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BLUF (BOTTOM LINE UP FRONT)
Welcome to the first newsletter of 2024! In this issue, we take an in-depth look at Russia’s emerging problem of obtaining lithium, a material essential for its war effort. The country stopped mining lithium in 1997, judging it could obtain the mineral easily and cheaply on the world market, and it did so for many years, buying from China and Latin America. But the energy transition has turned lithium into a booming commodity, causing prices to surge and leading to predictions that supplies will run out in 2027 as the world waits for new capacity to come online. As a result, Russia is dusting off its own mining projects, including one that could be an environmental threat to Northern Europe.
In the Digest, we review some powerful reporting by the Organized Crime and Corruption Reporting Project (OCCRP) and its local partners on the near monopoly supply of cotton cellulose from Kazakhstan and Uzbekistan to Russia. When nitrated, cotton cellulose is the base material for propellant used in artillery and ammunition. And while both countries are officially neutral in the war, Russia’s military could not function without their supplies. Meanwhile, we also read through the US House Foreign Affairs Committee’s Bureau of Industry & Security – 90-Day Review Report. The report engages in some strong rhetoric but also makes common sense reform suggestions for the BIS that can help slow or even prevent technology transfer to unfriendly states such as China and Russia.
In Qui Custodiet, we take the advice of an economic historian, citing precedents going back to Rome’s first war against Carthage (and wisely not the Third Punic War), to push for confiscation of Russian assets abroad to support Ukraine’s rebuilding. We note an Executive Order targeting financial institutions from third countries that support sanctioned companies and the Russian war effort. In Around the World, we stay in Europe, looking at a trio of stories that are linked by concerns about Russian malign influence and attacks on the rule of law. In France, as the Washington Post reports in an important investigation, a far-right figure operates openly to subvert French democracy with Russian assistance. In Slovakia, Prime Minister Robert Fico has enraged Slovaks and European institutions with a crime-reform bill designed to gut protections that helped drive him to resign from office back in 2018. And we see how Hungary could end up controlling the European Council in two different ways due to an unusual set of circumstances in Brussels.
RUSSIA NEEDS LITHIUM
Russia has a lithium problem. While it is among the top ten global leaders for estimated lithium reserves, it has not mined lithium domestically since the late 1990s. The country needed around 700 tons of lithium per year before its full-scale invasion of Ukraine and its needs can only have grown. Russian data suggest that lithium may be more in demand for lubricants, such as Lithol-24, one of the main lubricants required by Russian tanks, than for batteries. It is also a critical component of nuclear fuel. For the last 25 years, Russia’s policy has been to rely on imports from low-cost producers in Argentina, Bolivia, Chile and China. This strategy has run up against two big problems – surging global prices and sanctions.
On the price side, the global energy transition has kicked off a rush for lithium for batteries, accounting for around 80% of the consumption of the metal. S&P Global Commodity Insights reports that lithium prices rose 533% between 2018 and 2022 while estimating a global shortfall will emerge by 2027. At the same time, S&P warns that many large mining groups are wary of entering the market for a metal that is so abundant yet requires specific technologies. Not least, companies fear the perfection of new technology that could extract lithium from seawater would make huge investments in conventional mining obsolete.
Sanctions are Russia’s second headache. Chile and Argentina, which supplied 80% of Russia’s lithium, suspended their exports to Russia in 2022. China, another major supplier, is facing its own shortages. These combined factors have left Bolivia as the only remaining major foreign source for Russia’s lithium needs. However, Bolivia only produced 600 metric tons of lithium carbonate in 2022—insufficient for Russia’s needs even if it wasn’t also exporting to China.
Import substitution
There are no prizes for guessing what Russia’s playbook is in this situation. First: develop additional external supplies. Russian state nuclear agency Rosatom, in a partnership with Chinese battery giant CATL, reportedly invested US$1.4 billion to build more production capacity in Bolivia’s iconic salt flats. Rosatom has also shown interest in projects in Tanzania, Namibia and Zimbabwe. Second: use state companies – unburdened by worries about profitability, the environment or long-term economic viability – to lead costly projects to develop domestic production capacity as quickly as possible after ignoring the issue for decades.
A survey of recent Russian reporting suggests at least four large lithium mining and recovery projects are in the works. In by far the largest, Rosatom and Norilsk Nickel announced a joint venture in April 2022 to develop the Kolmozerskoye lithium deposit in the Murmansk region, which represents nearly 20% of the country’s known lithium reserves.
