Divergent and Convergent Scenarios For Global Commodities During the Russia-Ukraine Conflict

This writing was inspired by Gergely Husz’s The Role of Technology in Russia — Ukraine War. Gergely Husz puts the technology and information aspects together to illustrate how the dynamics of international warfare are shaping the Russia-Ukraine conflict and future trends in warfare.

I will expand on what’s happening in global commodities with some updates about them during the ongoing Russia-Ukraine conflict. However, in order to understand more about my views on strategy in international relations (IR) I suggest reading what I put together about A New Era of Adversarial Geopolitics Is Beginning on the Indo-Pacific & Arctic Oceans.

Commodities are global in nature. The only attention being truly paid to regional development is about large investments in infrastructure — these investments do not seek to enhance regional connectivity, but give an advantage to a producing country so that it can more efficiently transport raw materials to markets far away from the original source.

This is the essence of the Arctic Strategy, Belt and Road Initiative (BRI) and Indo-Pacific Strategy: all of them revolve around the maritime domain while also seeking defense mechanisms through military cooperation.

In my view, this is the future trends for which the world is headed. Whereas countries are rethinking industrial policies, while also emphasizing the need for new security measures to industrial assets as a result of nascent, unpredictable cyber threats from adversaries. An adversary, or group of adversaries, can target an industrial asset because it has immediate results, and which the perpetrator can determine the trajectory of action on the cyberattack. Governments, corporations or even individuals could be consumed in a cyberattack that effectively shuts down an industrial asset or network which it is operating on.

It’s very important to undertand this phenomenon in the context of sanctions on Russia and China. Under the backdrop of a resurgence in global commodities, the legal aspects of Russia’s sanctions include industrial asset seizures and targeted oil and gas mergers with Russia’s national companies. Both of these aspects have a cybersecurity dimension

What this means at a political level is that Russia intends to transform its industrial policies in a way that favors the “anti-West” rhetoric; from a geographical point of view, raw materials are located in vulnerable areas where supply chains are being disrupted by sanctions. This is why Russia must expand its “sovereignty” over global commodities.

Simply put, this is Russia’s geopolitical objective within the context of global commodities, hence the critical nature of the China-Russia relationship. China basically has the same geopolitical objective within the context of global commodities, which is why the two countries could seek to dominate raw materials in some of the world’s most vulnerable areas.

If you ask me, though, it seems like the world is still desperate for the commodities that have been lambasted as a tool of influence for adversarial governments, bringing in some key concepts about the effect of foreign policy aims: For which commodities? Against Whom?

In this scenario of the world, it’s a pretty scary place to live in, since the demand for raw materials, commodities and energy are producing effects in the foreign policy area of many countries today, including in both developing and developed areas — I’ve already written extensively about the illustrations of this theory from the perspective of how countries and corporations are formulating industrial policies around oil and gas while preparing for the Energy Transition in the future.

These strategies are being carried out under the backdrop of increasingly volatile global markets and diverging geopolitical trends, which have put global commodities at the forefront of geopolitics. For instance, the of future industrial production revolves around future facing commodities which means that industrial policies are also being regulated by Environment, Social, Governance (ESG) framework with respect to global commodities.

Moreover, the China-Russia relationship is not only a cause of concern for the United States and European Union but also enhances the narrative around geopolitics and commodities: a paradigm shift whereby global commodities are at the forefront of geopolitics and ESG corporate frameworks.

The strategic dilemmas for both China and Russia reveal that advancements and achievements in the new Space Race are a top priority for their geopolitical objectives vis-a-vis the United States and European Union.

The competition for this new Space Race allows for China and Russia to use this adversarial geopolitical scenario as a political tool of information to use against the United States and European Union, to the effect of bolstering “anti-Western” values of their domestic populations. While both countries seek to dominate the production and supply of raw materials, of which those commodities are directly linked to the aerospace industry, and therefore are susceptible to geopolitical tensions. The evidence of this trend is apparent in legal cases revolving around food security and energy dependence.

The Nord Stream 2 and South China Sea are two examples that explain how energy, commodities and maritime areas will form a synthetic issue-area in determining dispute resolutions within the framework of international conflicts in the future.

