Sanctions, Export Controls and Potential Commodity Impacts from Russia Ukraine crisis

In late January I had the pleasure of appearing on the Doorstep Podcast to share my views about the risks of sanctions, commodity market disruptions and other trends.

What’s the willingness to impose sanctions and costs on consumers in Europe and Globally? In a sense, I think the mixed messaging we have seen—particularly out of Germany, though more recently out of France in a different way—has been highlighting particularly these energy risks.

I think there is a willingness to act – albeit maybe on a sliding scale, depending on which ally one talks to, that in the case of a major incursion, an invasion, that does need to be met with things that might have meaningful impacts on the population.

What we have seen over this week, towards the end of January, is the Biden administration sort of saying: “Okay, well, you’re worried about energy implications. Let’s try to deal with this energy crisis. Let’s try to replace some of this.” I know, Nick, you have written about this issue, of the way that Russia was adding to and taking advantage of the energy situation and imbalances in Europe last year, in 2021, going into 2022, which complicates it.

The events of last year were partly triggered by a fundamental imbalance as the global economy reopened and Asia demanded more natural gas. We were sitting here in the summer of last year saying: “Well, there are no stockpiles. Nobody is filling up the natural gas storage. Why are they not doing that?” Putin is saying, “I’ll approve Nord Stream 2 and suddenly you’ll have a lot of gas.”

This has maybe focused the mind of saying, “Well, how do we deal with this short-term issue? Which then triggers this question mark of: “Well, where do short-term measures this year fit in with these longer-term goals around the energy transition?”

We know that among the things Russia is unhappy about—and there is a long list—is the fact that European banks won’t green-light financing of energy projects on environmental grounds, not just anything relating to the system. It is much harder to get funding for projects in Russia’s Northeast. Europe wants to stop drilling in the Arctic. . Russia is worried about CBAM, the Carbon Border Adjustment Mechanism. So there is a number of issues and different economic models that I think are at stake here.

I sidestepped your question of how much willingness. I think that part of this trying to focus and crystallize attention on where additional supplies might be is part of this effort the United States is doing to try to keep the alliance together, to try to make sure that there are not fissures that Putin can take advantage of—he, along with Xi Jinping and Chinese leaders, is very good at playing those fissures and widening them—but I think ultimately what we will see in any sanctions package will not be anything that directly targets energy supplies, it is probably more a risk from the counter-sanction side.

The other thing is that if there is a risk of military conflict, there are a lot of different scenarios that could impact energy supplies and pipelines but also grain supplies. Ukraine and Russia are big suppliers of grain. Russia already stopped exporting as much because they had a poor harvest, so actually Ukraine has been benefiting in the short term, but there are important supplies here that could exacerbate some of the doorstep issues you guys are looking at.

This has already been a year where food prices are rising. There are fertilizer challenges that come from there having big sanctions on Belarus. There are other issues where high energy prices in Europe mean that fertilizer plants aren’t operating because they are really energy-intensive. There are a lot of different pieces.

And let’s not forget that some of the biggest buyers of Eurasian grain are in the Middle East—Turkey and Egypt—and I don’t want to overstate the risks, but let’s also not forget that the Arab Spring came after a year where food prices rose rapidly in part because of poor harvests and export controls of grain from Russia.

So there are a lot of potentially challenging issues. This agriculture issue is one of the reasons why agriculture is not one of the sectors that is on this target list.

If anything, I think the worries about the impact on the doorstep for Europeans, for Americans, for global consumers, has been why the U.S. government has pivoted more towards trying to use export controls and not just what we think of as financial sanctions. Those are likely to target banks, but this thinking about cutting off the supply of electronics and of software—Russian companies have been under orders to use more domestically made software. State-owned enterprises have not done a great job replacing foreign imputs.

Import substitution is hard and it is costly, but in a sense I see that in part as the U.S. effort to look around and ask: “Well, what’s the asymmetric power we have now?” We have used some of the asymmetric power since 2014/ 2015 and Russia has adjusted to some of those measures. We might look and say, “Okay, they’re choosing not to grow, that’s a cost,” but that is a choice that they’re making.

So I do see this push towards export controls as being that attempt to try to ask, “Well, what are the things that might hit Russian doorstep issues?” But, as I think a number of people have rightly highlighted, things like export controls are longer-term structural issues.

We have seen Chinese companies adjust to some of those sorts of controls. I might say Russia wouldn’t have a harder time doing that than a Huawei or a Chinese industrial complex, but there are limitations and there are costs to all these tools, including to global trade and the like.

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