The London Metal Exchange (LME) has suspended the inflow of Russian base metals into its U.S. warehouses prior to the planned imposition of tariffs on Russian metal by the United States. Aluminum will be the hardest hit with the U.S. slapping penal tariffs of 200% on imports of Russian metal, effective March 10. Import tariffs on other metals including copper and lead will now double to 70% while nickel will be subjected to a 35% duty. Only 400 tonnes of Russian metal was already in U.S. warehouses registered with the LME during the time of the announcement, which means it will no longer be available to settle NASAAC futures.
The full package of the latest set of sanctions and trade measures now covers over 100 metals, minerals and chemicals. The LME has been under intense pressure to suspend deliveries of Russian aluminum across all its global warehouse network but has so far rejected the idea.
"The LME does not believe that the recent U.S. announcement changes this position, given that many U.S. consumers had already 'self-sanctioned' in respect of Russian metal," the exchange said in a Feb. 28 notice. The LME appears to have borrowed a leaf from the British government which unilaterally hiked import duties on Russian goods in August last year.
The tariffs have led to widening time spreads, with cash-to-three-months contango ballooning to $50.50 per tonne at the weekly close, the biggest spread since 2013. The LME three-month aluminum price has, however, remained largely unmoved by the news, currently trading around $2,350 per tonne, the lower end of its year-to-date range of $2,250-2,680 per tonne.
Following the metals ban, the White House has issued a statement saying that the ‘’...measures are designed to target key Russian commodities generating revenue for the Kremlin while reducing U.S. reliance on Russia.’’ But how effective have western sanctions been at limiting funding for Putin’s war machine? Apparently, not as much as many would have hoped for.
During the early days of the war, a cross-section of experts predicted that sanctions would lead to Russia’s economy contracting as much as 15%. However, the latest forecasts by the IMF show that Russia’s economy contracted only a little over 2% in 2022, with moderate growth expected in 2023. Several reasons have been advanced to explain why Russia’s economy is faring much better than expected.
First off, the EU largely refrained from sanctioning Russian energy commodities in 2022 in a bid to avoid compromising its own energy security. For most of 2022, only about 8% of the export value of Russian energy was under sanctions, practically all of it by third countries. Even better for Russia, the huge increases in energy prices, oil and gas revenues led to a nice 45% bump in revenue for the Russian government budget.
Second, Russia deployed an effective economic policy that succeeded in preventing the economy from tanking. First, Moscow provided tax breaks, social benefits and subsidies for loansequivalent to 3% of GDP and also increased the minimum wage. This move was similar to the support EU countries provided to homes and businesses to help them cope with high energy prices. For instance, Germany, Europe’s largest economy, ditched earlier plans for a gas levy on consumers and German Chancellor Olaf Scholz set out a €200 billion ($194 billion) “defensive shield” to protect companies and consumers against the impact of soaring energy prices. Moscow also increased government consumption as a way to compensate for the big drop in private consumption and investments. Meanwhile, the Russian Central Bank intervened with several measures that helped to stabilize the exchange rate and provide liquidity to the banking system.
The third reason is simply because a big part of the world has failed to condemn Russia for its war in Ukraine. Indeed, nearly 10% of the world’s total population is either neutral or actively endorses Russian aggression, with Belarus, Iran, Cuba, Nicaragua, Venezuela, and Kyrgyzstan in direct support while Syria, UAE, Kazakhstan and Armenia have supported Russia indirectly. Some African countries have also been sympathetic to Russia, with reports that Russia has started sending crude to Ghana for storage.
But things are bound to get tougher for Russia with EU sanctions meaning that a good 40% of the export value of Russian energy will be under sanctions going forward. Although the EU still has not sanctioned Russian gas, the quantities it imports from Russia via pipeline are down to a trickle though it’s taking in Russian LNG. In the first few weeks of 2023, the EU energy imports from Russia crashed 80%, a situation exacerbated by the fact that China and India have been unable to fully cover the shortfall. Further, with upwards of80% of US and EU multinationals having either left or suspended activities in Russia, it’s only a matter of time before Russian industries and the economy start feeling the heat.
By Alex Kimani for Oilprice.com
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