Moreover, both of these disputes will continue to face dynamic maritime threats from non-state actors, such as extremists and pirates, who have been given very little attention to maritime law issues due to the significant interstate tensions in international politics.

In fact, these tensions have become so outstanding that two grand strategies have been developed and publicized as a vision for the future of World Order: the Indo-Pacific Strategy (IPS) and the Maritime Silk Road Initiative (MSRI) (part of the Belt and Road Initiative), of which the maritime dimension is the focal point of these strategies.

Like the Nord Stream 2 and South China Sea dispute, both the IPS and the MSRI serve as indicators that the world has entered into a new era of Adversarial Geopolitics. (Ignore the “new/next Cold War” jargon).

For instance, these competing visions for the future of World Order encompass a wide array of areas and actors — like the Nord Stream 2 Pipeline and South China Sea — so it’s worthwhile to analyze how these maritime strategies are driving the future of the global economic activity too.

The Eastern Economic Forum (EEF) is definitely a way for Russian Federation President Vladimir Putin to flaunt the foreign policy goals and bring together a coalition of countries that submit to Russia’s power.

Many people will probably judge this forum as irrelevant due to the actors that are present, but in fact, both Myanmar’s military junta leader and China’s foreign policy minister were in attendance.

However, since Russia’s industrial policies now favor deeper collaboration with China and the Asia-Pacific region, this forum is very important in understanding how Russia’s strategy to combat the sanctions from United States and European Union. Because it is the region with the fastest growing industrial base economies in the world, this means more raw materials are needed for economic development of those countries.

On October 18, 2021, a security pact was signed between U.S. Defense Secretary Lloyd Austin and Georgia’s Defense Minister Juansher Burchladze, in response to Russia’s expansion in the Black Sea. The meeting came after the Biden Administration approved foreign military sales (FMS) to Georgia worth $30 million, including Javelin anti-tank missiles and launchers. As the US had already been providing military assistance to Ukraine, the FMS to these countries proves that the United States is taking the Russian threat to these countries very seriously.

Speaking on the security pact with Georgia, Donald Jensen of the United States Institute for Peace (USIP) asserts that “even though the military situation is relatively at a standoff [in 2021] Russia tries to undermine Ukraine in other ways.” This implies that more military assistance might not be enough to deter Russia’s actions in the future. That’s why it has been the Biden Administration’s strategy to compel Russia by both military and economic means — a combination of military assistance to Russia’s neighbors, as well as forcefully applying economic sanctions on Russian individuals, entities and business sectors.

On March 29, 2022, peace talks were held in Istanbul, Turkey, whereby Ukraine President Volodymyr Zelenskyy acknowledged that, because Ukraine could not be allowed to join NATO, then a viable option would be for Ukraine to accept neutrality — under the condition that security guarantees would be provided by the United States, France and United Kingdom. However, in order to appease Russia, the Ukrainians offered not to apply such security guarantees to the Donbass region. The Donbass region of Ukraine, according to George Friedman of Geopolitical Futures, “was always a pro-Russian region, where the Russians have special forces there.” Due to Russia’s lack of progress with fighting in Donbass, Friedman claims that Russia’s overall invasion has weakened morale, and thus Russia intends to launch an offensive during this “window of opportunity” before USA’ military assistance arrives in Ukraine.

EU officials have called Russia’s demands for Ukraine to “demilitarize” unreasonable and that Ukraine needed more military assistance to stop the Russian invasion. At the same time, analysts have argued that a “proxy way” is being initiated by countries outside of Ukraine in response to Russia’s so-called “special military operation.” Proxy wars have been defined as a way to de-escalate conflict and increase leverage over the disadvantaged country in a conflict. In this case, Ukraine is the country seeking leverage at the negotiating table with Russia. In fact, former CIA director Leon Panetta is confident that the proxy war between USA and Russia has already begun, “[USA] are engaged in a conflict here. It’s a proxy war with Russia.”

