In addition to dominating the news headlines over the past month, the crisis in Ukraine has had a major impact on commodity markets.

The Crimean population overwhelmingly voted to secede from Ukraine and become part of the Russian Federation almost two weeks ago.

Western nations, led by the US, voiced their anger at the vote, declaring it illegal and responding with sanctions against Russia.

So far the sanctions have been limited in scope, with the US issuing travel bans and asset freezes on a select group of people with Putin's inner circle.

Still, it is the threat of future sanctions that has markets worried. A tit-for-tat between Russia and the US/European Union can quickly escalate into a trade war.

At the present moment there is a low probability of the US going after Russia's financial system the same way it targeted Iran last year.

Also, European nations have indicated a reluctance to slap a ban on Russian gas exports. After spiking initially at the onset of the crisis earlier this month, natural gas futures have dropped sharply in recent weeks.

Ukraine export bottleneck

A more lasting impact of the crisis has been on the price of wheat. Ukraine is the world's fifth-biggest wheat exporter and shipments from the Black Sea region are destined to countries like the US.

The Black Sea is a major transportation route for commodities and the Russian takeover of Crimea has raised the possibility of those shipping lanes being cut off.

Russia took control of Crimea's ports following its annexation of the region, and now effectively has a stranglehold on a key shipping route known as the Kerch Strait (highlighted on the map below).

Two of Ukraine's major export hubs are Mariupol and Berdyansk (two red dots on the chart), and exports from there pass through the Kerch Strait

This shows the extent to which Russia has gained leverage over grain exports from Ukraine and Crimea.

Russia could theoretically retaliate against sanctions imposed on it by choking off exports from the Kerch Strait, either through a total ban or the introduction of a levy on shipments.

Both measures are likely to drive grain prices higher.

Wheat prices jump

It is perhaps no surprise that May 2014 wheat futures (green line) have rallied strongly in the last couple of months, as the following chart illustrates:

Source: Bloomberg

The white shaded line represents the Ukrainian currency, the hryvnia, versus the US dollar.

The key takeout from the above chart is how the hryvnia and wheat futures have moved in tandem over the last two months.

The collapse in the hryvnia has coincided with the political and economic turmoil in Ukraine.

There are grave fears Ukraine will soon run out of money, with its economy likely to collapse if it fails to receive emergency funding from other countries.

The US Senate is presently debating whether to back a $1 billion loan guarantee for Ukraine. It is hoped the money will give the country's government some breathing room until the economy stabilises.

However Russian Prime Minister, Dmitry Medvedev, demanded last Friday that Ukraine pay back some $11 billion it owes Russia via discounted gas prices.

Ukraine would suffer a huge rise in the price of gas it buys from Russian state-owned energy giant, Gazprom. That could deal a significant blow to Ukraine's economy even if its government receives emergency lending.

What it means

The grim outlook for Ukraine's economy is threatens to drag the hryvnia even lower against the US dollar. The hryvnia's decline is also expected to coincide with further gains in wheat prices.

Wheat sold on global markets is denominated in US dollars. It therefore stands to reason that when the local currency weakens, farmers have an incentive to sell their wheat.

The higher US dollar fattens the revenue received for the grains when the sale is converted back to the local currency.

However this may not be the case going forward.

Rising wheat prices are providing a hedge against the declining hryvnia, and expectations for continued currency depreciation will incentivise Ukraine's farmers to hold back on grain shipments.

The weakening hryvnia is also likely to increase the price of seeds and fertilisers for farmers, as well as drive up their financing costs, which will constrain their production of wheat.

Amid this uncertainty, the collapsing hryvnia is indicating further short-term gains in wheat futures.

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