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BLUF (BOTTOM LINE UP FRONT)
Welcome to our fifth newsletter of 2024!
In this issue we take a closer look at a hot-button issue – of course, we’re talking about lubricant additives. Lubricants are essential for Russia’s war machine and the country’s petrochemicals industry is reliant on special additives, mostly imported, that give lubricants essential properties that allow them to work under punishing conditions. Since Russia’s full-scale invasion, the world’s Big Four lubricant additive makers have pulled back from the country, but we take a look at two companies, one Chinese and the other South Korean, that appear to have become essential players in the market, and how they might be incentivized to change direction.
In the Digest, we review the unprecedented (at least since February 2022) raft of sanctions announced by the US to coincide with the two-year anniversary of Russia’s full-scale invasion of Ukraine following the death of opposition figure Alexey Navalny. We also look at the “Kremlin leaks” – an extraordinary trove of documents from the Russian presidential administration that detail a US$1 billion campaign to “pre-rig” the election coming later this month (prediction: he will win).
In Qui Custodiet, a stunning investigation by The Insider reveals substantive evidence for the first time that the COO of Germany’s Wirecard – a payment system that blew up because of fraud in 2020 – was indeed a Russian agent. We also see how the latest round of US sanctions has pushed Indian state and private oil companies to reduce dependence on Russian oil. In Around the World, we ask if Hungarian Prime Minister Viktor Orbán’s visit to Mar-a-Lago this week will provoke soul-searching about his ever-closer ties to China. We examine Poland’s military build-up and the wider risk of a new European arms race caused by Western inaction in Ukraine. Finally, we return to the question of Russian agents amid a French investigation of anti-Semitic provocations last November that reportedly led back to Russia’s Federal Security Service.
GREASING THE WHEELS
An army marches on its stomach, as the idiom goes, but lubricants are essential to keep mechanized forces rolling. You could be forgiven for thinking that Russia, as the world’s second-largest oil producer, has abundant lubricant supplies. Yet, since the full-scale invasion of Ukraine, Russian refineries have struggled to keep up with domestic demand for petroleum products amid factors ranging from a cut in subsidies, currency weakness spurring exports, and, more recently, Ukrainian drone strikes on their facilities. For the Russian military, a crucial weak point is the supply of the additives required to make specific types of lubricants needed for engines of all types as well as equipment for making weapons. As this research shows, two chemical companies, one Chinese and one South Korean, have emerged as important players in helping Russia meet wartime demand.
Russia has just one sizable domestic additives producer – Russian-Belarusian joint venture Additech – so must import the rest. Why is this important? As Stephen Blank and Andrew Fink wrote in January 2024 in an article for the Center for European Analysis (CEPA), “Saying lubricants are made of oil is like saying bread is made of flour. If you don’t use other ingredients like yeast and salt, you end up baking a pretty disappointing loaf.” Indeed, these additives provide lubricants with specific properties required by heavy vehicles, turbines and other military equipment, as well as for many types of heavy machinery used in military production.
Since Russia’s full-scale invasion of Ukraine, major multinational oil companies have pulled back from the Russian market, withdrawing from their lubricant operations. In turn, the so-called “Big-Four” global additive companies – Infineum, Chevron, Oronite, Lubrizol and Afton Chemical – have also pulled out. As the indispensable industry publication Lubes‘n’Greases has noted, these four not only account for most of the world’s lubricant packages, but they also provide lubricant makers with vital expertise in formulation and help certify that the products meet specifications.
Filling the gap
A review of the Russian civilian lubricants market shows that the full-scale war in Ukraine has driven many larger Western companies to exit the market, while Asian and domestic producers have grabbed market share. Notably, between 2021 and 2022, the import market share of European suppliers fell from 71% to 46%, while Asian countries rose from 26% to 53%, becoming the dominant source of imports. The North American share of imports fell from 3% to 1%. As prices rose by around 70% over the course of 2022, Russian consumers have switched to cheaper imports or domestic brands.
While bigger players from Europe and North America exited the civilian market after February 2022, mid-sized players from allied countries have remained. For example, German lubricant brands Fosser and Fuchs SE, and South Korea’s SK Enmove and GS Caltex, a Chevron joint venture, were reported to have retained or expanded their operations in Russia to fill some of the gaps created by the withdrawal of larger players.
For Russian lubricant makers, which include arms of Russia’s mostly state-owned oil majors, the challenge is to meet rising civilian demand while also fulfilling the immediate needs of the military. As reported by Lubes’n’Greases last year, Russian industry experts have said that while 60% of additives come from imports, some complex formulations rely on 90% of imported additives.