I highlight these two events above — U.S. security pact with Georgia and the peace talks held in Turkey — because the experts have completely ignored the issues surrounding the Nord Stream 2 (NS2) pipeline. This is significant because the politcization of NS2 brings out all of the issues revolving around the future of industrial policies.

In the publication Transatlantic Perspectives, Michael Gorecki lays emphasis on NS2 as one of the main catalysts of the Russia-Ukraine conflict. This speaks to the misconceptions throughout world media about why the war intensified this year. I agree with this perspective completely.

However, I disagree with the idea of abandoning the NS2 pipeline. The politicization of the pipeline should not be intensified, otherwise, it is likely to serve as a symbol of the Russia-Ukraine conflict for decades to come.

The NS2 pipeline should serve as a means for cooperation and ensuring energy supplies to the European markets — I understand this notion sounds barbaric given the current circumstances — but the NS2 will not just simply dissappear, nor will the vasts amounts of investments and demand for energy worldwide, so some practical demands must be given over the nature of NS2’s role in the global economy. All we can do, it seems, is work toward de-polticizing the NS2 as much as possible, in hopes that NATO enlargement and natural gas issues are resolved accordingly.

Liquified Natural Gas (LNG) was on the top of the energy affairs agenda at the Group of Seven (G7) Summit in Germany in 2022.

The G7 rejected demands from Russia that countries pay for natural gas exports in Russian rubles, after Russia’s President Vladimir Putin announced that “unfriendly” countries should respect Russia’s banking regulations in the future. By threatening to convert natural gas contract to rubles, European utilities companies are weary of an emerging energy emergency ahead of the 2022 winter season.

The G7 not only agreed to a plan that would put a price cap on Russian oil imports, the Group of Seven also formulated its joint statement to reflect both the climate change policies and the current concerns over the global energy crisis. Notably, the joint statement called for increased production of LNG and nuclear power sources, while adhering to a “fully or predominately decarbonized” global economy by 2035. Although the G7 continued to lambast coal production, they noted that LNG needed investments to address global energy needs.

All of this activity in the LNG sector is critical as governments prepare for their energy supplies for the upcoming winter season. It’s also a signal to the world that companies are searching for new sources of energy during such volatile times for the oil and gas markets.

On 5 September 2022, French President Emmanuel Macron announced to the public in Paris that the so-called France-Spain Midcat pipeline project should not go forward, indicating that current pipeline are only operating at about half capacity.

According to Spanish Energy Minister Teresa Ribera a gas pipeline from Portugal, through Spain, could be built in less than one year for the benefit of France, Spain and other European energy consumers. Calling it a “new interconnection” German Chancellor Olaf Scholz agreed that the pipeline would be beneficial to Europe’s energy supply dilemmas.

This is essentially an issue of increasing liquified natural gas (LNG) imports to Europe. With the capacity of Portugal to receive LNG at its terminals on the coastline, it is a perfect way for France to receive more imports of LNG. However, this plan has been in the works since 2019 as the Spanish grid operator Enagas called for the pipeline to be abandoned.

On 12 September 2022 it was reported by TradeWinds that China’s top shipbuilder, based in Jiangsu Province, was awarded a license enabling it to build new LNG carrier capacity with some new technological components.

The license agreement was made with Singapore-based GTT with the purpose to use membrane technologies owned by GTT.

Upon the agreement between the two companies, chief executive of Yangzijiang, Ren Letian, said: “The awarded license will enable us to make strategic inroads into the large LNG carrier market, which we previously have not been able to penetrate into…This is a landmark achievement, and we are proud to be the first private shipyard in China to obtain the license.”

According to Llyod’s List Yangzijiang is the only privately-owned shipbuilder in China to recieve such a lucrative opportunity to expand on LNG carrier capacity.

Yangzijiang also has some major shipbuilding projects in the pipeline:

1. “TIGER MAANSHAN” — a shipbuilding construction project classified by the China Classification Society (CCS)
2. Tianyang Green Ship Technology (T-GET) — a manufacturing plant for LNG fuel tankers through a joint-venture of Yangzijiang and Mitsui Shipbuilding Company
3. Tiger Longkou — the world’s largest dual-fuel LNG tank carrier constructed by Yangzijiang for Hong Kong’s Tiger Gas

Notwithstanding the potential liabilities from African energy supply in the future, the Chinese LNG carriers are a potential savior for the European energy demand in the near-term.

