Russia’s invasion of Ukraine and related sanctions have distorted trade routes across the Eurasian continent.
Ukraine was forced to find new export routes for its grain after its Black Sea ports were blockaded. China and other Far Eastern exporters that previously sent goods via Russia’s railways to Europe are looking for alternative routes not compromised by sanctions. European countries are importing gas from Azerbaijan and North Africa, and liquefied natural gas (LNG) from the US, as they seek to fully free themselves from dependence on Russia.
For Russia itself, sanctions have necessitated finding new sources of imports, especially those critical for its manufacturing industries, as well as a pivot to Asia, in particular China, after European sanctions restricted its Westward oil and gas exports.
Ukraine finds new grain export routes
Right at the start of the invasion, alongside the movement of troops overland into Ukraine, Russia dispatched its navy to blockade Odesa and other Ukrainian Black Sea ports. That prevented the transport of grain from Ukraine, in normal years one of the world’s top grain exporters, not only restricting Ukraine’s ability to earn export revenues but also sparking fears of food shortages, especially in the Middle East and North Africa.
Sympathetic to Ukraine’s plight, friendly nations in Central and Southeast Europe were quick to offer their own ports to get Ukraine’s grain to international markets, a lifeline for Kyiv until the Black Sea Grain Initiative that allowed maritime exports was brokered by Turkey and the UN.
By last summer it was reported that the flow of merchandise through Romania’s Port of Constanta had tripled since the war in Ukraine started. Steps taken to facilitate exports from Ukraine included repairing a railway line compatible with the wider-gauge trains used in Moldova and Ukraine from the Moldovan port of Giurgiulesti to the Romanian port of Galati on the Danube. That has meant freight trains coming from Ukraine through Moldova no longer have to be reloaded at the border between Moldova and Romania.
However, while the Romanian government sought to help Ukraine’s exporters access international markets, local exporters complained that opening Romanian ports to Ukrainian companies was causing problems for them, by putting pressure on the capacity of the ports. In mid-2022, trucks were reportedly waiting in queues of over 30 km to unload their containers at Constanta.
Further north there were also reports of trucks backed up for miles at border checkpoints between Ukraine and Poland and other Central European countries. In response, Poland doubled the number of access points for trucks on its border with Ukraine in June. Michal Dworczyk, the Polish prime minister’s chief of staff, told a press conference in June this was intended both to help Ukraine and to benefit Poland by increasing transit trade. New rail terminals have also been added.
Road freight transportation between Slovakia and Ukraine used to be modest, as the two countries have only a short shared border with a small number of crossings. “The Russian aggression in Ukraine caused a significant increase in the transported volumes and a change in the composition of traded categories,” says a recent comment from think-tank GlobSec. “As the threat of attack from the east continues to loom and Ukraine becomes more integrated with the European market, the exchange of goods between Slovakia and Ukraine will continue to grow.” Now Slovakia wants to build a motorway connection with Ukraine in anticipation of future trade.
Meanwhile, the EU is building up the Paths of Solidarity initiative, which has allowed the export of 15mn tonnes of agricultural products as well as non-agricultural Ukrainian goods, and enabled the war-torn country to import what it needs, such as fuel and humanitarian assistance. The European Commission has described the initiative as “the lifeline of Ukraine’s economy”, bringing in more than €15bn of much-needed income to Ukrainian farmers and businesses.
Russia turns East
Russia’s trade has shifted dramatically Eastwards after Western countries imposed sanctions.
Amid confusion over the impact of sanctions, trade with China briefly dipped in the spring, but has since rapidly bounced back. In 2022, China overtook Europe to become Russia’s top trading partner. Russia’s bilateral trade with China in 2021 reached $141bn, of which Russian exports to China amounted to $68bn, but trade volumes are believed to have grown sharply during 2022.
Russia had already been working on reorienting its hydrocarbons exports eastwards, as demand for gas and oil from East Asia was expected to continue to grow in the coming decades, while the green revolution will eventually lead to an end to Europe’s dependence on fossil fuels. As early as 2014, Russia and China signed a contract on the delivery of 38bn cubic metres of gas per year via the Power of Siberia pipeline.
The sanctions accelerated that process. Following its invasion of Ukraine, Russia slashed pipeline deliveries of natural gas to the European Union by more than half – cutting off some countries such as Bulgaria entirely – and the International Energy Agency (IEA) warned in a recent report that Russia could send as little as 25 bcm this year.
Conversely, China is critical to Russia’s plan to increase gas shipments to Asia following the loss of most of its market share in Europe. In January, Russia and China signed an intergovernmental agreement on pipeline gas deliveries via the Far East. The agreement sets out the key parameters for a 10 bcm per year gas supply contract that they clinched in February 2022.
Moscow and Beijing are also discussing a 50 bcm per year contract to underpin the construction of Power of Siberia 2, which would run from the Russian Arctic to China through Mongolia. It would supply gas from fields that until recently served the European market. The Far Eastern supplies would come from Gazprom-operated fields off the coast of Sakhalin Island.
