A Trainspotters Guide to Running Sanctions in Eurasia

Firstly: why write this? I am an investor and care about where the world is and where it is going and how that might impact security prices. We are in the midst of a commodity price shock following the Russian invasion of Ukraine and for each and every commodity the questions are:

• How much supply has actually been lost? For how long?

• If the supply stays online in Russia or Ukraine, how does it get out?

• Why can or will buy it, and how will they move it?

On the first point I am resolutely anti consensus here: if Russia has had its reserves frozen and needs to produce to get gold or some kind of barter trade going there will be no holding back on production whatsoever, especially since equipment from the likes of Sandvik might wear out and not be able to be replaced. Can Russia move entirely onto Chinese mining equipment over time? We are going to find out with significant implications for companies like Norilsk.

On the second point, this all comes down to what the product is and logistical capacity. From what we are seeing from shipping data Russia is struggling to get freight shipping access. That leaves trucking, and rail. But rail to where? Kazakhstan freight linkages are meagre so China is going to have to play a big role here otherwise Russia is stranded. Where China lands here between State Department warnings and a “no limits” friendship with Russia is going to be very important for the world and markets and it is largely a question of rail freight.

In 2001 I spent a summer in Harbin learning Chinese and traveled around the are including the Russian border. Later in 2010-2011 I did a number of work trips to Mongolia. More recently, I have been doing some work with some academics on Chinese rail and coal logistics. So I know more (more than I would like) about freight rail interconnect in the area. Given that nobody is going to send ships to collect goods from Russia anymore rail interconnect is going to be very important for evaluating how large, and how durable Russia’s trade shocks are going to be. Understanding the topology of these logistics networks is also going to be important for working out where Chinese policy is going: if China starts importing as much as it can, “no limits” would seem to be very much a thing. If China build more rail interconnect, even more so. If there is no uptick in trade, we can probably infer that US threats work or China has decided to wash its hands of Putin and perhaps Putin is living on borrowed time economically and logistically. I am a big fan of revealed preference and there will be nothing more clear than what happens here.

China’s Rail Interconnect to Russia

China has only one direct rail crossing to Russia at Manzhouli whose capacity will soon reach 70MT. There are a number of bridges around Heilongjiang but it is telling that if you look at Khabarovsk there is no rail line and you *still* have to take the bus to get here from Harbin. For Manzhouli press articles give some sense of the freight flows which are growing with an expanded terminal area. The other way you get to China from Russia is rail via Mongolia - and happily Mongolia produces excellent rail statistics though they may be less excellent if this post blows up.

After years of delays Mongolia and China suddenly became very decisive about sorting out their freight interconnect last year, and particularly so from December. That is quite a coincidence though construction of major coal freight lines had been going on for some time. It seems that urgency on the China side increased markedly from December and terms for container terminals were quickly hashed out in February. This is great for Mongolian coal exporters and Mongolia as a whole but quite clearly will provide additional freight capacity for Russian exports if there is capacity. That being said historical transhipment volumes are small - 6 million tons annualized which is unlikely to move the needle much for Russia.

What is most remarkable is that Russia’s main freight line across Siberia that primarily transports coal has no direct connection outside of Manzhouli despite running to Khabarovsk and being less than 20km from China’s rail line to this corner of Heilongjiang. If China wanted to build out another border freight port it would not take long. I imagine the US will take an active interest in this part of the world as far as satellite imagery goes.

Finally there is the option of transhipment from Russia via North Korea to China. There is a bridge at which you can occasionally see coal freight crossing from North Korea to Russia which I think is a sanctions violation anyway. Regardless, now Russia is becoming North Korea this is probably less of a problem and could be a means by which Russia could export more high value products across North Korea to Dandong assuming the North Korean rail is servicable.

Google earth shot of Khasan and bridge to North Korea

I should point out that aside from this rail there is extensive interconnection via bridges. Russian products could be shipped to Siberia and then trucked from rail heads across into China which would be much harder to monitor.

So, what does Russia export to the world and what is likely to make it across? As you can see Jason Furman’s characterization of Russia as “basically a big gas station” is not without merit.

Excluding oil and gas and coal which are bulky and hard to export and precious metals which are very easy to smuggle there is approximately $143bn left. Wheat exports are approximately 35MT, fertilizers are approximately 40MT, copper is approximately 800kt, Nickel is smaller at 200kt. So, can higher value non energy commodities still make it out via overland transport to China? My guess would be “yes”. Russia has already expanded the TransSiberian Railway to over 150MT and most of the exports below would fit under that constraint assuming China would want them.

How will we know China is doing this? Firstly there will be a hierarchy of proof. First will be satellite imagery and counting rail cars - expensive but well within the scope of the USG. The second will be freight data through Mongolia and China, assuming someone can get it. Thirdly will be a notable slowdown in China’s purchases of wheat, wood and fertilizers from abroad. The railway freight constraint is unlikely to support coal exports given how tight capacity will be and China will likely buy from Mongolia instead and hasten railway expansions. I do not see a way out for much Russian coal here.

The biggest tell will be if any infrastructure is brought forward to better connect the Trans-Siberian to China’s main network. Trucking or barging from Russia to China across the border is an option shorter term but won’t be that cheap. Seeing any changes here will again will be for satellites. It will also have implications for Taiwan’s risks: China no doubt is watching the Black Sea empty out to shipping and noting that in a real fight there will be no imports by sea. The more China shores up supply lines by rail the more room to move they have on Taiwan.

How these expansion proceed, if at all will be a major tell for US policymakers. Intent is hard to measure but capabilities are not. The calculus for people more enthusiastic about a rules based order are clear too: if you want to be safe, make sure you can secure your own energy and food as much as possible. Energy security is decarbonization is security. It is that simple.