Isolated by Western sanctions, Russian metals producers are increasingly turning to China, which has gone from being a primary competitor to a principal client.

The EU’s fourteenth sanctions package adopted in April included bans on imports of Russian aluminium, copper and nickel, all critical inputs for producing a wide range of goods from drinks cans to semiconductors and electric vehicles (EV).

Since the full-scale invasion of Ukraine in February 2022 and the subsequent sanctions, Russia has increasingly been forced to redirect its metal exports from Europe to China. Rusal, Russia's top aluminium producer, reported that its revenues from exports to China almost doubled in 2023 despite China's substantial domestic aluminium production and international competition. Nornickel, Russia’s leading producer of nickel and copper, saw its revenue from exports to China grow by 74.2% in 2023, while revenue from exports to North America fell by 30%. Nornickel head sanctioned oligarch Vladimir Potanin said that China will soon account for over half of the company’s sales, Vita Spivak reported in a recent paper for Carnegie Endowment for International Peace.

Like oil exports that were successfully redirected from Europe to Asia, Chinese customer data confirms a similar thing is now happening with metals. Russia’s share of Chinese copper imports rose from 1.8% in 2022 to 10.4% in 2023, making Beijing one of the top three importers of Russian copper. Russia accounted for 25.7% of China’s aluminium imports in 2023, up from 12% in 2021. Although Russia’s share of Chinese nickel imports was modest at 3% in 2023, this was a significant increase on just 0.56% in 2021.

Simultaneously, Russian metals producers have been integrating with Chinese value chains. In 2023, Rusal bought a 30% stake in Chinese alumina producer Hebei Wenfeng New Materials for $267mn. Rusal, heavily hit by the war in Ukraine, lost access to about 40% of its alumina supplies due to an Australian ban and the shutdown of its Ukrainian refinery in Mykolaiv, which was nationalised by Kyiv in 2023.

In April 2024, Potanin announced plans to relocate copper production to China by 2027 and form a local joint venture, though he did not specify partners. This likely aims to leverage Chinese lithium-ion battery technologies, crucial after Nornickel's cooperation with German firm BASF fell through in 2022. Potanin commented: “It is better to be inside the system than to watch from the outside as you get, so to speak, squeezed out.”

Despite lacking expertise in battery production, Nornickel and Russian nuclear giant Rosatom plan to develop one of Russia’s largest lithium deposits through their joint venture, Polar Lithium, expected to launch by 2026. With China holding 72% of global lithium refining capacity, Polar Lithium will likely supply the Chinese market predominantly.

“As Beijing’s competition with Washington over critical minerals intensifies, China and Russia are partnering on global metals exploration,” said Spivak.

In mid-2023, Rosatom and the Chinese investment group CITIC Guoan won a tender to develop lithium deposits in Bolivia (home to the world’s largest lithium reserves), beating a US bid backed by billionaire Bill Gates’s Breakthrough Energy Ventures. Rosatom and CITIC Guoan plan to invest over $1.4bn in the project, which envisages the construction of two lithium carbonate technology plants. Despite the concerns of US officials, this development marks another milestone in the integration of Bolivia’s mineral resources into China’s battery production supply chains.

The US and UK bans on Russian metals imports may enhance the role of the Shanghai Futures Exchange (SHFE) in setting international benchmarks and promoting yuan-denominated metals trading. As the London Metal Exchange and the Chicago Mercantile Exchange are barred from accepting Russian metals, SHFE remains the only major exchange accessible. This is a significant loss for London, which, as of April 2024, held substantial Russian-origin stocks: 50% of copper, 33% of nickel and 89% of primary aluminium.

While London and Washington have refrained from directly sanctioning Russia’s main metals producers, such a step could limit further integration of China and Russia’s metals supply chains, as Chinese firms would fear Western secondary sanctions.

Rusal experienced the direct impact of US sanctions in 2018 when its then-majority shareholder Oleg Deripaska was targeted, causing global aluminium market volatility and driving prices up 30%. The sanctions were lifted ten months later after Deripaska reduced his stake in Rusal. To hedge against new sanctions, Potanin's plan to relocate Nornickel's copper production to China aims to mitigate potential Western sanctions impacts.

“Amid the war in Ukraine and the intensifying US-Chinese technological competition, China and Russia have been developing a more economically interdependent relationship, albeit an asymmetrical one that largely favours Beijing. Moscow’s deeper integration into China’s metals value chain is yet another sign of growing Chinese influence over Russian industries that extends from consumer electronics and appliances to metals and hydrocarbons,” says Spivak.