The Return of Russian Commodities? They Never Really Left
Only natural gas could see a big drop in prices once trade normalizes.
Russian oil could be flowing back through these Spanish pipes again.
Photographer: Bloomberg/BloombergThe return of Russian commodities to the global market isn’t a question of if, but when – and under which conditions. That moment is approaching, yet the lifting of sanctions by the West and the normalization of trade won’t be as bearish for prices as it looks at first sight.
As US-Russia negotiations over the Ukraine-Russia war start, there are two competing views in the market. One says the talks will be long and winding, thus, sanctions will remain in place for months, perhaps years. The other says that relief is around the corner.
I believe the latter is more likely. Moreover, what really matters is not the sanctions, but their enforcement. And after last week, does anyone really believe the US Treasury will prioritize policing, say, Russia oil exports? Or that US diplomats are lobbying Asian countries to avoid commodities from Russia? Or that the White House isn’t cherishing for the return of American oil companies into Russia? The sanctions regime is crumbling — in reality if not in law yet.
The stakes are huge. Russia is a commodities superpower, ranking among the top five in many markets, from crude to aluminum to wheat, and is a key supplier to its neighbors. Before Vladimir Putin invaded Ukraine in 2022, disrupting flows, Russia supplied Europe with 25% of its oil; another 50% of its coal, plus nearly 40% of its gas.
The war turned the trade upside down, but Russian commodity production didn’t change much. In a few cases, output is today higher than in 2021.
That was, in part, by design. Washington, London, and Brussels faced an ugly choice: Embargo Russian commodities, and witness sky-high inflation, or allow the trade to continue, financing the Kremlin in its war against Ukraine. Instead, they took an impossible third way: Impose sanctions but with enough loopholes so the flow continues.
Hence, lifting the sanctions may not drive down prices – at least, not in the very short term. Take oil. Russian crude production isn’t constrained by Western sanctions, but rather by its own choices as a member of the OPEC+ cartel. True, Russian oil output is lower than it was in late 2021, running at about 9.7 million barrels a day, compared to 10.6 million barrels. But the output of other leading OPEC+ nations, such as Saudi Arabia, is down by a similar amount, if not even more.