A deal between Trump and Putin won’t ease global energy costs much

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 normalization 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 prioritize policing, say, Russia oil exports? Or that US diplomats are lobbying Asian countries to avoid commodity imports from Russia? Or that the White House isn’t looking forward to the return of American oil companies to Russia? The US-led sanctions regime is crumbling—in reality if not in law yet.

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The stakes are huge. Russia is a commodities superpower, ranking among the top five in many markets, from crude oil to aluminium to wheat, and is a key supplier to its neighbours. Before Vladimir Putin invaded Ukraine in 2022, disrupting flows, Russia supplied Europe with 25% of its oil, another 50% of its coal, plus nearly 40% of its gas.

The war turned that trade upside down, but Russian commodity production didn’t change much. In a few cases, output today is 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 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.

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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 tonnes, up 60% from 2021-22.

The metallurgical sector is similar. Russian aluminium production rose last year to 3.8 million tonnes, the highest in more than a decade.

The exception is natural gas. Ironically, current 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 (LNG), 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%, 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.

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For every other commodity, the biggest change wrought by the Russia-Ukraine war wasn’t in its production, but in its 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 oil alliance is strong. But Putin himself has advocated including the US in tri-party talks on the energy market, alongside Riyadh and Moscow. US President Donald Trump has 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. ©Bloomberg