A Putin-Trump deal ending Russia sanctions will be a blip for commodity markets

By Javier Blas

The 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 normalisation 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 prioritise 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 per cent of its oil; another 50 per cent of its coal, plus nearly 40 per cent 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.

Agricultural commodities are another example of a corner of the commodity market that won’t be affected. Beyond the friction created by banking sanctions, Russia has been able to export as much of its crops as it wanted. In effect, wheat exports in 2023-24 reached an all-time high of 55 million metric tons, up 60 per cent from 2021-22. The metallurgical sector is similar. Russian aluminium production rose last year to 3.8 million tons, the highest in more than a decade.

The exception is natural gas. Ironically, the sanctions on gas are Russian – not Western. It was Moscow that, by and large, stopped selling its gas to Europe. Wherever the commodity is still available, such as in the form of liquefied natural gas, Europe remains a willing buyer. In fact, some European countries are buying Russian LNG in record amounts, more than 1,000 days after the invasion.

While I don’t expect Europe to ever buy as much Russian gas as once it did, it’s clear that when it flows again, even if only to a small group of countries, the impact would be large. European benchmark wholesale natural gas prices could drop 25 per cent, if not more, by next year if Russian gas is available. That, in turn, will push electricity prices also down. I have consistently anticipated that Germany and others will again buy Russian gas, even if Putin remains in the Kremlin. Nothing so far makes me think that’s not the case.

For every other commodity, the biggest change wrought by the Russia-Ukraine war wasn’t in production, but in destination. Rather than flow to their natural buyers, based on geographical proximity, Russian commodities went mostly to China and India.

If lifting sanctions won’t change supply for commodities immediately, it does open the door for future hikes. First, a deal could alter Moscow’s stance versus OPEC+. For now, all suggest that the Russia-Saudi alliance is strong. But Putin himself has advocated including the US in triparty talks about the energy market, alongside Riyadh and Moscow. President Donald Trump has publicly asked OPEC+ to lift output.

Beyond that, lifting sanctions – and particularly, the return of US money – could boost Russian production capacity, particularly for oil. But that’s the stuff of years, rather than weeks.