Russian ‘Force Majeure’ on Resource Exports Could Clobber Western Economies: Here’s Why
19:12 GMT, 12 September 2024
President Putin has asked the government to consider restrictions on the export of strategic materials like nickel, titanium and uranium in response to unfriendly countries’ actions. Sputnik asked investment experts specializing in resource markets how these restrictions would impact the world economy. In short: it wouldn’t be pretty for the West.
SputnikInvestors and market experts are buzzing over the Russian president’s instructions to Prime Minister Mishustin to whip up a report on measures Russia could take to limit the export of certain strategic minerals in response to Western sanctions policy, with uranium stocks
enjoying an immediate price surge, and observers warning of shortages and hefty price increases for strategic metals if were to Moscow move forward with restrictions.
Along with nickel, titanium and uranium, Putin hinted that “other” resources may be affected, while emphasizing that restrictions should be considered so long as “this does not harm us.”
A resource superpower, Russia is endowed with substantial reserves of virtually all the primary commodities required to keep a modern economy functioning.
The country possesses up to 12% of the world’s oil reserves, 32% of its natural gas, 8% of all untapped uranium, and 11% of the planet’s coal.
Russia accounts for 25% of global iron reserves, 33% of nickel, 15% of zinc and titanium, 11% of tin, 10% of lead and rhodium, 8% of chromium, 7% of copper, 3% of cobalt, 2% of bauxite and about 1% of gallium, plus substantial amounts of beryllium, bismuth, and mercury. Russia also has about 12% of global potash (used in an array of areas, from agriculture and industrial chemicals to pharmaceuticals).
Up to 23% of the world’s gold, 12% of silver, up to a fifth of platinum group metals, and as much as 55% of diamonds are buried under Russia’s soil.
Russia is also a potential world leader in the production of rare earth minerals (which are used in an array of modern high-tech devices, communications systems and advanced weaponry). While it only accounts for about 2% of rare earths production today, Russia has the second-largest reserves, constituting up to 28.7 million metric tons, and has committed to major investments in production and processing. Known rare earths possessed by Russia include samarium, europium, gadolinium, lanthanum, neodymium, promethium, and cerium.
World's Dependence on Russian Resources
Russia’s detractors have often played up its resource exports as a sign of the country’s lagging development or low place in the global hierarchy of ‘developed vs. underdeveloped’ nations. However, the partial breakdown in ties with Western countries after 2022 showed that while Russia can definitely survive without Western technological and consumer goods, the same cannot be said of the West when it comes to Russian oil, gas, uranium, fertilizers and other materials.
The US, for instance, continues to rely on Russian uranium to fuel its nuclear power plants, vowing to wean itself off its dependency
only by 2028. Europe, having largely cut itself off from Russia’s cheap and dependable pipeline-delivered natural gas, is currently
buying record volumes of Russian LNG amid shortages of US and Gulf-sourced supplies. Furthermore, major Western agricultural producers including the US, Germany, France and Poland have
carved out special exceptions for themselves to allow the continued purchase of Russia’s world-class nitrogen fertilizers, which are energy-intensive to produce.
“The pain” of a Russian freeze on strategic resource exports “would be felt by both the US and the EU, and all countries listed as ‘unfriendly’ to Russia, as they would have to source the required elements from third country suppliers, and that would entail an appreciable price increase for the commodity, and the extended supply chain costs that entails,” Paul Goncharoff, general director of consulting firm Goncharoff LLC, told Sputnik, commenting on Putin’s proposal.
“In this case, most if not all alternative suppliers would be countries listed as ‘friendly’ to Russia. This is a value-added benefit for those countries,” Goncharoff added.
“In every instance the end user pays this mandatory unlegislated tax bill in the form of even higher inflation,” Goncharoff said, hinting that the higher commodity prices would add to the pain already being experienced by producers and consumers in many Western countries as a consequence of the two-and-a-half-year-old hybrid war against Russia.
The US and Europe should expect a 15-20% bump in the costs of its strategic resource imports if Moscow moves ahead with the restrictions, especially since Russia is in a unique position globally in the production of high-quality nickel, aviation-grade titanium, and enriched uranium, says Maxim Khudalov, chief strategist at Vector X, a Moscow-based investment and brokerage firm.
For instance, while Russia today accounts for 'only' about 8% of total global nickel output, it accounts for about 20% of the production of “high-grade nickel used to produce high-quality stainless steel and nickel-containing alloys, which are needed for space, aviation and defense technologies,” Khudalov explained.
