Metals unfazed by Russia sanctions except via energy inflation: analysts

Western sanctions imposed so far against Russian banks and individuals are unlikely to have a significant effect on metals trade, industry analysts said Feb. 23. However, the risk of rising energy costs arising from sanctions looks set to keep metals production costs and prices high and volatile, they said.

"The sanctions announced so far have underwhelmed commodity markets," wrote ING Economics' commodities analysts Warren Patterson and Wenyu Yao Feb. 23. Local banks that are heavily involved in the commodities industry have been left untouched by the sanctions imposed by western governments on five Russian banks and three billionaires, they said.

The sanctions were imposed in response to Russia's declaration that it will formally recognize the Russian separatist states in eastern Ukraine, and support these by sending in peacekeeping troops.

Nord Stream 2

"The biggest development related to commodity markets is that Germany has decided not to progress with the Nord Stream 2 pipeline," the ING analysts said, noting that while this should not yet have any impact on natural gas flows to Europe, given that the pipeline is not yet operational and there is spare pipeline capacity via other routes, it could lead to Russian retaliation by further reducing overall Russian gas flows to Europe, keeping the gas market tight until the end of the next heating season. This in turn could put upward pressure on smelters' costs.

John Meyer of brokerage SP Angel said Feb. 23 that Russia was "driving global energy inflation higher" as troops march into the separatist states of Donetsk and Luhansk of Ukraine, collectively called the Donbas region.

Price risk premium

Both SP Angel and ING Economics said the geopolitical concerns have also created an emerging "risk premium" for some base metals of which Russia is a major producer, including aluminum and nickel.

"Aluminium and nickel continued to stand out yesterday, given the geopolitical risks related to Russia, along with the threat of Western sanctions," ING's Patterson and Yao said. "LME 3M aluminium was only 15 cents shy of its record high back in 2008, whilst nickel broke above $25,000/mt, driven by mounting fears of a potential disruption in Russian metals flows. However, sanctions announced so far appear as though they will have little to no impact on metal flows from Russia."

Meyer noted that gold has held around $1,895/oz after having hit a nine-month high of $1,913/oz on Feb. 22.

"The imposition of sanctions on Russia and the suspension of Nord Stream 2 failed to propel the metal higher, suggesting the gold market has priced in further escalation in the region," he said.

More sanctions may come: ACSS

Saskia Rietbroek, executive director of the Association of Certified Sanctions Specialists, formed by compliance professionals from 73 countries, said Feb. 23 that the designations this week of sanctions on VEB and PSB bank and their subsidiaries was an only an initial sanctions package.

This was "less ambitious than I had expected," she said. "These two sanctioned Russian banks are policy banks and not retail, so, while it keeps sanctions compliance professionals busy, it hasn't caused a financial panic. However, the door is open to more designations in the financial sector. Further, less known is that there is also effect on other industries like the international shipping sector, as five vessels were placed on the sanctions list."

Rietbroek said she believes that more sanctions can be issued against Russia and that these "will be incremental as the situation on the ground develops."

"Among the Russian companies sanctioned by the US this week, there were several non-financial entities, including a leasing company, an electric energy company, a construction company and a coal mining company. I did not see a metal company among those listed," she said in a statement emailed to S&P Global Platts. However, the legal framework is already there to impose sanctions on metals companies, at the discretion of OFAC, the main agency dealing with sanctions in the US, she said.

"The US government can impose sanctions under Section 223(a) of a 2017 law, called CAATSA, that can target specific sectors, including state-owned entities operating in the Russian railway or metals and mining sector," Rietbroek said. "As such, they can impose targeted sanctions on specific sectors of the economy of Russia, including the metal sector, for its aggression in Ukraine."