These efforts have already started to pay off but still fall short of the desired result.

In ancient Greek mythology, Sisyphus, a king of Ephyra, was punished by gods for eternity to roll an immense boulder up a hill only to see it rolling back down every time it neared the top. In 2023, Russian importers trying to circumvent Western sanctions must be feeling like they are doing precisely the labor of Sisyphus, as new supply chains it often takes months to establish get
ruined overnight.

On March 1, the Turkish government halted the transit of goods sanctioned by the EU and the U.S. to Russia. In the wake of Western sanctions, Turkey emerged as one of the key transit hubs of European goods on the way to the Russian market. Turkey’s exports to Russia rose to $9.3 billion in 2022 from $5.8 billion a year earlier. The ban was put in place without an official announcement, leaving tons of goods stuck in the Turkish ports.

In 2022, Turkey exported chemicals worth $239 million to Russia, compared with only $80 million in the previous year, according to the United Nations Comtrade database on international trade. While exports of non-organic chemicals nearly doubled, reaching $104 million, in the organic chemicals segment, a stunning six-fold growth was registered to $135 million.

The U.S. warned Turkey in early February 2023 about the export to Russia of chemicals, microchips and other sanctioned products. Bloomberg reported that a representative of the U.S. treasury met with officials of Turkey and UAE, another country which is believed to allow transit of some sanctioned goods to Russia, warning them about a rising supply of export-controlled goods, including some of U.S. origin.

Valeria Savenkova, commercial director of the Russian transport firm Transasia Logistics, involved in importing some goods to Russia from Turkey, explained that Turkey made no official statement on the transit ban because this would mean admitting that the country had been re-exporting sanctioned goods during the previous year. She added that all information about the restrictions, as a result, “appear in unofficial channels.”

Nevertheless, Russian importers found a way out of their predicament relatively shortly. Several market players confirmed that they managed to pass customs clearance redirecting their goods to Central Asia, in the first place Kazakhstan. However, this option is not going to last for long, as, for instance, the Kazakh government has recently disclosed plans to put a system preventing the transit of sanctioned goods to Russia starting in April.

At the end of March, it was also reported that the EU is considering imposing sanctions on Central Asian countries for helping Russia bypass restrictive measures. According to a plan presented by the Telegraph, the EU intends to hold talks with the countries of Central Asia to warn them about the consequences of helping to circumvent sanctions. If these efforts prove successful, they will significantly narrow the range of opportunities for Russian coatings companies to source necessary raw materials on the global market.

An Unfortunate Status

In early 2023, Russia’s leading carmaker Avtovaz reported that due to an acute shortage of automotive coatings, it began assembling cars only in three colors: black, white and deep green. It is not clear yet when the company will be able to solve this issue. A source in the Russian coating industry, who wished not to be named, told local publication Moskovskaya Gazeta that the Avtovaz case illustrates that an absence of European raw materials has become a problem.

“Avtovaz uses relatively effective enamels and paints: metallized, with a pearlescent effect, and even mono-pigment coatings, which all contain the pigments that we took in Europe,” the source said, adding that the same raw materials Russian coatings manufacturers managed to source in China, India, Korea and South Africa “appeared to be not quite identical to those sourced in the European market.”

In addition, coatings and raw materials exported to Russia are subjected to increasingly tight control, because of how they can be used. “Raw materials and components for the production of paintwork fell under sanctions because they are also used for other purposes,” the source told Moskovskaya Gazeta, explaining that these are dual-use products that are also find their application in the defense industry. For example, he added, Western sanctions have completely barred the way to Russia of colloxylin and some other chemicals considered to be dual-use.

“Paint consists, roughly speaking, of pigment and solvents. And all solvents can be used for the preparation of explosives. And pigments can be used for the same purpose,” Dmitry Mustafin, a Russian chemist, told Moskovskaya Gazeta, adding that the coating industry is one of many segments of the Russian economy suffering from this issue. “Solvents are used in the production of rubbers, plastics, in the chemical industry, in the production of tires or synthetic shoes, and the printing industry. All these industries, lacking these substances, can, of course, experience problems with product quality,” Mustafin added.

On the other hand, Gennady Averyanov, president of the Russian Union of coating manufacturers Centrlack, argued that it is wrong to view all raw materials used in the coating industry as dual-use goods.

“About 4,000 types of raw materials are used in the coating industry. You can, of course, imagine that you paint the fence in green and paint the tank with a coating having the same pigments. But to say that pigments are dual-purpose would not be correct,” Averyanov told Moskovskaya Gazeta, adding that the Russian coating industry seeks ways to overcome the shortages.

“Solvents are produced in the West. But Western factories are largely owned by Russian companies, for example, [Russian oil company] Lukoil, so it is quite possible that thanks to Lukoil, we can get solvents from the Czech Republic or Italy. But the point is that the latest [EU] sanctions packages ban the import of chemical products into Russia as a whole. Indeed, in terms of raw materials, there is a switch towards the Asian-Pacific market and parallel imports [import through third countries],” Averyanov added.

Relying on Internal Resources

While import schemes remain fragile, the Russian authorities and market players put a lot of effort into achieving self-sufficiency in critical raw materials and seemingly succeeded in several
important fields.

For example, the Russian company Titanium Investments has managed to meet almost the entire demand on the domestic market of titanium dioxide, or TiO2, as reported by Eduard Davydov, general director of Russian Hydrogen, the parent company for Titanium Investments.

In 2021, 70% of the demand on the Russian TiO2 market was met by imports from the EU and the US, Davydov told a local news outlet Lkmportal, adding when sanctioned barred the way for TiO2 to the Russian market, all local coatings manufactured experienced difficulties. At the beginning of 2022, Titanium Investments halted production due to a shortage of ilmenite concentrate but managed to solve this issue.

Titanium Investments operates a TiO2 plant in the city of Armaynsk, in the Crimean Peninsula, with a production capacity of close to 120,000 tons per year. Previously, it used ilmenite concentrate from several mines in Ukraine. In 2022, the company switched to supplies from Vietnam and Mozambique. The company stocked up with ilmenite concentrate to make sure even if new supply disruptions emerge, production keeps running, Davydov said. In addition, there are plans to launch production of ilmenite concentrate in the Amur Oblast on the Russian Far East, he disclosed.
Davydov expressed confidence that the Russian chemical industry can eventually get rid of dependence on imported raw materials if investors join forces.

“In the current conditions, when we are striving to make the state less dependent on imports, it is necessary to create large associations using a cluster approach when the raw material of one company is the product of another. This includes the products that used to be purchased abroad. It is necessary to restore cooperative ties between enterprises, manufactured new products and increase their competitiveness,” Davydov said.

There are several other import-replacement initiatives. For instance, under a plan recently rolled out by the Russian Industry and Trade Ministry, Russia should increase self-sufficiency in aluminium hydroxide to 50% compared to 30% in 2022. In the list of goods subjected to import-replacement through prepared by the Russian government at the end of 2022, every third item is a chemical product. Since the Russian federal budget is clearly willing to support the production of raw materials in the chemical industry, the import-replacement potential is far from being exhausted.