19. July 2022

The massive Russia Risk Premium: How to tackle it and what to avoid

Given Russia’s major influence in the global oil and gas market as a key producer and exporter, its invasion of Ukraine has pushed energy prices to multi-year highs. The West is seeking to punish and isolate Moscow by hitting at the nation’s biggest revenue earner, sanctioning its oil and gas exports, either via an outright embargo or price caps, or a combination of both. As a result, a tangible risk has emerged that the country’s production may fall, with clear consequences to global supply and demand balances. The uncertainty has prompted traders and investors to assess the risks associated with this potential drop, and hedge against it – generating what we call the Russia Risk Premium (RRP). This is the theory. But in practice, how large is the RRP?