Russia also worked hard to secure new sources of imports after being cut off from European exporters for a wide variety of goods. Russian firms have found new suppliers in Asia, or alternatively have managed to get around the sanctions by using parallel import schemes, as bne IntelliNews reported in November.
Back in April 2022 Russia approved so-called “parallel imports” or “grey imports” to maintain supply chains. That means importing products without the permission of the copyright owner.
China became the main contributor to the recovery in Russian imports, increasing its deliveries by 21% year on year as of September, but other suppliers such as Turkey, Azerbaijan and Belarus also came to the fore. Many of the more sophisticated products like semiconductors and high-quality machinery are still missing, but consumer goods and basic agricultural and industrial inputs have mostly reappeared.
Meanwhile, Russia’s partners in the Eurasian Economic Union (EAEU) hiked exports to Russia by 70% y/y in the first seven months of 2022, according to BCS GM. There are reports that some of Russia’s trade partners in the bloc – Armenia, Belarus, Kazakhstan and Kyrgyzstan – are simply rerouting supplies through these countries or local traders are taking advantage of the parallel import schemes to send hard to find goods to Russia. By end 2022, Russia-EAEU trade is anticipated to reach $127.2bn, up by $54.59bn y/y.
Kyrgyzstan, for example, has more than doubled its exports to Russia since the start of the war, while its imports from China have almost tripled, reported RFE/RL. While the data is incomplete, the hike in trade appears to be linked to re-exporting. Temir Shabdanaliev, head of the Association of Carriers and Logisticians of the Kyrgyz Republic, told RFE/RL that goods from Europe that were previously sent to Russia are now registered as deliveries to Kyrgyzstan and Kazakhstan, but immediately dispatched to Russia after unloading. This could, however, be problematic for Kyrgyzstan, which risks being targeted by secondary sanctions.
European politicians are already getting suspicious. Krisjanis Karins, Prime Minister of noted Russia-hawk Latvia, warned on February 4 that traders were using Turkey, Kazakhstan and Armenia to evade EU sanctions on Russia. The three countries' sanctions-busting trade is breaching their compliance with EU trade embargoes on Russia, said Karins.
"It seems quite clear that traders are finding ways to legally trade goods, say with Turkey, Kazakhstan or Armenia, which are then resent to Russia, because these countries are not adhering to the sanctions regime", Karins told reporters in the Estonian capital Tallinn, as reported by Reuters.
Turkey the big winner
Turkey, in particular, has been a big winner from the sanction’s regime. Bilateral trade with Russia in 2021 amounted to about $30bn, with around $23bn of this being Russian exports to Turkey. As well as the high level of energy trade between the two countries, Russia’s need for parallel imports is also driving up bilateral trade.
Few countries have a more advantageous geographical position in geopolitical affairs than Turkey. And few leaders know how to exploit the inherent opportunities better than the country’s leader of two decades, Recep Tayyip Erdogan.
Since Russia invaded Ukraine, Erdogan has hardly missed a beat in exploiting the opportunities offered by both the West and the Kremlin, knowing that with Turkey located at the crossroads of Europe, Asia and the Middle East, none of the major powers dare lose Ankara as an ally.
Nevertheless, there has been at least some pushback from Europe and the US at some of Erdogan’s more flagrant breaches of the spirit and letter of the economic backlash against Russia’s waging of war. Senior US officials visited Turkey in both October last year and late January to turn the screw on Erdogan over Ankara’s growing trade co-operation with Moscow, in both imports and exports. It’s clear the Erdogan administration is busting numerous sanctions, but Washington remains too polite to say it out loud.
The latest suspect scheme put forward by Vladimir Putin and Erdogan is to turn Turkey – linked by several pipeline strands to Russia – into a regional gas hub. How will Europe know that the gas it gets out of this hub is not Russian in origin rather than, for instance, Azerbaijani or Qatari LNG?
Another winner from the sanctions is Azerbaijan, which has also been playing both sides of the field, signing new gas deals with European Commission President Ursula von der Leyen on the one hand but boosting exports to Russia on the other.
Meanwhile, countries like Iran, China and India are seeking to strengthen trade turnover by pushing the International North-South Transport Corridor (INSTC) project for a better connection via a multimodal transport network that spans rail, road and sea. International experts say this project could become an alternative to the Mediterranean-Suez Canal route that would allow Russia to bypass waters dominated by its Western rivals.
The Middle Corridor
With China-Europe cargo forwarders looking to offer businesses the option of freight routes that avoid Russia, Turkey and other countries in the region are keen to help equip and build up the Middle Corridor, officially the Trans-Caspian International Transport Route (TITR) – connecting East Asia to Europe via Kazakhstan, the Caspian Sea, Azerbaijan, Georgia and Turkey.