In the current geopolitical environment, that poses a challenge for Russia, as the global additives industry is highly consolidated. Of the Big Four, three are US-headquartered and one is from the UK with a large US manufacturing presence. Russia’s own Additech is reportedly scaling up, having doubled capacity between 2016 and 2022 to 40,000 tons annually, but this appears to be far short in terms of both capacity and product range to meet local needs.
A review of Russian customs data shows that the market for oil additives experienced a shock in value terms following the full-scale invasion of Ukraine in February 2022. (An important caveat when relying on customs data is that not all additives are coded the same way.) Notably, Russian media has reported regularly over the past two years on shortages of lubricants for the civilian market. In the meantime, according to a report in Lubes’n’Greases, Russian lubricant makers have been “frenetically seeking replacement additives” to replace supplies from the Big Four.
Customs data for 2022 show a dramatic result. Within weeks of the invasion in late February, the additives market was transformed, with a small number of Chinese companies virtually taking over the market and one, Xingiang Richful Lube Additive Company, becoming a dominant player, according to the available data.
A public company based in Henan province, Richful saw its revenues and net income nearly triple in 2022, while its share price hit an all-time high in October 2022. As Blank and Fink noted in their CEPA article: “This company appears to have one large additive manufacturing facility that is keeping Russia’s lubricant production going.” As they also observe, this represents a significant vulnerability.
Another important lubricant additive player is the South Korean company DL Chemical. A past review of public procurement data from Gazprom Neft – the oil arm of state-owned gas giant Gazprom – shows a significant volume of imports from Korean company DL Chemical during 2022 and early 2023. Specifically, Gazpromneft was importing an additive called DaelimSynol 1100. This additive improves the shear, the stability, and the viscosity index of lubricants.
Notably, DL Chemical acquired Houston-based specialty polymer and biochemicals producer Kraton in 2022 for US$2.5 billion. Kraton makes lubricants, additives and other chemical products. It is worth noting that DL Chemical is part of the DL Group, a South Korean conglomerate. In 2021, its DL E&C construction arm won contracts to build a chemical plant for Russia’s Baltic Chemical Complex and another to modernize a Gazprom Neft refinery. Both projects were put on hold after the full-scale invasion.
Squeezing the supply chain
Shortly before Christmas 2023, the US Treasury’s Office of Foreign Assets Control (OFAC) issued a “Russia Critical Items Determination” that included turbine oil and turbine oil additives. This means that foreign financial institutions can be sanctioned for “having conducted or facilitated any significant transaction or transactions, or provided any service” supporting the Russian military and industrial base with identified items. This is a classic example of a “smart sanction” as it targets a very specific point in the supply chain.
OFAC’s determination of this type of lubricant product reflects an ongoing effort to go after specific weaknesses in Russia’s war machine. Unlike export controls, this shift since late 2023 puts the onus on financial institutions and has, at least anecdotally, proven effective in deterring individual banks and companies in countries like China and Turkey from working with Russian customers in oil and other strategic industries.
In our previous in-depth story on lithium, we noted that the element is an important ingredient in lubricants, including those used in tanks. Russia does not currently mine lithium and is wholly dependent on imports. As it prepares multiple projects to substitute imports amid a global supply crunch, it is depending, over the short- to medium-term, on projects in Bolivia to secure supplies. With far less success over two decades, Russia has tried the same with CNC machines, trying to localize production, encourage foreign companies to set up domestic production and cover the gap with imports.
The same dynamic appears to be at work in the lubricant additives market, as the Additech joint venture works to increase its production volume and range, while companies Richful and DL Chemicals appear to be filling in the gaps. This does not imply any illegality by either company but underlines their role as enablers. In the case of DL Chemicals, its significant US presence can also be a point of leverage for both civil society and the government to encourage a change in its practices. Western governments could also contemplate preclusive buying of key additives to remove them from the market.
Another step is to issue Russia Critical Item Determinations on a much wider range of lubricant products, including additives, building on last year’s determination on turbine oil. As the US has been a negligible supplier of additives to Russia since 2022, focusing on foreign banks rather than American export controls would have a far greater impact. This would rely on an expert determination of what other additives are most in demand by the military and heavy industry. A more radical proposal would be the sanctioning of the lubricant arms of the largest Russian oil companies. This step would create real friction in Russia’s already vulnerable market for civilian lubricants, forcing both politicians and producers to make difficult choices about whether to keep passenger cars or tanks on the road.
US responds to invasion anniversary and Navalny death with a raft of sanctions
Ukraine’s Western allies were under pressure ahead of February 24 to make a clear statement ahead of the second anniversary of Russia’s full-scale invasion. The death of Russian opposition figure Alexey Navalny a week before only underlined the need to send a clear signal to the Putin regime that it would face real consequences for its actions. With the EU, whose sanctions process is necessarily public and drawn-out, the details of its 13th sanctions package were already well known. The US, on the other hand, dropped its largest set of sanctions since the full-scale invasion, targeting 300 individuals and entities, exceeding earlier guidance of “likely over 100” given in mid-February. The US both painted with a broad brush and went after specific vulnerabilities. It went after financial infrastructure, including payment systems, drone procurement, additive manufacturing, machine tools, certain lubricants, optics, hardware, software and more.