A generalization of lithium mining internationally is that it is both costly and environmentally impactful, an irony given its central role in decarbonization. As the Columbia Climate School has stated, it involves “the use of large quantities of water and related pollution; potential increase in carbon dioxide emissions; production of large quantities of mineral waste; increased respiratory problems; [and the] alteration of the hydrological cycle.”
Indeed, a now-exiled activist from the local Sami indigenous community described the Kolmozerskoye approval process in stark terms: “When in a state of war, the state will use repressive means and fast-track solutions to approve the project. It is like when you put a gun against somebody’s head and demand project approval.”
Countermeasures
Russia’s import substitution strategies often fail. This is the case with CNC machines, where two decades of import substitution measures have failed to provide the country with the ability to build sophisticated machine tools. Sadly, as PBS and others have reported, this has not stopped Russia from obtaining the machines, consumables and spare parts from Western companies, including after the full-scale invasion of Ukraine in February 2022.
In the case of lithium, we cannot assume all or indeed any of these projects will fail. While Russia cannot build sophisticated CNCs – or, indeed, an electric car that is not ridiculed at home and abroad – it is a country built on resource extraction with state-run mining giants and smaller players. However, while Russia has a deep well of mining expertise, it is still reliant, in many instances, on foreign technology. According to a brochure for Russia’s biggest mining industry exposition in April 2024: “It is common knowledge that during many years the mining industry in Russia has been dependent on the import of machines, equipment and spare parts. Experts provide the following figures: import dependence is estimated to be 50-55%, for open mining – at least 80%. The 60% of reagents for minerals processing were imported from abroad.”
This constellation of factors suggests that the US and its allies have an opportunity – bound by a clear window of time – to exploit a strategic vulnerability and weaken the Russian war machine. This will require coordinated, international action.
The first step is to address Russia’s reliance on interim supplies from a single country. The US and Bolivia have endured nearly two decades of tensions under multiple US administrations and Bolivian President Evo Morales from 2006-19 – one reason the country has brought in China and Russia to develop its lithium reserves. However, other Latin American countries and several EU countries enjoy far greater credibility, with the EU helping to broker Bolivian elections in 2020. This trust allows for dialogue about offering Bolivia more sustainable mining technologies and partners, for instance. With a coming shortfall in the global lithium market, the West can study market-based solutions that emphasize indigenous rights and equity – indeed, Chile’s government has transformed how it regulates and taxes the industry in recent years.
Second, international coordination is required to keep Russia from acquiring the mining technology and reagents required for lithium mining. Rosatom, the main player, is not sanctioned, except by Ukraine. The reason for holding back on this designation is likely the company’s significant role in the global uranium market, including the transshipment of uranium from Central Asia to Europe. This is unlikely to change, so the emphasis of any sanctions should be on specific subsidiaries and operating companies set up for the new mining projects. Export controls can focus on specific technology and reagents. Most importantly, coordinated enforcement efforts are required to deter supplies through third countries.
Lithium represents a significant opportunity for a military-style campaign approach to degrade Russia’s war effort. As the world enters a period of unprecedented lithium demand, there’s a chance to redirect technology and supplies to projects outside of Russia that are environmentally sustainable, safe for workers and provide equity for residents. By contrast, the Kolmozerskoye project will have none of these protections. Instead, it will be run with wartime urgency and will be around 100 miles from the Norwegian and Finnish borders in an ecologically fragile northern environment. Beyond the moral clarity of supporting Ukraine, stopping this and other Russian lithium mining projects is an urgent project for Europe’s environmental security.
Central Asia’s cotton feeds Russia’s war machine
Kazakhstan and Uzbekistan are officially neutral in Russia’s war against Ukraine. But, as demonstrated by a painstaking investigation published in late December by the Organized Crime and Corruption Reporting Project (OCCRP) and its local partners, both countries are critical suppliers for Russia’s propellant industry, making it possible to keep up production of shells and ammunition. The countries supply almost all of Russia’s imports of cotton cellulose – a byproduct of cotton cultivation. Once imported to Russia, a half dozen or so plants nitrate the product, creating nitrocellulose, also known as gun cotton, the basic ingredient in propellants for artillery, tank main guns, small arms, and other gun systems. OCCRP’s reporting names the companies exporting cotton cellulose to Russia – in the case of Uzbekistan, two companies dominate, while in Kazakhstan, a single company controls the entire market.
