend payments and an upcoming increase in FX sales by the finance ministry, according to reports. 

 

Russian stocks:
Russian stocks opened lower on Tuesday and the dollar-denominated RTS index was down 1.9 per cent at 1,028.7 points, a near four-week low. The rouble-based MOEX Russian index was 1.4 per cent lower at 2,655.6 points, a near two-week low. The market in Russia is looking ahead to Friday, when the central bank is widely expected to keep rates on hold at 7.5 per cent. Most of the stocks slipped to around two-week lows during the session after the Ukraine dam breach.

However, analysts and banks are maintaining optimism and do not foresee a deteriorating situation for markets yet.

“There are no signs of panic yet, however, while dividend payments and announcements are continuing to provide support, so after a refreshing correction, the market could well reach new highs this week,'' said Sinara Investment Bank in a note.

 

Chicago Wheat:
Chicago wheat climbed more than two per cent on June 6 nearing three-week highs as a result of the dam breach in Ukraine, which heightened worries about an escalation in the war between major grain exporters Ukraine and Russia, according to Nasdaq. 

The most-active wheat contract Wv1 on the Chicago Board of Trade (CBOT) was up 2.8 per cent at $6.41-1/4 a bushel, after touching its highest since May 17. Litres of water gushing through the villages added to supply worries in wheat as dry weather grips part of Europe and Russia that had fuelled gains in US and European futures on Monday.

"This morning, prices are sharply up again in response to the escalating situation in Ukraine, particularly the blowing up of the Kakhovka dam," said brokerage Copenhagen Merchants in a note on Tuesday. "With funds heavily short in wheat and corn, we may expect a volatile trade ahead,'' it added.

Also Read: Oil retreats over 2% over global growth fears after Saudi output cut led one-day rally; what lies ahead

Why is the dam important?

The 30-meter-high (98-foot-high) dam and associated hydroelectric power station sit in Russian-controlled territory along the Dnieper River about 70 kilometers (44 miles) east of the city of Kherson, which is a flashpoint of Russia’s war in Ukraine.

The reservoir created by the dam holds as much as 18 million cubic meters (4.8 billion gallons) of water — a volume nearly equivalent to that of the Great Salt Lake in the United States. The Kakhovka reservoir also supplies water to the Zaporizhzhia nuclear plant, which is under Russian control - where fighting has repeatedly raised fears of catastrophic accident.

Together with the power station, the dam helps provide electricity, irrigation and drinking water to a wide swath of southern Ukraine, including the illegally annexed Crimean Peninsula.

 

Ukraine dam breach: What is at risk?

After the breach, floodwaters swelled in the region and both Russian and Ukrainian authorities ordered evacuations of towns and villages, though neither side reported any deaths. As many as 22,000 people live in areas at risk of flooding in Russian-controlled areas, while 16,000 live in the most critical zone in Ukrainian-held territory, according to Associated Press. 

Ukraine’s Energy Ministry also said there is a risk of flooding at energy facilities in the Kherson region. Nearly 12,000 consumers in the city of Kherson have already been left without electricity, and there may be issues with water supply.

Ukrainian authorities have warned about the possibility of an environmental disaster. At the Zaporizhzhia plant, the Ukrainian utility operator and the UN atomic energy agency said that the situation was under control and there was no immediate risk to safety.

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First Published:6 Jun 2023, 09:43 PM IST
Business NewsMarketsCommoditiesRussian stocks slip to 2-week lows, crude pares gains: How Ukraine dam breach stirred global markets

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