News Focus: Ukraine conflict hits chemicals in Russis and Europe

14 April 2014 00:00 Source:ICIS Chemical Business

The Ukraine conflict is impacting chemicals companies across the region, as Europe faces natural gas price hikes and the indirect impact of sanctions, while Russian businesses plan to reorient from West to East as they adjust to potential problems in accessing Western finance and markets.

Although the Russian occupation of Crimea has, so far, resulted in limited sanctions against Russia, chemical companies in Europe who are currently negotiating contracts to secure future gas supplies can expect to pay a steep premium.

According to an analysis obtained from ICIS Energy, long-term future gas contracts now carry a risk premium factor for winter 2015 related to the Ukraine crisis. For the key UK National Balancing Point (NBP) this amounts to 3 pence per therm, which is described as “quite significant”.

USSR map

Prices for winter 2015 are now trading above winter 2014 while the opposite was the case before the Ukraine crisis. This is a reverse of the normal trend where contracts further out tend to gradually decline in price, according to ICIS Energy.

Companies trading into Russia also face the risk of inadvertently coming into contact with businesses owned by the 33 people blacklisted by the EU and subject to a travel ban and asset freeze.

According to a briefing document from UK-based legal services group W Legal, businesses and individuals who have any commercial dealings with companies belonging to the designated people will be subject to fines and up to five years imprisonment within the EU.

European chemical companies that trade with Russia will need to check their entire value chain, including finance, transport, insurance and purchasing to ensure they are not doing business with a business owned or part-owned by one of the people on the list.


Progressive Russian chemical companies such as Sibur are investing heavily to expand production capacities targeting not just their domestic market, but increasing exports to Europe.

Sibur declined to be interviewed for this article, but according to Ekaterina Kozinchenko, Russia-based vice president at management consultancy Booz & Co, Russian companies in many sectors, including chemicals, are reviewing their growth strategies for Europe because of the prospect of deteriorating political and trading relations with the region.

She said: “There are lots of plans for Russian groups to grow their market share in Europe. A lot of Russian companies are now investing in projects to grow this share. These very likely will not now happen also taking into account the fact that access to finance for Russia will be more difficult.”

Any restriction or reluctance by Western banks to lend for Russian chemicals projects could be very damaging. According to Kozinchenko, they are usually funded by a mixture of local and Western finance.

“The Russian financial sector is not healthy enough to support all these projects. Access to finance is very significant for Russian companies and there could be a reduction in the amount of new build projects: costs for projects will be much higher.”

She adds that Russia has a lot of potential for chemicals, especially as it has such an advantaged feedstock position. But the prospect of poor relations with the West is likely to jeopardise the sector’s expansion westwards.

On a more positive note, Kozinchenko believes that access to Western engineering expertise is not now so critical to the success of Russian projects.

“Russia has now done a number of these projects together with international companies – such as Sibur’s Tobolsk polymer plant. They have acquired some knowledge from international companies and we have some not bad EPC (engineering, procurement and construction) companies which could do it.”

She adds: “I know there are some companies which were focused on Europe and that is not the case any more. There is now a clear strategy for Russian companies to focus more on Asian markets and not on the EU.”

The prospect of Russia restricting gas supplies to Europe would hurt Russia, which relies heavily on exports to gain foreign currency reserves. So the worst case scenario, said Kozinchenko, would be restrictions on gas to Ukraine or the EU.

“Some European chemical companies consume a lot of Russian gas and any interruption would have a major impact on them: BASF uses Gazprom’s gas quite significantly,” she said.

Central and Eastern European companies, particularly fertiliser producers, would also be hit hard. Around 70% of Poland’s gas comes from Russia while 
25-30% of Europe’s gas comes from Russia.

Ukraine and its chemicals industry, especially fertilizers, would suffer significant losses if the conflict resulted in restrictions to gas supplies.

Around 8-9% of the country’s exports are fertilizers with its main plant being owned by Russia’s Lukoil.


Kozinchenko points out that the prospect of the closure of the Black Sea port of Odessa would disrupt trade between Russia, Ukraine and Europe significantly as this handles a lot of goods moving to and from Russia.

“This port is near Crimea so if there is a further intervention it could be closed – there is some threat to this port as it is in eastern Ukraine. Eight percent of global fertilizer trade (mainly from Ukraine) goes through this port so if it is closed the impact will be significant,” added Kozinchenko.

By Will Beacham