The West needs Russia’s raw materials – but not as much as it thinks

You will have seen the script. Russia supplies 40 per cent of the world’s palladium, 90 per cent of its neon, 30 per cent of titanium, while Russia and Ukraine together produce a third of the world’s exported wheat. No wonder the commodities markets have been all over the place. The aluminium price has doubled in 18 months, while wheat has risen by a half since the start of last year. Traders have decided that farmers in Ukraine might be justified in finding more urgent things to do than sowing next year’s crop.

As everyone now knows, the cost of almost all raw materials, from oil and gas to metals and maize, is rising strongly, driving inflation everywhere. The last time wheat cost this much, it triggered the bread riots which led to the Arab spring. Yet this striking statistic disguises an even more striking one: that commodities are terrible long-term investments. The $900 per bushel spike in 2012 was followed by a long bear market which took the price down to $400, despite more mouths to feed, a shrinking acreage under production and growing affluence round the world. Only the war in Ukraine has driven the price past its previous peak.

Brent crude oil reached $125 in 2012, the equivalent of $157 now, adjusted for UK inflation. The war may drive the price much higher than today’s $100, but crude as an investment has been even worse than lending to the UK government. A similar pattern can be seen almost everywhere in these markets. A short term squeeze in any commodity where Russia is a major supplier will be painful, but as every trader knows, the solution to high prices is high prices.

In other words, higher prices stimulate efforts to find alternatives. The world is not going to run out of resources, as Gale Pooley argues in Superabundance, a book which will cause trouble when it is published in the UK in August. He has tracked the Simon Abundance Index, which measures changes in prices, global incomes and population. Over the 40 years to 2020, the world’s population grew by 75.8 per cent, while the “personal resource abundance” – essentially, the average, inflation-adjusted disposable income – grew by 303 per cent. Far from falling as the world became more populous, individual wealth rose. He told the Adam Smith Institute all about it here.

In 1980, Julian Simon challenged Paul Erlich’s apocalyptic predictions of doom, scarcity and famine from too many humans in his best-seller The Population Bomb. Simon bet him that a representative clutch of metal prices would be lower a decade hence. In 1990 he won the bet, as the inflation-adjusted prices were 37 per cent lower. Erlich declined to bet again, while Simon developed his Abundance Index. This accepts that the world’s resources are (obviously) finite, but that growing knowledge allied to our ability to find new and better ways of using them is infinite.

This implies that as a planet, we will never run out of anything, no matter how many of us there are on it. It’s quite a claim, but centuries of accumulating knowledge and how we use it support Simon’s thesis, and unless these drivers are suddenly about to go into reverse, it is hard to see why it is not true. So the West may be beholden to Russian palladium, neon and titanium today, as well as their oil and wheat, but the pain from going without them will not last.

In the end, prices will fall and hurt the Russian producers and economy much more than ours. It is people’s restless desire to do things better (and freedom to do them) rather than possession of valuable raw materials, that determines the prosperity of a state’s citizens.

He’s Russian, so that’s enough

Here’s a big, solvent, internationally-spread UK-registered company whose shares are yielding 67 per cent – that’s not a missing decimal point, but a dividend equal to two-thirds of the market price – except that you can’t buy the shares. The company is Evraz, the Russian-based steelmaker, and trading in the shares was suspended by the Financial Conduct Authority “in order to protect investors.”

It’s not clear from whom the FCA was protecting investors, unless it feared some terrible, value-destroying action from the company’s 29 per cent shareholder, Roman Abramovich. Yes, him again. Now he has been sanctioned by the UK government, it seems that almost anything connected to him is fair game, and as if to make the point, all the UK non-executive directors of Evraz had immediately run for the exit.

While their resignations are understandable as a gesture against the horrors in Ukraine, neither their departure nor the FCA’s precipitate action is obviously in the interests of the shareholders the authority is there to protect. Nor does the suspension make any difference to Abramovich, since he could hardly shift much stock even if he wanted to. As the FCA should know, that is not how markets work.

Protestations from the company that it makes steel for construction rather than for tanks cut no ice, nor did its emphasis that Abramovich could appoint only three of the scheduled 11 directors.

This is a very bad precedent. At what point should the FCA step in with a suspension order in future? 20 per cent of a company? 15 per cent? Or if any of the hundreds of Russians sanctioned by the British government is executive chairman or CEO of a UK listed company? If the sanctions weapon is used against other individuals from other countries, would their shares be suspended too?

The move hardly makes London a more attractive place to list if a company’s shareholders can be arbitrarily punished this way. Like so much else in the constant attempts to damage the Putin administration, this looks like a case of “Something must be done, this is something, therefore it must be done”.