An uptick in liquified natural gas (LNG) demand revealed some new activity in the energy sector during the peak of oil and gas demand this summer. This included competition for LNG tankers among the world’s largest energy companies — TotalEnergies, Shell, China Unipec — to stock up on LNG supplies ahead of the winter season in 2022.

Because of this trend the price of LNG carriers is rising to the highest levels in 10 years, at around $120,000 a day, as LNG import demand is expected to grow higher and higher for developed countries.

It’s essential to point out that even when the largest companies are pushing for ways to successfuly carry out Energy Transition around the globe, that committments to natural gas production and exports via LNG will continue to grow over time. TotalEnergies even highlighted in its 2021 Energy Outlook that natural gas and renewable energy sources would play complementary roles to achieving the energy transition toward Net Zero.

Analysts however believe that the European Union (EU) hasn’t done enough to meet these challenges. Writing for Oil Price Irina Slav noted that French and German industries have been too late to develop LNG development plans and production capacity, such as terminals, while environmental regulations were also likely to stall upcoming LNG projects in Canada.

That’s why theres so much focus on Africa now. One of the concerns is how geopolitics and international events are going to affect the global energy outlook and prospects in the context of Africa.

For instance, Algeria and Morocco have both announced plans to source more gas reserves to the benefit of TotalEnergies, Eni and USA exporters. But underlying political and territorial issues between those two countries are inevitably going to be a major problem. Algeria cut off Morocco’s access to its gas pipeline in 2021 after Morocco announced that it would develop LNG terminal capacity.

Upstream has been writing about energy companies that are exploring Africa’s potential for LNG pipeline infrastructure as an alternative to Russia and Persian Gulf producers. Siva Prasad of Rystad Energy said “Asian and European importers will need to consider African priorities as they develop projects, as many African producers are focusing on supplying energy locally as well as to intra-African markets, along with catering to global markets.”

Prime examples include a a proposed natural gas pipeline from Tanzania to Zambia.

On 3 June 2022 that Kazakhstan would change the name of its vital oil exports to Kazakhstan Export Blend Crude Oil (KEBCO) to avoid the USA’s and Europe’s sanctions risks on oil originating from Russian sea ports.

In the fray of the Russia-Ukraine conflict narratives it was easy to miss what has been happening with Kazakhstan’s oil export crises during these tumultuous times for the oil & gas industry. I compiled a list of events about the Caspian Pipeline Consortium (CPC) below.

The CPC is a 1,500km pipeline beginning at the Tengiz field in Kazakhstan. Big international companies such as USA’s Chevron (15%) and ExxonMobil (7%) each have stakes in the crude oil capacity of the CPC.

23 March 2022 — The CPC warned that disruption to oil shipments were very likely following storms in the Black Sea during March that required major repairs and equipment replacements — “an emergency set of replacement hoses”. Oil tanker loadings were stopped at the Novorossiysk terminal but continued to accept oil while onshore storage facilities filled up space. Deputy prime minister of the Russian parliament Duma said that CPC’s foreign shareholders should get ready for repairs by international companies, as they were blamed for the disruptions.

28 March 2022 — The CPC began to resume oil tanker loadings. This was less than 5 days after announcing disruptions to operations from storm activity on the Black Sea. However, repairs were still needed desparately by foreign companies, for which the USA and European sanctions might have come into play. It was stated by the Kazakh Association of Oilfield Services Companies that the country could lose over $1 billion in revenues if the repairs were not finished within a two-month time frame.

29 March 2022 — Kazakhstan’s Energy Ministry said that daily oil output would be cut back by 320,000 barrels. They also announced that this cutback was a planned way for the country to meet OPEC compliance measures.