For non-combatants, the challenge has been getting trade around Russia, the biggest country in the world, and with railways linking Europe and Asia. This has benefited countries in Central Asia (chiefly Kazakhstan) and the South Caucasus that have long held ambitions to create a complementary route across their territory with much talk of a new Silk Road.
As reported by bne IntelliNews in 2022, cargo dispatchers in China faced with sending goods to Europe via either Russian or Kazakh territory are increasingly opting for the latter. Volumes dispatched via Kazakh railways are booming, as is transport via Aktau and other Caspian seaports. The head of the Aktau Sea commercial port, Abai Turikpenbayev, forecast in mid-2022 that the volume on the TITR would increase sixfold during the year to up to 3.2mn tonnes.
Moreover, there is a new impetus to develop long-discussed routes westwards out of China, including the China-Kyrgyzstan-Uzbekistan (CKU) railway.
From fertiliser to coal at the Baltic ports
As trade between the EU and Russia slumps, there has been a dramatic fall in the cargo transported to and from Russia and Belarus via the main Baltic ports. Yet data provided by the main ports – Riga in Latvia, Klaipeda in Lithuania and Tallinn in Estonia – shows this has to a great extent been compensated for by other traffic.
Algis Latakas, CEO of the Klaipeda State Seaport Authority that manages the Port of Klaipeda, said in November that although the Klaipeda port was predicting a gloomy 2022 with a drop of up to 35% in cargo turnover, the year turned out much better: the general cargo handling volumes in the Port of Klaipeda in 2022 fell by only 19.7% during 10 months of 2022 y/y, to 30.02mn tonnes.
For many years, Belarusian fertiliser cargoes have made up a significant part of the port’s cargo turnover. In 2021, Belarusian fertiliser cargo accounted for 32% of total transport by volume, while Russian, Ukrainian and Chinese cargoes accounted for around 8% more. In 2022, however, Belarusian cargoes comprised just a mere 11-12% of the total cargo transported through the port. With the start of the war in Ukraine in late February 2022 and the subsequent sanction packages against Russia, those transit cargoes just disappeared.
The Port of Riga recorded an increased container cargo volume with 460,700 TEUs in 2022, a record-high cargo turnover rate, exceeding the previous year's result by 16%, and transshipped 326,000 TEUs, which is the highest annual turnover in its history.
Importantly, in 2022, coal transportation returned to the port of Riga, and with a turnover of 5.2mn tonnes, it formed the second-largest group of handled cargo. Compared to the previous year, when coal transshipment in the port of Riga had practically stopped, in 2022 the flow of coal increased 4.6 times. Instead of Russian coal transit, coal from Kazakhstan, Africa, Australia, Indonesia and other coal-mining countries is currently being handled at the port.
In 2022, the Port of Tallinn saw 18mn tonnes of cargo pass through the port, a 21% decrease y/y, due to the implementation of sanctions on Russian and Belarussian cargo. However, the decline in liquid bulk and dry bulk volumes due to sanctions was somewhat offset by growth in all other cargo types, the port said.
New natural gas routes
Sanctions and fears of a Russian decision to sever supplies have led Central and Southeast European countries to intensify their search for alternative suppliers of natural gas, with many alighting on Azerbaijan. The country had long been seen as an important supplier via the Southern Gas Corridor (SGC), an ambitious project launched long before the war began to diversify Europe’s gas supply away from Russia.
Azerbaijan already supplies some of Southern Europe through the Trans-Adriatic Pipeline (TAP), but since the start of the war, several Southeast European countries have started investing into new interconnections with their neighbours to enable them to tap into supplies of gas from Azerbaijan. Most recently, Bulgaria started the construction of a new gas link with Serbia with capacity of up to 1.8 bcm a year will help increase energy security and diversify gas supplies, while North Macedonia is working on plans for a gas interconnector with Greece.
At the same time, in 2022 EU became the world leader in LNG imports, overtaking China, Japan and South Korea, according to data from consultancy Refinitiv.
During the year, EU countries expanded LNG purchases by 58%, up to 101mn tonnes, equivalent to 137 bcm of natural gas, slightly less than the 155 bcm Russia delivered to the EU in 2021.
Earlier the IEA reported that Russian sent slightly more than 100 bcm of gas to the EU in 2022, and after the explosions appeared to have caused leaks in the two main Nord Stream gas pipelines on September 26 last year, the total piped gas deliveries to the EU are anticipated to fall to between 50 bcm and 60 bcm, almost exclusively via Turkey and Ukraine.
Germany remains the largest market for natural gas in Europe and until recently had Russia as its largest supplier. This position is now held by Norway, which has ramped up pipe gas supply to the country over recent months. Germany has rushed into operation five floating LNG (FLNG) terminals and is currently building its first onshore terminal, which could come into operation by this coming winter.
Contributions from Ben Aris in Berlin, Will Conroy in Prague, Iulian Ernst in Bucharest, Linas Jegelevicius in Vilnius, Clare Nuttall in Glasgow and Kanat Shaku in Almaty.