Price debates may seem secondary at the moment. However, Russia’s wealth in raw materials is not only crucial for financing its military, but also for energy and mobility in the West.
The sanctions against Russia because of the Ukraine war are already considerable – but the West is still keeping a potentially particularly drastic step in reserve.
What could happen if sales of gas, oil, coal, metals and other basic materials from the resource superpower are banned?
When it comes to energy and natural resources, vulnerability is high. The World Bank and International Monetary Fund warn: “The effects of the war are spreading to other countries, commodity prices are being pushed up and could fuel inflation – which would hit the poorest hardest.” Depending on the sub-area, various scenarios for increased supply from other sources are under discussion.
1. Gas by pipeline
According to data from the Federal Institute for Geosciences and Natural Resources (BGR), Germany recently obtained more than half of its natural gas requirements from Russia. The gas flows through transit pipelines through Ukraine and Belarus and through the Baltic Sea via Nord Stream 1. Nord Stream 2 certification halted due to attack on Ukraine. Other important natural gas suppliers for Germany are Norway (a good 20 percent) and the Netherlands (about 11 percent).
German funding is declining, and it can still cover 5 to 6 percent of domestic consumption. For comparison: According to earlier BGR figures, the Bovanenkowo deposit alone on the Yamal Peninsula could theoretically supply Germany alone for 60 years.
The largest gas fields in the Russian Federation are located in the North and Far East. In terms of world exports in 2020, Russia was in first place with a share of more than 17 percent, well ahead of the USA and Qatar. Since then, some countries have become even more dependent on imports, says Stefan Ladage from BGR. Business with China is also growing, but essentially the Russians continue to sell their gas to Western Europe. Turkey is also a big buyer.
In addition to being used as heating or fuel, natural gas mixtures are essential for the chemical industry and other sectors. In the energy transition, the gas, whose combustion usually releases less CO2 than liquid hydrocarbon mixtures, is to be used as a “bridge”. On a world scale, Ukraine is rather insignificant as a gas producer, but it is a large consumer.
According to an analysis by the Hamburg Institute for the World Economy (HWWI), the high prices for European natural gas fell by a fifth in January. However, this was partially offset by more expensive American gas. The reason: more demand for liquefied natural gas (LNG).
The federal government is planning to set up a national gas reserve in order to be prepared for bottlenecks given the relatively low storage levels of currently 28 percent. The filling levels at the Russian state-owned company Gazprom were historically low in winter.
2. Gas by ship
In Germany, too, there is now movement in long-held plans to switch to LNG. Chancellor Olaf Scholz wants to have terminals built in Wilhelmshaven and Brunsbüttel. LNG is frozen natural gas that can be transported by ship. Qatar and the USA are major exporters – many previous supply contracts are long-term and have been concluded with countries in Asia. Environmentalists are critical of LNG because using gas would delay the achievement of climate goals – they are now hoping for a “turbo” for the energy transition with green electricity.
Russia also has a lot of LNG business. If the Northeast Passage through the Arctic is ice-free more often as global warming progresses, more liquefied natural gas could be transported there. In Germany, building the necessary infrastructure takes time. For Wilhelmshaven, the Belgian investor TES plans to start operations from 2025. Lower Saxony’s Prime Minister Stephan Weil estimates: “All in all, one can assume that LNG could replace up to two-thirds of the current natural gas imports from Russia.”
3. Petroleum
Consumers have been rubbing their eyes at the pump for a long time. When it comes to “black gold” oil, many people first think of the Middle East, but Russia is also a key supplier. The HWWI warned in February: “An escalation of the conflict could affect crude oil supplies.” Sales of heavyweights like Rosneft or Lukoil are important for the chemical, pharmaceutical and plastics industries, because oil is a raw material for all kinds of products.
In Europe, according to the International Energy Agency (IEA), domestic production continues to decline while the further processing of petroleum-based products increases – so imports remain important. In 2021, Russia accounted for 34 percent of German oil imports; in the previous year, with a 10.9 percent share of the world market, it was the second largest oil exporter after Saudi Arabia.
