How the Russia-Ukraine War Is Shaping New Global Trade Patterns
The effects of the war will likely be felt around the world, for years to come.
Few expected the Russian war on Ukraine to last for such a long time. But now, 11 months after the initial invasion, the war continues to shape political, economic, and trade relations. It has become clear that the consequences are not limited to the conflict region itself, but are global and will be long-lasting.
In the second quarter of 2022, due to its aggression on Ukraine, Russia experienced volatility in its trade with nearly every other country around the world. More recent data reveals the emergence of new trade patterns.
From the perspective of exports to Russia, strong year-over-year declines in trade value can be seen in nearly every nation. This trend relates not only to those countries that have imposed sanctions, which are primarily developed economies, but also to many emerging economies. On average, global exports to Russia dropped by about 50 percent initially, an effect that has been decaying slightly since June. The three countries that contributed to this decay the most—by significantly increasing exports to Russia—are mainland China, Iran, and Turkey.
From the perspective of imports from Russia, trade value for countries around the world increased in late 2022. This may be primarily a result of rising prices for oil, gas, and coal. In addition, though, Russian exports to several specific countries spiked. The group increasing imports from Russia includes mainland China; Brazil; Vietnam; Turkey; Serbia; and—most important—India, which noted an increase of more than 100 percent year-over-year in trade during each month since the war started.
India’s imports from Russia have contributed to its remarkable resistance to the global economic slowdown and impressive year-over-year growth rates over the final months of 2022. In fact, the monthly year-over-year growth in Indian imports from Russia is the most significant shift in trade relationships among any of the world’s largest economies over the past year.
Energy Supply Crisis in Europe
Western countries have responded to Russia’s invasion of Ukraine by imposing economic sanctions on Russia, including a number of export and import restrictions. The European Union (EU) has adopted a series of sanctions packages against Russia since the war began. The sixth package, which was adopted in June 2022, prohibits “the purchase, import, or transfer of crude oil and certain petroleum products from Russia to EU.” The restrictions on crude oil imports have applied since December 5, 2022, and the ban on refined petroleum products will take effect on February 5, 2023. This package was adopted by all EU member states, with a temporary exception of pipeline imports for landlocked countries like Hungary, Slovakia, and the Czech Republic (or “Czechia”) that are largely dependent on Russian oil supplies and have few other alternatives.
As the embargo on crude oil was approaching, European countries prepared for the halt of Russian supplies. Some of these countries—including Poland, which initially said it would not take any gas or crude oil from Russia, even before the sixth package of sanctions took effect—recently admitted that they may need to use the Druzhba pipeline supplies. Italy has also requested an exception for its Inhalation Sciences Sweden AB (ISAB) refinery, which is currently using only Russian urals and is having trouble accessing other sources.
Therefore, a number of European countries that are highly dependent on Russian crude oil—like Bulgaria, Czech Republic, Hungary, Italy, Poland, and Slovakia—were still reporting imports from Russia in the second and third quarters of 2022 so that they could meet domestic demand this winter. Other nations, like Austria, Denmark, Spain, Sweden, and the UK, halted their imports by mid-2022.
However, as European countries have been trying to self-sanction imports of crude oil from Russia, other players in the global marketplace, including mainland China and India, have leveraged the situation to obtain cheaper Russian oil. According to the Global Trade Analytics Suite (GTAS) from S&P Global Market Intelligence, the volume of Chinese crude oil imports from Russia during the second and third quarters of 2022 increased by 20 percent compared with the same period a year earlier, while India’s crude oil imports from Russia hit a record 680.7 percent growth rate last year.
The EU also introduced a price cap for crude oil, petroleum oils, and oils obtained from bituminous minerals exported from Russia. The price of $60 per barrel has applied since December 5, 2022. That European cap is expected to diminish the revenues Russia obtains from its oil products and to calm down prices on the global market.
In addition to oil products, the EU ban on energy imports from Russia is also hitting Russian gas—and that is significantly impacting the Baltic states. This winter, Baltic nations are relying mainly on the Klaipeda terminal, which is a floating storage and regasification unit in the port of Klaipeda, Lithuania. However, several alternatives are now in the works. The Inkoo regasification terminal in Finland, which is in the commissioning phase, sent out its first liquid natural gas (LNG) shipment at the end of December 2022. Other projects to build new LNG terminals are commencing in Paldiski, Estonia, and Skulte, Latvia; both aim to supply gas to Baltic states. It is worth noting that the risk of gas-supply shortages in the Baltic states is limited by the small size of the markets and the expectation that high gas prices will dampen demand this winter.
The Russia-Ukraine war’s disruption of global markets for fossil-fuel resources is also impacting the coal sector. According to S&P Global Market Intelligence’s GTAS, Russia was the third-largest exporter of coal in 2021, after Australia and Indonesia. These three countries combined to account for 60 percent of global coal exports that year, leaving all others far behind.
