Border Carbon Adjustment: Implications for Russian Companies and Regions in the Context of the Russia Sanctions (the case of Magnitogorsk Iron and Steel Works and Chelyabinsk region)

Abstract

Relevance. There are at least two serious challenges that Russian exporting companies are now facing: first, in 2021, the EU introduced the carbon border adjustment mechanism (CBAM), which will come into force in 2026, and, second, since February 2022, many exporters have been subject to the EU sanctions as part of the Russia sanctions regime. There is much uncertainty surrounding the duration of the current sanctions episode as well as the introduction of the carbon tax in the Middle Eastern and Asian countries. Research objective. The study aims to assess potential economic losses resulting from the CBAM introduction and the pressure of sanctions on the Russian exporters of metallurgical products and their home regions. The study focuses on the case of Magnitogorsk Iron and Steel Works (MMK) and Chelyabinsk region. Data and methods. Methodologically, the study relies on scenario analysis. Two scenarios are considered: the EU sanctions against Russian steel companies will be lifted after 2024–2025 and the sanctions will not be lifted in the near future. For each scenario, two variations are analyzed and the annual economic losses are calculated both for MMK and for Chelyabinsk region. The data for the study was taken from ММК official reports. Results. If the EU sanctions are lifted in the nearest future, at the initial stages of the carbon tax introduction, the economic consequences for Russian exporters will be insignificant. In the future, however, carbon regulation can create serious threats to the financial condition of such enterprises even if exports account for a small share of their revenue. If the EU sanctions stay in place, Russian enterprises are likely to search for trade partners in the Middle East and Asia. If the latter introduce a carbon tax, Russian companies can enjoy a competitive edge due to the comparatively low carbon intensity. Conclusions. To ensure Russian steel companies’ competitive edge, it is necessary to stimulate them to reduce their carbon footprint and create a national carbon regulation system. Not only will this measure help to reduce the loss of export income and regional governments’ tax revenues but it will also enable companies to stay competitive and deal more effectively with the sanctions pressure.