The technology sanctions of the EU should also affect suppliers of Russian companies, experts see investment backlogs. US giant Exxonmobil is turning its back on Russia, while Shell and BP are exiting Gazprom and Rosneft. While Germany and other IEA countries are releasing part of their national oil reserves, “Opec Plus”, which is dominated by Saudi Arabia and Russia, only wants to cautiously increase production. So energy inflation could continue.
4. Coal
Coal, which is particularly harmful to the climate, could also be needed longer than 2030. A lot of hard coal is mined, especially in the Kuznetsk Basin in Siberia. Russia is the number one supplier country for the Federal Republic of Germany, in 2020 45 percent of the imported hard coal and hard coal products such as briquettes or coke came there – a short-term replacement is considered extremely difficult. According to preliminary data from the Federal Statistical Office, the proportion increased to 57 percent in 2021.
World market prices rose earlier this year for coal from Australia by 27 percent compared to December. The first politicians are proposing to reconsider the targeted German coal phase-out by the end of the decade. If this is to be avoided and import dependency reduced at the same time, the energy transition must progress very quickly.
In Ukraine, the Donbass region is one of the most important coalfields in the world. However, many capacities are “exhausted”, as the BGR says. For Russia, the export share of hard coal in 2020 was over 15 percent worldwide, which was third behind Indonesia and Australia. Ukraine ranked 20th.
5. Metals and Minerals
Industrial goods are inconceivable without metals and metal compounds – Russia is the fourth most important producer after China, Australia and Brazil. With Rusal and Norilsk Nickel, the country is home to the world market leaders for aluminum and nickel. According to HWWI, both became more expensive by a tenth in January. In 2021, Russia accounted for around 19 percent of all global metal exports in terms of export value.
Aluminum components are found in cars, airplanes, buildings, consumer goods and packaging. Nickel is a component of various types of steel, as is iron and, as a precursor, iron ores. Cobalt is used in batteries and copper in almost all electrical products. Platinum and palladium – for the latter Russia had a production share of 43 percent in 2018 – are needed for car and industrial catalysts. The country is also a major gold producer.
With a view to the need for battery raw materials due to e-mobility, there are European initiatives to mine more metals in domestic deposits. Experts doubt whether that will be enough if traffic and the energy system are to be completely rebuilt. “We’re worried if there are major delivery failures from Russia,” says an analyst. You have to try to negotiate further supply contracts quickly – otherwise you will slide into the next raw materials crisis.
Ukraine also plays a certain role internationally in metal commodities. Among other things, iron, manganese, which is important for certain types of batteries, and the light metal titanium are exported – the latter for example for the production of paints with titanium dioxide.
6. Steel
Without steel there would be no cars, no machines, no buildings. On the one hand, metals coming from Russia such as nickel are used in the alloys, on the other hand, the country itself is a large producer of finished steel. After the EU sanctions, the Severstal Group announced that it now wanted to focus on other markets outside of Europe.
Ukraine also has a large steel industry, being the fourth largest net exporter in 2020. Experts fear a tight supply should deliveries to the West fail. The country’s steel industry – like coal mining – is primarily based in the Donbass.
7. Uranium
Nuclear power is being phased out in Germany, but other EU countries such as France remain dependent on nuclear fuels such as uranium. From 2015 to 2020, Russia took 7th place in the production of natural uranium according to the BGR, with a 6 percent world market share. The ex-Soviet republic of Kazakhstan was in first place by a wide margin. However, according to the BGR, there have been no direct deliveries of uranium from Russia or Ukraine to Germany for many years.
8. Agricultural Commodities
The Ukraine is considered the “granary of Europe”, it is also an important agricultural trading partner for the EU and, according to the European Farmers’ Association, the fourth largest external supplier of food. Grain and vegetable oil imports are particularly important. But the production of these agricultural goods is also an important business in Russia, along with the export of meat and dairy products.