Russia Sanctions and the Geopolitics of Global Energy, Fertilizers and Metals

This story is specifically looking at how sanctions on Russia is bringing critical commodities to the forefront of geopolitics. If you want more content about the Russia-Ukraine conflict itself then read what I put together here:

My Opinion on the Concept of Russia Sanctions

Looking at the cause and effects from sanctions is one way to explain the USA’s response to military actions in Ukraine. It should also give us an idea of how USA will use sanctions to respond to future events as well.

In my view, the ability to wield sanctions is clearly one of the USA’s biggest advantages against other countries in the international system. They’ve proved to be effective in deterring countries from certain actions, such as doing business with Russian conglomerates, China’s Huawei and Iran’s state-owned oil companies.

Initially I think USA sanctions were used to target specific individuals and entities. But now what we’re seeing is a much broader use of the sanctions to target wide sectors of the Russian economy.

For instance,the two American agriculture and construction giants, John Deere and Caterpillar, both announced they would comply with sanctions, which means both Russia’s agricultural and construction sectors will be impacted. This is more significant, in my opinon, than the consumer-led brands (McDonalds and Starbucks) because Russia’s economic growth is more dependent on developing commodities at home and building infrastructure for others abroad.

One of the outstanding cases to emerge from this event is how Russia is responding to private jet and commercial aircraft lessors, a primarily Irish industry that has massive global effects. This is a global leasing business protected under international law conventions (Cape Town) worth billions, but Russia has publicly announced that all of those jets and aircraft will be nationalized if sanctions are imposed on that sector.

This is a major problem not only for those jet and aircraft lessors but for the whole international business environment. It’s situations like this that will deter businesses from operating globally, which I feel is what Russia would like to see happen. The sanctions have cut them off from many opportunities to operate globally which puts them at a disadvantage with most other countries.

Ultimately what we want to know is how are sanctions working in preventing the crisis and conflict in Ukraine?

As we know the conflict still looms large and it doesn’t look like sanctions against Russia are deterring their military invasion. It seems the sanctions are less intended to impact Russia’s military strategy, and more so to send a strong message that the USA regulatory regimes will not let their businesses do whatever they want (this is also a message to companies operating in China).

More importantly, USA sanctions are being used as a way to drum up domestic and international opposition to Putin’s regime. I question whether this political motive for the sanctions is working effectively. Clearly the invasion of Ukraine has already damaged Putin’s regime in the eyes of many people around the world. But those sanctions also hurt the Russian economy in a way that affects Russian citizens more than the regime itself; this has allowed the Russian government to bolster its argument that “anti-USA” or “anti-West” values should permeate Russian society and culture.

This is probably the most dangerous concept of the 21st century.

The Energy Dimension

In the event that OPEC+ comes to an agreement over production and supply targets, it may be too late to make a difference on prices overall, as Americans and Europeans will continue paying for higher prices.

This is a lesson that many people tend to ignore.

On the news of Russia taking over the Sakhalin-2 Project, the effects on LNG production will have an impact on global supplies; therefore, Russia has once again disrupted energy supplies in a big way — Russia already disrupted oil supplies from the Caspian Pipeline Consortium (CPC) in Kazakhstan.

In fact, Russia has disrupted Energy and Commodities in unimaginable ways, which brought the discussion of Global Food Security to the G7 Summit.

Energy and Commodities are the biggest concerns of the global economy due to the Russia-Ukraine Conflict, among other factors, as Germany is preparing for more coal plants, the United States is preparing for more mining projects like the Copper World Complex in Arizona, 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 occurring under the backdrop of USA and European sanctions on Russia’s critical LNG industry, such as Novatek’s Arctic LNG 2 project.

It’s essential to point out that even when the largest companies are pushing for ways to successfully carry out Energy Transition around the globe, that commitments to natural gas production and exports via LNG will continue to grow over time.

And as the Global Commodity Supercycle continues to drive demand for crude oil and iron-ore, among other commodities, there is going to be a lot more attention on how Russia extends its political agenda.

The Russia-Ukraine conflict has taught us that the international outlook is no longer as uncertain as before. The G7 has come together in solidarity to denounce and outmaneuver Russian aggression, while the developing world seeks to cooperate further with a more energy- and commodities-oriented economic power in Russia.

As for the macro-economy, does Vladimir Putin have enhanced leverage at this critical juncture of the Global Commodity Supercycle? This will be the ultimate question about global oil prices and LNG supplies going forward.

The Fertilizer Dimension

But looking elsewhere in the fertilizer scenario puts a spotlight on potash. Russia stopped exporting potash due to the conflict in Ukraine. Brazil acted quickly on this circumstance by pushing ahead with one of the key strategic advancements in the National Fertilizer Plan: mining for large reserves of potash underground in the Amazon Rainforest.