The same goes for high quality titanium, Khudalov said, pointing out Russia’s titanium giant
VSMPO-AVISMA in Sverdlovsk region is
“unique in the world” as far as its ability to produce vast amounts of aviation-grade titanium is concerned.
Finding a replacement supplier would take time, including running a gauntlet of quality and safety testing and recertification which could take years, and in the case of aviation-grade titanium be required to meet strict temperature, bending, pressure load and other requirements, the expert noted.
“In an airplane, you can’t just say ‘well, I don’t like this supplier of an element used for the wing, I’ll take it from somewhere else.' Nothing of the kind. If you replace the element used in the wing, you change the airplane, and have to retest it, because it’s no longer safe for civilian use,” Khudalov explained. “The conclusion here is that it is very difficult to replace Russian supplies in the aviation industry, requiring significant recertification efforts.”
If Europe loses access to Russian aviation-grade titanium, that would add to Airbus’s production costs, affecting the aviation giant considerably in its high-stakes rivalry with Boeing.
Meanwhile, higher nickel costs would mean higher prices for virtually all of Europe’s high-tech products, from electronics to specialized mechanical engineering products, Khudalov said, emphasizing that “all of this will become more expensive in Europe and again allow their American ‘friends’ to grab the remainder of their markets.”
“In this sense, Europe is more vulnerable than the US, because the US, with all its capabilities, can afford to increase production costs, at least because their energy is cheap. Europe cannot afford any increase in production costs and will objectively lose,” Khudalov said.
In the case of enriched uranium, the situation is even more complex, according to Khudalov, because it is a restricted resource typically exported to a specific customer for a specific use, and planning for the replacement of suppliers is a long and painstaking process, since nuclear power plants can’t simply be turned on and off at will.
“The French are the second player after Russia in uranium enrichment, but Russian enrichment technology is head and shoulders above anyone else in the world, and our enrichment costs are 35-40% cheaper than anywhere in the world. So if a country is forced to switch to French-sourced material, it will have to pay a very hefty premium,” Khudalov emphasized.
In that sense, France could meet increased US demand over time, but not overnight, since it would have to ramp up its own enrichment capacity.
“The US themselves were planning on disconnecting from our uranium starting in 2028. Well, we could ‘help them’, so to speak, to implement their decision by making deliveries more regulated,” Khudalov suggested.
Short-Term Losses, Long-Term Win
Russia, over the short term, could lose a bit of its export revenues if resource exports to the West were suddenly curtailed, Khudalov noted.
“But on the other hand, what do we need export revenues for? Generally speaking, the whole point of international trade for us is to sell raw materials in exchange for technology. Western countries have refused to supply us with technology basically going back to 2014. Then the question is: why do we continue to supply them with strategic raw materials? To get some green pieces of paper which they then seize from us? This is a rather strange position. Therefore, here it is turning out that since they limit our access to technology, we are starting to limit their access to raw materials,” Khudalov said.
“It can’t be said that all these possible restrictions on the Americans and the Europeans are critical and would kill their industry. It won’t. But it will add very serious difficulties, first and foremost of an organizational nature, because they would have to look for a supplier of comparable quality, and of course, pay a price they’re not accustomed to paying. Because when a force majeure occurs on the market, and for them this would constitute a force majeure, any normal businessman will be obliged to take advantage of their status as an alternative supplier. Most of the alternative suppliers are located in China, with whom the Americans are in the process of kicking off a global trade war,” the observer stressed.
“The cherry on the cake is that the president’s proposal sounded like a proposal to limit the supply of strategic metals to unfriendly countries, but probably implies no restrictions for friendly countries. In that case, we would deliver a nice pass to China, whose entire industry is aimed at producing high-tech equipment, and would effectively get a 15-20% advantage on the cost of strategic materials over Western competitors,” benefiting Beijing in its push to put “pressure on Europe and the US in all markets” globally, Khudalov said.
Russia, meanwhile, will be able to reorient its strategic metals exports to other major alternative markets as well, including India, according to the expert.
As for uranium, Russia is ramping up peaceful nuclear power cooperation with countries in the Global South, from Bangladesh, China and India to Mongolia, and has a number of exciting domestic technologies and projects in the works that could use the extra capacity, from the unique-in-the-world
Lomonosov floating nuclear power plant, to new series of small, modular, low cost and secure reactors, Khudalov summed up.