The current shortages of oil and gas have increased demand for coal across Europe, even though the EU has committed to reduce CO₂ emissions by at least 55 percent by 2030. Right now, some Western European countries have reopened their coal power plants. This adds to the demand of some Central and Eastern European countries, which are not yet phasing out solid fossil fuels and continue to rely heavily on coal plants for electricity and heating.
Taking all this into account, the question is: Will Europe survive this winter—and the next few years—without Russian coal?
The first step in answering this question is to distinguish between steam coal and thermal coal. Russia was a major exporter of the latter—more than 50 percent of the total thermal coal supply to Europe comes from Russia. In fact, Cyprus, Lithuania, Greece, and Romania get more than 90 percent of all their coal imports from Russia, while Bulgaria, Poland, Denmark, Croatia, Ireland, and Italy rely on Russia for more than half of their coal imports.
It’s worth noting, though, that these countries vary in the degree of their dependency. For Cyprus and Greece, for example, Russia is the main coal supplier, but these countries use very little coal compared with some of the others (in terms of total volume in metric tons, or mt), and they could manage without coal, if necessary.
Four countries that might suffer significantly from the lack of coal imports from Russia are Poland, Bulgaria, Lithuania, and Ireland. Poland stopped importing coal from Russia at the beginning of the Russia-Ukraine war. It was a strategic mistake, because other EU members continued their Russian imports and ensured they would have enough supplies for the winter. In October and November 2022, coal prices in Poland were 300 percent higher than they were a year prior. Prices dropped at the beginning of this year, but they remain almost twice as high as they were in January 2022.
All these countries are trying to find new coal suppliers. Bulgaria is looking to import primarily from South Africa and the United States; Cyprus from Colombia; Denmark from Australia and Indonesia. Italy is also considering Colombia, as well as Australia, the United States, and South Africa. And Poland is trying to buy coal from Colombia, South Africa, and Australia. However, there may be problems on both the supply side and the infrastructure side. The number of coal suppliers is limited, and they cannot rapidly increase their output. Hence, the demand—which is now higher than it was before the pandemic—may not be entirely met.
One additional factor impacting the European coal market is that domestic energy production in some countries, including Germany, will be unable to fully meet demand this winter, in part because those governments have closed nuclear power plants in the recent past. Now, they will likely want to use coal as a substitute for gas in heating, adding to the imbalance between supply and demand.
The Impact on the South Caucasus and Central Asia
The Russia–Ukraine conflict has impacted global energy markets and resulted in a number of trade shifts in Europe, but what about the neighboring countries in South Caucasus and Central Asia? Our analysis will focus on two nations from that region—namely, Azerbaijan and Kazakhstan—but other countries, including Georgia and Uzbekistan, are also feeling effects of the Russia–Ukraine war, either through secondary exposure to sanctions or through the worsening economic situation in Europe that has resulted from the conflict.
Azerbaijan remains in the top 10 most energy-sector–dependent economies in the world. In 2021, crude oil and natural gas accounted for around 84 percent of the country’s total exports (by value), according to S&P Global Market Intelligence’s GTAS. More recently, Azerbaijan has started importing natural gas from Russia’s Gazprom for its own domestic use, under a deal struck on November 15, 2022. This is a controversial move that raises the prospect of effectively rerouting Russian gas, via Azerbaijan, to the EU.
Russia is the top source of Azeri imports, followed by Turkey and mainland China. These three countries accounted for around 50 percent of the country’s imports from January to August 2022.
Azerbaijan, Russia, India, and Iran are all taking part in the initiative for developing an International North-South Transport Corridor (INSTC). The legal framework for the corridor was provided in 2000 by a trilateral agreement signed by India, Iran, and Russia, which Azerbaijan joined in 2005. The aim was to develop a 7,200-kilometer corridor that combines road, rail, and maritime transport capabilities into an India–Russia trade route via Central Asia and Iran.
In September 2022, Azerbaijan, Russia, and Iran signed a declaration that sets the target of using the full potential of the corridor by the year 2030, at which point 30 million mt of cargo will be carried through these three countries each year. The project includes construction of 146 kilometers of railway from Azerbaijan to Iran, financed by Russia and Azerbaijan.
Deteriorating European growth and surges in commodity prices have also impacted the economy of Kazakhstan. On the other hand, higher energy prices are beneficial for Kazakhstan. In 2021, Kazakhstan exported around 31.5 million mt of crude oil to the EU, which classifies the country as the seventh-largest supplier of crude oil to EU countries. Due to price increases in 2022, the value of total EU imports from Kazakhstan increased by 53.5 percent from January to September 2022, compared with the same period the prior year. During the first nine months of last year, around 85 percent of Kazakhstan’s exports to the EU (by value) came from crude oil.
The primary overland trade route between mainland China and Europe, via Russia, was also impacted by sanctions on Russia. As a result, the Trans-Caspian International Transport Route (TITR), also known as the Middle Corridor, is gaining importance. The Middle Corridor is geographically the shortest trade route linking Western China and Europe. It starts in Southeast Asia, goes through Kazakhstan, the Caspian Sea, Azerbaijan, Georgia, and Turkey, and ends in central or southern Europe.