It’s a fact that Brazil’s potash reserves lie within lands owned by indigenous peoples. And it’s the reason for why an indigenous mining bill has been held up in the Congress. A crowd gathered for the “Earth Event” during which legendary Brazilian musician and artist Caetano Veloso led the protest against the mining bill. It was reported that Veloso met with the Senate to plead for not letting the bill pass.

Where will Brazil fit into this future global fertilizer scenario? According to the USDA, a report compiled on March 6, 2022, outlines the following data about the outlook for Brazil’s National Fertilizer Plan.

• For Nitrogen Production: 1) increase nitrogen capacity to 2.8mnt by 2050; 2) attract 2 nitrogen producers to Brazil by 20230; 3) attract an additional 4 producers by 2050; 4) allocate $10 billion for nitrogen production and output by 2030; 5) allocate $10 billion for nitrogen production and output for 2030–2040 and 2040–2050.
• For Phosphate Production: 1) 5 auctions to be held for phosphate mining areas; 2) add 2 phosphate producers to new mining areas by 2030; 3) increase the number of phosphate producers to 10 by 2040; 4) increase phosphate rock exploration by 3% annually through 2030 and 2% annually from 2030–2050; 5) enhance phosphate rock production at 27mnt annually by 2050.
• For Potash Production: 1) 5 auctions to be held for potash mining areas; 2) raise national potash production to 6mnt by 2050; 3) increase the number of potash producers to 10 by 2030; 4) add an additional 10 potash producers by 2040.

Key Points: For nitrogen production the words increase, attract and allocate should mean that international investors and companies are welcomed to set up shop in Brazil’s fertilizer industry. For phospate production the words add, increase and enhance standout as if phosphates are in high demand for Brazil’s crops, so getting more of it is beneficial to short-term demand. For potash production the words raise, increase and add are necessary for the National Fertlizer Plan, because, as I’ve already mentioned before, potash production in Brazil is in high demand due to problems with Russia and Belarus imports to Brazil; it is possibly the biggest concern for long-term industry planning.

The current global fertilizer scenario reveals some intriguing data points about production and supply. Companies like Morocco’s OCP are expanding into Africa to solve many of the countries’ food problems. USA is restricting access to its fertilizer markets, while China looks to shut down many of its export operations for domestic supply and Russia uses its fertilizer diplomacy to achieve political ends.

Voting matters.

Whether at the UNGA or in Brazil’s Congress, votes are made that have far-reaching consequences. It’s votes like these that allow countries to push their strategies, such as Brazil’s abstention from the vote to suspend Russia from the Human Rights Council. In addition, countries from the Middle East and North Africa — Morocco, Qatar, Oman, Saudi Arabia and Algeria — have stepped in to fill the void of Brazil’s fertilizer import dilemma. While Jordan hopes to keep its potash fertilizer exports, valued at $70 million in 2021, replacing Russian exports for the forseeable future.

The Metals Dimension

In the case of Russia, combating sanctions is a key part of the country’s economic development in the future.

These metals are becoming so valuable to the global economy that Russia (plus others) must carefully consider how its industries will avoid sanctions from the United States and European Union. Avoiding the massive blow from sanctions due to its invasion of Ukraine would be a high achievement in their overall strategy to defend Russia’s nationalist policies.

Whatever happens with Russia’s commodities and the impact brought on by related industries from sanctions, will have an effect on the relationship between Russia and China, which will also cause great concern to the USA and European Union.

The fact is that the Russia-China strategy is still very uncertain to how far it will go, though China’s Chairman and President Xi Jin Ping did stand by Vladimir Putin’s side irrespective of the war in Ukraine, which in my view shows a lot about the direction of the two countries common interests in world politics.

The Olympics is certainly one of the largest stages to make such a statement.

I argue that China is likely to face tough decisions in the future about the consequences from increasing exposure to Russian commodities, particularly metals such as copper and nickel, for which Russia has production capacity and strategic reserves to keep supplying China with these critical metals in the future.

China is also less likely to get tangled up in the ESG Paradigm Shift and the related issues to their economic projects abroad with a dependence on these vital commodity exports from Russia. This would be an advantage to China’s strategic dilemmas vis-a-vis the United States in the future.

To understand what is happening more broadly in the metals industries, I suggest reading this piece I wrote about the nickel trading crisis on the London Metals Exchange (LME) in March 2022. It includes information about China, Indonesia, Australia and Tesla. My overall opinion in this writing is that the metals industries will become a bigger factor in a country’s strategy in the future, while companies such as Tesla and BHP are bearing the burden of the geopolitical crosshairs, especially in the aftermath of Russia’s invasion of Ukraine.

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