In sum, these sanctions reflected months of careful work by the US Treasury and the targeting of procurement networks in critical areas impacting the Russian war machine. This is important and goes beyond the symbolic designations of senior officials. The designation of the Alabuga Special Economic Zone (SEZ) in Tatarstan, where Iranian-supplied Shahid drones are assembled, covers a network of officials, universities and companies, was especially notable as it exemplifies the hybrid nature of Russia’s drone manufacturing. Amid the continued blocking of US aid to Ukraine in Congress, the sanctions should be seen as the effective deployment of the economic weapon by the administration. At the same time, even without Congress, the administration still has weapons it can use. As the Wall Street Journal Editorial Page recently argued, there is precedent for the seizure of frozen Russian sovereign assets held by the US through executive order. President George H.W. Bush did this with Iraqi assets in 1992. There are also arguments in favor of using draw-down authority to transfer an additional US$4.2 billion in weapons, amid questions of whether funds need to be approved by Congress to replace them. Still, there is little question that the only way to send a clear message to Russia is for Congress to pass the US$60 billion aid package and for the US and its allies to seize the US$300 billion in frozen assets, most of which are held in Europe. Those actions would be in line with the “devastating” consequences President Biden promised in 2021 if Navalny was killed and for a country that came within 300 feet of killing the Foreign Minister from NATO member Greece this week.
Kremlin leaks detail the buying of an uncontested election
Delfi Estonia led a consortium of European investigative media in dropping a bombshell story in late February detailing the contents of a leaked trove of Kremlin documents that describe Vladimir Putin’s US$1.2 billion campaign ahead of the presidential election on March 17. The analysis of the documents – apparently obtained from the presidential administration itself – reveals an eye-watering level of orchestration. An outsider might be forgiven for asking why a regime that controls all media, murders viable opposition candidates and stuffs ballots, among other measures, needs to spend so much money to pre-rig an election. As British Russia analyst Mark Galeotti notes in the reporting, the documents are important because they show on a macro level how the presidential administration is still trying to develop the ideology of a state it has ruled for 24 years while it seeks to exercise control of every part of society on the micro level.
Among many other things, the documents show how the Kremlin spent US$650 million on ostensibly non-governmental organizations to promote civil, moral and political values and even detail the “four sentiments” required for films and television, with tropes such as the heroic soldier in Ukraine. The oversight of culture by what one analyst dubbed “commissars” and a focus on youth camps and orchestrated displays of patriotism are distinctly Soviet, with the modern touch of trying to control the internet and social media. Especially grubby is the focus on delivering votes from occupied Ukrainian territories where people already face abduction, exile and murder. The documents also provide a useful glimpse of some of the individuals and groups that will likely be mobilized to interfere in the EU parliamentary elections in June and the US presidential election in November. Above all, the trove underlines the desperate need of a kleptocratic elite to try and control every aspect of society, and the implication that the slightest act of resistance, if not immediately crushed, poses a mortal threat.
The man behind Germany’s largest financial fraud outed as a Russian agent
The unraveling of Wirecard – once dubbed Germany’s PayPal – was Germany’s largest financial fraud in modern history. For those who weren’t defrauded, the story reads like a thriller, with management and a small group of investors deploying private investigators to go after journalists, activist investors and whistleblowers. In 2020, its CEO was arrested, and the COO fled to Russia via Belarus after the company became insolvent amid a US$2.1 billion hole in the balance sheet. But the story gets darker. The Insider (a TDP network partner) in partnership with Der Spiegel, ZDF, and Der Standard recently published a stunning investigation demonstrating that the fugitive former COO – Jan Marsalek – was an agent recruited by Russian military intelligence (GRU). Notably, Wirecard’s imprisoned CEO claimed it was Marsalek who funneled money from the company into offshore accounts. Most ominously, the story includes surveillance targeting a member of the team that investigated Marsalek’s case, journalist Christo Grozev. If the Wirecard story writ large was a lesson in tech-sector hubris and failed oversight – activist investors published an investigation accusing the company of money laundering back in 2016 – Marsalek’s identity as an Austrian citizen turned Russian agent suggested more. Marsalek reportedly had high-level ties to Austrian politicians and intelligence agencies. His story, ending with him hiding under an assumed name in Russia, underlines the degree to which Russian intelligence has penetrated Austria, from where he was able to create havoc as one of the architects of a giant financial fraud.
