How The Scenarios In Russia’s Arctic Strategy & EU’s Industrial Policies Will Affect Global Markets
Coal was not phased out by the G7 countries during this year’s G7 Summit in Tokyo, Japan. The G7 Summit primarily revolved around Africa and the challenges they countries are facing with energy and food security. But these results are a reflection of EU industrial policies and energy demands.
Liquified Natural Gas (LNG) was at the top of the G7 agenda at last year’s summit in Germany. Here were the following results:
- 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 to EU’s energy supplies in the future. As governments prepare for the upcoming winter seasons; they must also compete for new sources of energy with other countries in Asia markets.
To illustrate the role of LNG, just look at France. On 5 September 2022, French President Emmanuel Macron announced 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 LNG imports to European market. 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.
However, since Russia’s industrial policies now favor deeper collaboration with China and the Asia-Pacific region, EU energy regulations have yet to determine how effective Russia’s strategy is to combat the sanctions from the U.S. and EU at present. Because the European region has one of the fastest growing industrial base economies in the world, which means more raw materials are needed to ramp up industrial production.
Russia has also been successful at overcoming the sanctions regimes, in certain case, like the proposed metal merger between Norilsk Nickel and Rusal.
Norilsk Nickel «Норникеля» is a Class 1 nickel producer and the world’s largest producer of the base metal. The company is also Europe’s largest supply of nickel, which has deterred the European Union (EU) from applying sanctions on the company and its affiliates. But it didn’t stop the United Kingdom (UK) from sanctioning Nornickel executive Vladimir Potanine on 29 June 2022.
Potanine responded after the sanctions were announed by the UK goverment with this statement:
“We have a fairly huge volume of mutual relations with UK banks and UK entities that arranged loans for us. Therefore, we are analyzing now the extent of the effect on the company. We definitely understand there will be no negative impact on its stability but certain loans will probably have to be repaid in advance.”
Due to sanctions Nornickel is seeking to merge with Rusal «Русала» in what has been heralded by Potanine as a “national champion” to defend Russia’s nickel industry against the economic impact of sanctions from USA and EU as a result of the war in Ukraine.
According to Reuters, the metal merger has the potential to reach a revenue of $30 billion due to the two companies’ exposure to palladium, nickel and aluminum. These three metals are crucial to the global economy as the world strives for Energy Transition and a more commodity-centric investor marketplace.
It was reported by several sources that the sanctioned Nornickel executive, Vladimir Potanin, must step down as an executive of the company in order the the Nornickel-Rusal merger to be successfully completed.
On 22 July 2022, the London Metals Exchange (LME) announced publicly that it would not immediately ban the prosposed metal merger and would instead carry out an investigation of the sanctions.
An LME spokesperson issued this statement to S&P Global Platts, “We are looking into the detail of the sanctions and what it may mean for the LME, its participants and Norilsk brands.”
But this hasn’t affected the UK government’s position on sanctioning one of Russia’s richest persons. As the spokeperson also pointed out:
“Potanin continues to amass wealth as he supports Putin’s regime, acquiring PJSC ROSBANK, and shares in JSC Tinkoff Bank in the period since Russia’s invasion of Ukraine. As long as Putin continues his abhorrent assault on Ukraine, we will use sanctions to weaken the Russian war machine. Today’s sanctions show that nothing and no one is off the table, including Putin’s inner circle.”
To understand the significance of this massive metal merger, however, requires an in-depth look at how geopolitical trends and global commodities are affecting overall strategies of Russia and China.
This metal merger intends to succeed in the strategy of combining two large (national) companies into one massive entity controlled by the Russian state itself.
These metals are becoming so valuable to the global economy that Russia (and China) must carefully consider how its industries will avoid sanctions from the U.S. and EU. Avoiding the massive blow from sanctions due to Russia’s invasion of Ukraine will be one of the highest achievements to defend the county’s nationalist policies toward the West.
However, the company would be forced to reconsider its supply chains in the aftermath of sanctions as a broad base of Russian industries have been hit with sanctions from the United States and European Union. For instance, Argus Media reported that Nornickel has considered re-structuring its logistical partners by sending more shipment through the Middle East and North Africa (MENA), an area which is critical to the sustainability of Russian exports through the eastern corridor.
The talks about reconfiguring supply routes has come in tandem with one of the Russia’s strategic dilemmas: the Arctic Strategy.
Russia’s Northern Sea Route (part of the Arctic Strategy) seeks to increase exports via transshipments of products through North African ports that will reach Asian markets that have a high demand for the base metals of nickel, aluminum and copper, where Nornickel and Rusal could increase production from plants on the Kola Peninsula and in Monchegorsk of the Murmansk region on the Arctic Ocean.
Evidence is already showing that Russia is expanding its oil exports to China via this vital sea route within the Arctic Strategy.
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