Shortly after Russia invaded Ukraine, Azerbaijan, Georgia, Kazakhstan, and Turkey signed a declaration designed to boost trade flows through the region. According to the TITR Association, a number of initiatives taken during 2022 helped increase the volume of cargo being transported through Central Asia and the Caucasus. These initiatives included a container train from mainland China to Central Europe—which started running on May 10, 2022, using the Middle Corridor—and development of a new shipping route for feeder vessels between ports in Georgia and Romania. Additionally, Central Asian countries are investing heavily in developing modern infrastructure on the Trans-Caspian trade route.
Exports of Grains from Ukraine
In July 2022, Russia, Ukraine, and Turkey signed a Black Sea safe passage deal, which enabled the resumption of exports of grains and fertilizers through the Black Sea from three key Ukrainian ports: Chornomorsk, Odesa, and the Pivdennyi port in Yuzhne. The United Nations (UN) brokered the deal, which states that the “initiative will remain in effect for 120 days from the date of signature by all parties and can be extended automatically for the same period, unless one of the parties notifies the other of the intent to terminate the initiative or to modify it.”
In late October, the Russian government wrote to the UN, stating that, “starting today,” the grain deal allowing exports of Ukrainian food supplies would be suspended for an “indefinite term.” Shortly after sending this announcement, Russia backtracked. On November 17, 2022, the deal was extended by 120 days, soothing market worries over supply from the region and leading to a decrease in agricultural prices.
The Black Sea safe passage deal has enabled more than 1,000 voyages at this point and allowed for the export of around 10 million mt of grains and other food from Ukraine. According to S&P Global Market Intelligence–Commodities at Sea, total agricultural bulk shipments from Ukraine, on vessels above 10,000 deadweight tonnage, stood at 1.3 million mt shipped in August 2022, 3.2 million mt in September 2022, 3.8 million mt in October 2022, and 1.4 million mt in November 2022. Also, as per the UN’s Black Sea Grain Initiative statistics, volumes carried by vessels of less than 10,000 deadweight tonnage stood at an additional 1.54 million mt for that four-month period.
Thus, the total volume of grain transported from Ukraine from August to November 2022 was 11.2 million metric tons. The primary commodities shipped were corn (4.7 million mt), wheat (3 million mt), canola (871,000 mt), and barley (529,000 mt).
Almost half of this volume ended up in high-income countries. Russia has raised concerns about the fact that most of the flows were not destined for the countries that are most vulnerable to food insecurity. Out of 9.6 million mt transported by larger vessels, the majority of shipments were to the Mediterranean (4.3 million mt), followed by Northwest Europe (2 million mt), North Africa (1 million mt), South China (464,000 mt), and the Middle East (389,000 mt).
At the same time, the European Commission believes agricultural exports from Ukraine should rely on overland routes. EU Commissioner for Agriculture Janusz Wojciechowski stated that, considering Russia’s attempts to block the Black Sea corridor, the EU should instead focus on the development of land routes for Ukrainian exports. The land corridors through Poland and Romania are both passable—and, since March 2022, 12.5 million mt have been exported from Ukraine by land.
The main obstacle to overland transport from Ukraine is the difference in rail systems. The Ukrainian rail system operates on a different gauge from European neighbors such as Poland, so grain exports from Ukraine must be transferred from one train to another, or else must be transported in big bags, and there are not many transfer or storage facilities at the Ukrainian border. Nevertheless, by the end of November 2022, the Rail Cargo Group had transported more than 1 million tons of grain from Ukraine to Central and Southern Europe. The main importers of this grain are Hungary and Germany, followed by Italy and Austria.
Wojciechowski is convinced that it is necessary to intensify the development of ground transportation solutions for grain export from Ukraine. EU investment could also help construct a pipeline for vegetable oil exports from Ukraine to Poland.
Food and Energy Supplies Are Crucial to Regional Peace
Eleven months after the Russian invasion of Ukraine started, the war is still shaping political, economic, and trade relations, leading to the emergence of new trade patterns not only in Europe, but also globally. Since the war is ongoing, and we cannot anticipate its end, we cannot provide any time horizon for the end of the sanctions imposed on Russia, nor can we tell whether the country is ever going to restore its trade relations with Western countries.
The current export and import restrictions—including sanctions on Russian energy products—are having a huge impact on European markets this winter, and will probably continue to affect the energy market in the long term. Now, European countries are struggling to fill the gap left by the reduction in Russian supplies. Some have been forced to turn back to coal, while others are investing in new LNG terminals and regasification units.
Russia’s invasion of Ukraine is also resulting in a shortage of food supplies, especially in countries in the Middle East and North Africa. However, we expect the opening of new lanes of grain transportation to enable Ukrainian grains to reach their final destination, mainly in African countries. This will be crucial in avoiding further waves of migration and social unrest.