US sanctions threaten Russian oil sales to India
America’s sweeping sanctions package marking the second anniversary of the full-scale invasion of Ukraine (see above) is raising the barriers to Russian oil sales to India, Reuters and Bloomberg both reported over the last week. While Russia remains India’s largest supplier, market research group Kpler reported that imports from Saudi Arabia were up 22% in February, ahead of the latest round of sanctions. The reasons are not solely due to US action, Chinese demand has also reduced the discount available to Indian refiners, which sounds like positive news for Russia’s oil majors. At the same time, Reuters cited sources from India’s largest refiners, including state-owned Indian Oil as saying they were shying away from firm commitments to take contracted volumes of Russian crude in the coming financial year due to fears of running afoul of US sanctions. Current contracts run out at the end of March, so the industry – and the US Treasury Department – will be watching to see what happens next.
Orbán’s China Connections Getting Noticed Coinciding with Hungarian Prime Minister Viktor Orbán’s visit to Donald Trump’s Mar-A-Lago residence at the end of this week, analyst Dalibor Roháč wrote in American Purpose about Orban’s Chinese connections, the subject of our last newsletter. As Roháč noted, Orbán’s latest deal with the country, which creates an unprecedented security cooperation pact between an EU member state and China, is “likely designed to give the Chinese government greater leeway to spy on and police its citizens living in Hungary.” As noted in our last issue, there are other aspects of the relationship that should concern Hungary’s American allies. For example, Hungary has served as Huawei’s European logistical hub since 2011. In 2019, the Trump administration raised its concerns politely but publicly and warned that Huawei’s presence could impact the security of US assets in the country. As the Orbán visit this week underlines, he presents American conservatives with a real dilemma: Does his rhetorical commitment to many of their values outweigh his deep and increasingly strategic relationship with China? Unfortunately, in the current US political environment, it is difficult to have a public discussion about the risks and rewards of embracing Orbán and practical steps to address the real threats to US and European security posed by his policies. Poland reaches for great power status
Last fall’s legislative elections were bitterly contested, but Poland’s political forces are broadly united on one thing: the need to prepare the country for a future military confrontation with Russia. In September, the previous defense minister announced plans to give Poland the largest land army in Europe, in terms of personnel, by 2026. Earlier in 2023, the country also announced a US$465 million investment in a program to scale up private and public ammunition production, both to supply Ukraine and replenish domestic stockpiles. The work continues apace under Prime Minister Donald Tusk’s current government, with the country this week announcing its largest ever order for infantry weapons, a US$1 billion “mega deal” for Carl-Gustaf M4 recoilless rifles, ammunition and training equipment. Days earlier the country signed a US$2.5 billion contract for air defense systems software. The buildup – and accompanying rhetoric – indicate a deep concern about the reliability of aid from key allies, especially the US. The country’s foreign minister, Radek Sikorski, recently suggested that American failure to “come together with Europe and enable Ukraine to drive Putin back” would lead to the members of the “family of democratic nations” increasingly looking to their own defense and even starting a “new nuclear race.” While he focused on Asia, suggesting that countries like Japan and Korea might develop their own nuclear weapons to ward off China out of lack of confidence in US support, some interpreted his statement as a threat to pursue a Polish bomb (he has denied this). Poland’s build-up enhances NATO capacity, but when taken alongside such statements, it’s also an indication of a deeply concerning trend. The countries of NATO’s eastern flank are faced with the profound and immediate threat that they’ll be the next targets of Russian aggression if Ukraine falls, and their perception of unwillingness or inability on the part of Western allies to deliver much needed aid to Kyiv – such as the stalled US Ukraine aid package held up in Congress, or the Taurus missiles Germany has thus far been unwilling to provide – may decrease confidence that the alliance. Russian anti-Semitic provocations in France
Last November, a Moldovan couple were arrested for hate crimes after they allegedly were responsible for spray-painting stars of David on buildings in Paris. It was a dark reminder of the Holocaust in France at a febrile time, coming just weeks after the October 7 terror attacks in Israel and amid the Israeli army’s response in Gaza. At the time, prosecutors said the investigation into the graffiti had revealed a link between the Moldovans and another couple accused of painting similar graffiti a week earlier, who fled the country. In late February, Le Monde newspaper published an investigation detailing, based on French intelligence sources, how Russia’s Federal Security Service (FSB) allegedly organized the provocation as part of a wider set of actions in Austria, Romania and Spain. The reporting underlines that the purpose of Russian intelligence operations abroad goes beyond attempts to bring pro-Russian leaders and parties to power in Europe. It also stirs up social tensions and provokes real violence. Until Europe and the U.S. responds robustly to these provocations for what they are – acts of aggression – Russia will continue to combine disinformation and financial support to extremist parties with direct incitement to violence. |
