Commodities of war

In la Tribune 26/06/2022

This text is from a lecture given at the 2022 conference of the International Chromium Development Association

Heraclitus of Ephesus declared that “war is the mother of all things”. It was a common, banal event to conquer cities, lands and the natural resources they contained – energy and minerals – or the food they produced.

The Russian invasion is not of this nature. It is incomprehensible because Russia has no shortage of raw materials and therefore no need to conquer for natural resources. It is also incomprehensible because it is not the work of the Russian people who are struggling against unacceptable living conditions. And it is incomprehensible because it resembles a religious war, a kind of continuation of peace by other means that always leads to unhappy empires.

Instead of a war for commodities, the Russian invasion uses selected resources to finance and win the war: they are commodities of war.

Developing a Natural Resources Doctrine

In general, before war, leaders of nations prepare for it. They have thought through the unthinkable when building their Natural Resources Doctrine. They have secured long-term sustainable access to raw materials, local resources or resources from close and friendly countries. That is, they will have replaced the financial logic of “just-in-time” reserves management with “just in case” security logistics. This is what Russia did, while, unfortunately, Europe did not hear this message. This is why, because this security rationality seems to be an easy political fruit to reach, it fascinates the extremes in our democracies, while its path is, on the contrary, complex.

Once this stage has been reached, it is during war that commodities of war appear. The transformation of a natural resource into a commodity of war is related to the psychology of leaders. The war in Ukraine saw Russian natural gas taken hostage by the conflict and become a war commodity because it finances Russia. Gas is abundant, so this choice is political, not geological. In fact, in a conflict, all resources become strategic because they are political. Geological criticality takes a back seat.

Conversely, other remarkable materials have not been chosen. Spraying the ‘rare metals’ infox once again, no metal is ‘commodity of war’. On the contrary, at the height of the Russian offensive, without sanctions or embargoes, imports of nickel and aluminium of Russian origin continued to grow from March to June 2022 compared to 2021 by 22% and 13% respectively in Europe and 21% and 70% in the US.

The Physical Congestion Value (PCV)

More specifically, these policy choices are also linked to the physical emcumbrance bulk value (PEV) of the raw material. That is, the lower and easier the costs of extraction, logistics and disposal, the lower the PEV of the resource and the better the return on conflict financing. For Russia, the PEV of gas is very low. This is why the sabotage of the North Stream 1 & 2 pipelines was not in Moscow’s interest, but a price to pay . Otherwise, it would also have been necessary to sabotage the onshore pipelines that still run through Ukraine and Belarus. Therefore, in a tit for tat in commodities of war, this sabotage is a response to the bombing and occupation of Ukrainian nuclear power plants.

More generally, the best commodities of war are the real estate titles that the victor takes when he takes a city. This PEV is almost zero, because it is just a piece of paper from a notary that can be created, cancelled and recreated over and over again at no cost. The winner of the war can use it to sell or rent these properties while they are occupied by the historical owner; he can also give them away to reward or pay his soldiers or to anybody else. Northern Iraq and eastern Syria have recently witnessed such practices, Mariupol reconstruction is a modernised exemple.

The financing of conflicts in West Africa by blood diamonds was also explained by very low PEVs, as they were easily transported and traded.

Archaeological goods from the Middle East, minerals from the eastern Democratic Republic of Congo, oil, natural gas or certain crops (opium, coca) have a higher PEV. Their traffic can quickly become congested.

Finally, both animal and plant species (precious woods, wheat) have an even higher degree of PEV, as Ukrainian wheat exports have demonstrated.

In order to finance and self-reward itself, the Wagner militia will have made extensive use of this concept of commodities of war in all its palettes.

The existence of several international treaties

In order to counter this trafficking, the international community has forged international treaties, notably the Kimberley Process for diamonds; Unidroit for archaeology; IETI, Ocde, Dodd-Franck act, TinSCi for minerals and energy; Cites and Flegt for animal and plant species. The exception remains the trafficking of real estate titles. No international treaty has been put forward to curb this and it is understandable that it would be difficult to apply in the face of the example of the reconstruction of Mariupol by Russia.

Indeed, what about the continuity of housing rights between destroyed Ukrainian homes and new Russian homes rebuilt on their former foundations? A thornier question between private and public property is whether there is continuity of property rights if the foundations of destroyed Ukrainian buildings become streets and new Russophile buildings are erected in place of old streets. On what legal basis would the occupants become owners or tenants of these places?

Let us conclude with a quick look at commodity prices during the war.

The impact of conflict on prices is maximum when the confrontation is global and had not been foreseen. It will be more moderate if the fight was unexpected, but local and almost nil if it was planned and regional.

The evolution of prices during conflicts

During the 14-18 war, which, according to our classification, was unforeseen and global, agricultural (grain, meat, other) and metal prices soared. On average, aluminium and wheat prices increased by a factor of 3, meat and sugar by 2.5, but oil prices only increased by 50%.

During the Second World War, which was global but anticipated, the inflationary impact was less. Wheat and meat prices rose by over 100%, energy and metal prices were under control.

During the Korean War, inflation was less than 50% for the most affected natural resources. The wars and regional tensions in Vietnam and the Middle East had an even smaller price effect.

For the record, the 1973 oil shock caused a rise in crude oil prices of between 3 and 18 dollars, and economic or climatic crises have a greater inflationary impact than wars.

The conflict in Ukraine is regional and not global; planned by Moscow, it was foreseen according to the CIA, but unforeseen in Europe. Its effect on prices was therefore expected to be moderate.

Indeed, after three months of inflationary speculation last spring, at the height of the crisis, only gas prices peaked at over 150%. Wheat inflation very briefly exceeded 40% and oil 30%. This is not much compared to past wars. Moreover, other natural resources were at worst limited to between 2% and 15%. Since the summer and until the writing of these lines, 9 months after the Russian invasion, the commodity markets have completely digested the war.

Copper prices are 17% below those of 24 February 2022, aluminium -35%, gold -13%, oil -8%. The prices of the two war commodities, wheat and gas, are now respectively -10% and -13% below the prices of 24 February.

All these elements point to inflation returning to pre-war levels. Logically, as long as gas prices are low, this deflationary direction will be reinforced if, instead of consuming its stocks, Europe meets its gas needs through run-of-river purchases, thus preserving as much of its gas reserves as possible for the winter of 2023-2024.

In the end, as wars have progressed since the first world conflict in 14-18, commodity prices have learned to live with conflicts and the inflationary effects of the latter have been steadily diminishing for a century. The cause? Undoubtedly the fluidity of deflationary flows of natural resources brought about by globalisation.

Preparing for future conflicts of economic sovereignty

Precisely, since the Russian-Ukrainian conflict could be the last of globalisation if it continues to be challenged by the search for sovereignty, it is useful to prepare for the economic sovereignty conflicts of tomorrow.

This means considering commodity embargoes in return for belligerent actions. Sanctions on this or that material will lead to sanctions on other elements. The most obvious examples are between minerals and chips as well as between energy and agriculture. Therefore, it is before war that the leaders of nations must develop Natural Resource Doctrines dominated by something they do not like: surprise and the unthinkable.