13 April 2022 — Rostekhnadzor, a state technical compliance institution of Russia, began carrying out unscheduled inspections of certain segments of the foreign-operated oil export pipelines of the CPC in Kazakhstan. During this time it was reported that oil terminal bottlenecks had been removed and that large international companies were able to partially lift restrictions on their production.

25 April 2022 — The CPC announced that oil operations would resume at full capacity at the Novorossiysk terminal in Russia.

Interestingly, Kazakhstan was seeking to sell exploration and production rights for 60 blocks to international investors on on 21 March 2022.

Russia possibly used this moment after the Black Sea storm to ensure Kazakhstan its control over the Novorossiysk terminal was critical to the operation of the CPC oil exports.

Moreover, some of the most intense fighting in Ukraine occurred at Mariupol whereby oil tanker businesses at the Novorossiysk terminal were able to acquire a “war risk insurance premium” — a sign that the Russian war effort was indeed having an impact on the CPC and Kazakstan’s crude oil exports.

What does this mean for the future of the CPC?

Kazakhstan’s government understands that both Western oil interests and Russian oil exporters matter a great deal to the country’s own ability to export crude oil and increase oil production revenues. Just because Kazakhstan changed the name of its vital oil exports to Kazakhstan Export Blend Crude Oil (KEBCO) doesen’t mean it will be able to avoid the USA’s and Europe’s sanctions on oil originating from Russian sea ports.

The ultimate test of USA and Europe sanctions will be playing out in areas such as Kazakhstan and the wider Central Asia region, where those countries are the most susceptible to Russian influence, yet need Western oil imports and international investors to decrease reliance on Russia. I don’t see this problem getting solved in the near-term.

For Kazakhstan, the long-term problem is going to come down to the success of Russia’s political leverage and military strength to ensure that their economic interests, particularly crude oil exports from the CPC, stay intact in the future without any interruptions from USA and European sanctions.

In the aftermath of the Russia-Ukraine conflict, oil and coal production has become one of the biggest concerns of the global economy. It will affect the broad base of global commodities for the entire industrial production base.

Germany is now firing up coal plants, Canada’s mining company issued a preliminary economic assessment (PEA) for its Copper World Complex located in Arizona of the United States, and France’s President Macron is in talks with Romania to revive an old railroad transportation route from Odesa to the Danube River to increase grain exports from Ukraine to international markets.

All of this economic activity is occuring under the backdrop of USA and European sanctions on Russia’s critical LNG industry, such as Novatek’s Arctic LNG 2 project.

The St. Petersburg International Economic Forum was used as a stage for Russia to show the world how it is commited to its political agenda.

In the words of Russian President Vladimir Putin:

The Forum’s anniversary is taking place at a difficult time for the entire international community. The mistakes of Western countries in economic policy over many years and illegitimate sanctions have led to a wave of global inflation, the disruption of usual supply chains, and a sharp increase in poverty and food shortages. Yet, as can be the case, along with these challenges, new prospects are emerging. This is why the Forum’s slogan — New Opportunities in a New World — seems so relevant.

“New Opportunities in a New World” sounds like classic revisionism, but it also indicates how important Russia is — or at least thinks it is — to the global commodities. For instance, China’s President and Chairman Xi Jin Ping stood by Russia at the St. Petersburg Forum in claiming that “the era of the unipolar world” being led by the United States was over.

While most people will understandably focus on the inhumane war effort launched by Russia against Ukraine, with the surge of international refugees and internally displaced peoples (IDPs) all over the world, global commodities are driving the economic power of countries like Russia.

This allows Russua to revise the whole situation in the post-Soviet territories of Central Asia. Kazakhstan is worried — extremely. It has had to use the St. Petersburg Forum as a way to committ to the world its territorial integrity in the face of looming Russia threat on its border.

This is in many ways of desperate plea to the world — The United States? — for promoting the cause of Kazakhstan’s sovereignty for a country that has much to lose from USA and European sanctions on Russia’s oil and gas industries.

I’ll be publishing The Weekend Brief (TWB) regularly touching on aspects of the global markets (including stock markets) which are at the nexus of tech, industrials and global commodities. Please follow the publication Areas & Producers to read more content about the future of core areas and critical producers of the global economy.

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