Most Favoured Nation: Sanctions All The Way Down

Why sanctions lead to more sanctions, which lead to more sanctions, and then more sanctions.

As discussed last week, it is now really really difficult to trade with Russia. And fears about not getting paid, and the volatility of the Russia ruble, means it is difficult for everyone – even, for example, Chinese firms who aren’t being prevented from doing so by their government or voluntarily boycotting.

But there is still a difference: it is much easier to buy Russia critical metals such as titanium, palladium and platinum if you are operating out of China or India, rather than the West. In practice this means that (and I’m oversimplifying a little here) there are two global prices for critical metals: the higher, non-Russia, price and the lower, Russia, price.

Firms able to navigate the sanctions and repetitional risk will have access to discounted Russian critical metals. Which leaves open a number of possibilities (not all recommended or legal):

1. A company could buy Russian critical metals at a discount, paint them a different colour or something, and then sell them to Western buyers, pretending they are from somewhere other than Russia. (Illegal. Bad. Not recommended.)

2. A company could buy the Russian critical metals at a discount. Store them. Wait for the war and sanctions to end. And then sell them to Western consumers. (Risky. Cost of storage could outweigh discount. No guarantee that the post-sanction price will still be high enough to make a profit.)

3. A company could buy the Russian critical metals at a discount. Use them to make final products such as semiconductors and EV batteries more cheaply than competitors buying from the non-Russia market. Export the final products to Western consumers; benefit from relative price advantage. (Fine … for now.)

But while number 3 might be technically fine. It doesn’t feel fine. Which is why, if the war in Ukraine drags on, secondary sanction are likely. By which I mean non-Russian companies that benefit from circumnavigating the Western sanctions could find themselves subject to sanctions.

Making cheap semiconductors with cheap Russian metals? Sanctions. Making cheap car batteries with cheap Russian metals? Sanctions. Making cheap electric vehicles using cheap car batteries and semiconductors made with cheap Russian metals? Sanctions.

Sanctions. Sanctions. Sanctions. All the way down.