It is true that cotton cellulose has non-military uses, including in the production of paint and lacquers. But the growth of exports since the beginning of the full-scale war, combined with data on the importers and contracts, suggests much of the cotton cellulose is going to propellant makers. The reporting has some good news, however, with a claim from Kazakhstan’s exporter that it had ceased exports last summer after its counterparties were sanctioned. It is too soon to claim a win, but the reporting underlines the importance of individually sanctioning each part of the Russian military production chain, including importers and other middlemen. The US, EU and UK have been reluctant to sanction all but the most blatant front companies in Central Asia. For cotton cellulose, this approach makes sense if we offer alternative markets or simply buy out supplies – an approach known as ‘preclusive buying.’
Thwarting China’s rise through export controls
Representative Michael McCaul (R-TX), chairman of the House Foreign Affairs Committee, does not pull his punches in the Bureau of Industry & Security – 90-Day Review Report published in December. In essence, he blamed the Commerce Department’s Bureau of Industry & Security (BIS), the agency that manages export controls, for enabling China’s rise as an economic and military superpower “in the pursuit of short-term industry profit.” Some of the rhetoric may be partisan, but his points cover administrations of both parties going back decades. And if you look at the document as a playbook of what to do now about China, or indeed Russia, it sets out an action plan that warrants attention.
The report notes that “despite China’s strengths, it has several technology chokepoints—areas in which it is reliant on the United States or other countries for foundational technology.” It cites semiconductor technology, already the subject of Biden administration restrictions from October 2022 and 2023. Proposals include mandating that BIS refer license applications to other appropriate agencies, including Defense, Energy, and State, with relevant expertise in the product, while instituting a “presumption of denial” when China is involved. Another important point concerns so-called EAR99 items – ones not on the Commerce Control List (CCL) – which can nonetheless be dual-use or high technology items that are emergent technology and hence not yet on the CCL. The report calls for their review and potential inclusion in the CCL. One particularly important proposal – one that should be consistent across the government – is the inclusion of entire companies or “corporate networks”, including all subsidiaries, in an Entity List designation, not just one entity. Finally, and arguably the most important point for our China and Russia policies, is a ‘plurilateral’ approach with our allies that ensures the same restrictions are applied at least in the most vital areas (AI, quantum computing, biotechnology) across the US, Europe and our Asian allies.
Seizing Russian reserves
G7 officials moved in mid-December to explore ways to confiscate US$300 billion in immobilized Russian sovereign assets in Western institutions, with Bloomberg reporting on 10 January that President Joe Biden’s administration is throwing its support behind legislation allowing it to do so. It is a bold move from the US and EU given additional urgency by the failure of aid bills to pass in Washington and Brussels. One doesn’t need to be a Russian apologist to have concerns about the move; it could undermine faith in Western banks and will assuredly lead to Russian seizures of assets owned by Western companies in Russia. Regarding the latter concern, of course, Russian law already allows for the government to impose external management on, or seize assets owned by, companies from “unfriendly countries” at will. For companies like PepsiCo, the risk of expropriation has existed since at least the beginning of the war, regardless of Western action. Economic historian Simon Hinrichsen, writing in the FT, makes a clear moral and historical case for the payment of reparations by aggressors that goes back to, er, the end of the First Punic War in 241 BC. He notes that the estimated size of reparations tracks Ukraine’s estimated material losses and, as a share of Russian GDP, is not excessive compared to similar reparations. Writing in the Economist, Lawrence Summers, Philip Zelikow and Robert Zoellick argued that, far from setting a dangerous precedent, seizing Russian assets is critical to upholding international law. That said, confiscating Russian assets is not a replacement for Western aid. The first should be directed at rebuilding damaged infrastructure, homes and schools, while the latter should be supporting the ongoing running of the state. It would be dismaying if Ukraine were to receive reparations only to have to immediately direct the funds back to fighting a war unjustly imposed upon them.
