CIREC Monthly Report on Central Europe and Russia

October 2024, Issue 406

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  Monitoring Russia's chemical industry against sanctions and Russia's militarized economy

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Impact of sanctions on the Russian chemical industry

Although Russian production volumes have shown little overall change since the full-scale invasion of Ukraine in February 2022, sanctions and economic dislocation from the West have had a major impact on Russian organic chemical and polymer markets.  The effects have been felt across the board from domestic market sales to raw material sourcing, in addition to other key factors such as more difficult logistics, problems in securing plant equipment and components.  There have been advantages for Russian producers from sanctions, but overall these are heavily outweighed by the disadvantages of not being able to access Western technology and Western markets.

Due to sanctions and the swift exit of major Western engineering companies a number of projects inside Russia have had to be aborted or at least face an delayed schedule.  Unfinished projects have led to several major legal cases where the Russian partners are suing Western companies for breach of contract, despite the fact that these companies had little option.  Technology licenses have been sanctioned which means that has culminated in the abandonement of many Russian methanol and other chemical projects.  Those that have continued were fairly advanced by early 2022 and thus Russian companies such as SIBUR have found ways to replace Western equipment or Western expertise.

In terms of the domestic market, SIBUR and other Russian companies have benefited from the exit of Western companies and have been able to fill gaps in a wide range of product areas.  Polyethylene consumption has risen noticeably since 2021, particurlay in regard to pipe manufacture for water and gas.  Some of the demand for pipes has come from the new territories which Russia has annexed from Ukraine.  

In the organic chemical sector Russia is actively developing its own production of plasticizers, including phthalate-free such as DOTP (dioctyl terephthalate).  Since 2019, the annual consumption of DOTP in Russia has increased from 1-2,000 tpa to 106,000 tpa, and imports have decreased from 60,000 tons to 40,000 tons. The total consumption of plasticizers amounted to 180,000 tons in 2023.

Prior to 2022 Russian methanol producers depended heavily on exports to Europe in order to maintain high production levels, but the introduction of sanctions which came into full effect from June 2023 has had a major impact.  China has since become the major export market for Russian methanol which has involved much larger rail distances and low profit margins.  Synthetic rubber exports have undergone a similar cycle to methanol, but the higher prices of the various grades allow the costs of logistics to managed and to still be profitable.

China has become vital for not only Russian exporters but also imports of products that were previously sourced from the West.  Higher grade polyolefins are sent to Russia from China in addition to polyurethane raw materials such as isocyanates and polyols.  However, sanctions prevent some aspects of trade being undertaken and China's refusal to make payments with Russian counterparties has become a difficulty in purchasing imported equipment.

In conclusion markets inside Russia have adapted better than expected since sanctions were first introduced in 2022, and have performed even better than some of the European chemical sectors.  The process of replacing market has thus far been complex and challenging, and the removal of sanctions is seen as important for the chemical industry in the long term.  It is impossible to speculate This probably may only be possible following the defeat of Russia, and the emergence of a new regime.