US expands sanctions authorities to target financial institutions
Just before Christmas, the White House announced an executive order to expand sanctions authorities to target “financial facilitators of the Russian war machine.” With this quiet and welcome shift, the U.S. has signaled a change in how sanctions are used – from a means of punishment to a means of statecraft or even a weapon. The order targets both “witting and unwitting” financial intermediaries that are facilitating Russia’s acquisition of raw materials and technology. Specifically, the order allows the sanctioning of financial institutions that have provided services to sanctioned entities and those that provide services for the “military-industrial base.” Undetected intermediaries and foreign financial institutions have aided and abetted Russia’s unrelenting military build-up. Russian companies cut off from most US dollar transactions, and have sought ever more creative solutions to make payments. But most of the banks who are facilitating this cannot survive long without access to SWIFT and US correspondent banks.
France’s fellow travelers
At the end of December, the Washington Post’s prolific Catherine Belton delivered a major investigative story outlining how Russia continues to work to put Moscow-friendly politicians in key positions of power in France. If the reporting is important and new, the underlying tale, depressingly, is not. Belton allows far-right kingmaker Jean-Luc Schaffhauser to describe his overt agenda of putting pro-Russian, far-right governments into power not only in France but across Europe. The story also describes a series of documents showing how Sergei Kiriyenko, the deputy chief of staff of the Kremlin administration, has instructed Russian activists to sew political discord in France. This, of course, has a longer pedigree. Back in 2018, it came out that an obscure Russian bank had loaned the party of perennial far-right presidential candidate Marine Le Pen around US$12 million in 2014. Schaffhauser was reportedly the intermediary. The bigger picture suggests that the Kremlin will be busy ahead of France’s 2027 presidential elections where – three years ahead anyway – the field is wide open, not least because Emanuel Macron cannot run again due to term limits. Until European countries and the US take seriously Russia’s now-existential need to install allies in countries larger than Hungary and Slovakia, the West faces the very real risk of a pro-Moscow government in hock to Moscow at the heart of NATO and/or the EU.
Slovakia’s criminal reform bill
When a criminal reform bill brings out thousands of protestors in Slovakia, normally one of Central Europe’s quieter corners, and raises alarm in Brussels, it is fair to ask if the legislation is actually about improving the criminal justice system. Indeed, both the Slovak opposition and European institutions have reason to be concerned about the rule of law. The proposals that the government of Prime Minister Robert Fico has sought to fast-track through parliament include scrapping a special prosecutor’s office for high-profile graft cases, limiting the protection of whistleblowers, and reducing sentences for financial crimes. These moves come alongside plans to cut funding to public broadcasting and break it up into separate units to reduce its independence. Slovakia’s president, a human rights lawyer and anti-graft campaigner stuck in a largely ceremonial constitutional role, took the unusual step for her office of publicly blasting the moves as a “threat to fundamental rights and freedoms of Slovak citizens.” For observers inside and outside of Slovakia, Fico’s moves seem transparent – he appears to be trying to get the institutions that led to his resignation in 2018 in the aftermath of the killings of investigative journalist Jan Kuciak and his fiancée Martina Kusnirova. The investigation of the killings led to the acquittal of the alleged mastermind of the plot but led to the resignations of senior law enforcement officials while sparking the largest protests seen in independent Slovakia. Fico seems committed to avoiding a repeat and it’s not clear that Brussels or the opposition can stop him.
President Orbán, to reign over Europe?
It’s a possibility that dismays most European leaders and that is hard to explain to anyone not steeped in European Union governance: Hungary will assume the rotating presidency of the Council of the European Union in July 2024. Meanwhile, European Council President Charles Michel is stepping down early to run in European elections in June, requiring the EU to agree to a successor. If they are unable to do so expeditiously, Hungarian Prime Minister Viktor Orbán could become temporary president until the end of 2024. Viewed in many Western capitals as an authoritarian in thrall to Vladimir Putin, the real effect of Orbán’s oversight of key institutions in the second half of 2024 is hard to predict. At the end of 2023, he was not able to stop the accession progress of Ukraine and Moldova but was able to block billions of euros in aid to Ukraine. Asked about the prospect on Ukrainian TV, Foreign Minister Dmytro Kuleba said Hungary’s temporary dominance would not harm Ukraine and that Kyiv had worked hard with Brussels to establish clear timelines and decision tracks. He also reminded viewers that Ukraine, as a democracy, had to respect the decisions of other democracies. Orbán, in the meantime, could be about to get a lesson in the very weakness of the institutions he so often undermines.
