Putin's Gamble in Ukraine is Xi's Pot to Win

Also published on Forbes.com

On October 6, 1973, a coalition of Arab states armed with Soviet weaponry launched a surprise invasion of Israel during Yom Kippur, a Jewish holy day. The U.S. and the Netherlands, among other countries, provided military assistance to Israel, which won the war. In response, Arab members of OPEC, the Organization of the Petroleum Exporting Countries, banned oil sales to Israel’s supporters. In the Netherlands, this resulted in “car free Sundays,” which allowed my friends and I to cycle on the highways.

“The oil embargo 40 years ago spurred an energy revolution,” wrote energy icon Daniel Yergin on its 40th anniversary. Oil companies drilled the North Sea, Alaska, the Gulf of Mexico and the Canadian oil sands for new supply. Domestic coal and nuclear power regained momentum. The wind and solar industries emerged, and the U.S. set fuel efficiency standards for new automobiles.

On February 24, 2062, when we look back 40 years, we will see the genesis of another energy revolution, spurred by Russia’s brutal invasion of Ukraine. This time, however, the winner may not be “the West”—loosely defined as North America, Europe, Australasia, Japan, South Korea and their allies.

As Europeans break their dependence on Russian fossil fuels and accelerate their transition to carbon-free energy sources, they may find themselves unexpectedly beholden to another regime: China. Russia’s war in Ukraine is strengthening China’s geopolitical power and shifting more control over fossil fuels, base metals, rare earth metals and semiconductors to Beijing. The West may not like this—but can it do anything to change the outcome??

“Energy Independence” is Tougher Than it Looks

Europeans have long known that dependence on Russian oil and gas could be problematic. When Russia’s state-owned Gazprom cut natural gas supply to Ukraine in January 2006, “…it created a crisis of confidence on the EU side,” according to Russia expert Dr. Andrew Monaghan. He argued that Gazprom’s actions led some EU states to plan to “redesign their energy security strategies, with specific stated intentions to diversify away from dependence on Russia.”

Of course, the EU did the opposite hoping that economic integration with Russia would minimize the odds of conflict. Fast forward 16 years, and European dependence on Russian hydrocarbons is as dangerous as it is hard to break. If the EU bans Russian oil and gas, it will have no choice but to continue generating power with nuclear fission, and possibly coal, while attempting to source liquified natural gas (LNG) from North America and elsewhere. That won’t be easy and can only be done gradually.

Longer term, Europe must balance immediate needs with an energy transition that achieves “energy independence”—a tougher goal than enthusiasts imagine. Yes, Europe can and should accelerate deployment of wind and solar to power homes and feed new energy-hungry industries, like data centers. Hydrogen, too, should be expanded although its production relies partly on Russian gas for now. However, the most important investments for energy independence will be in utility-scale energy storage and nuclear fusion, which is expected to achieve commercialization in the next decade. It could provide cheap, clean, abundant energy anywhere on the planet.

Don’t cheer just yet. This energy strategy may be a loss for Russia, but a future built around renewables and electrification might have an equally problematic winner: China.

Xi’s New Vassal State

I am no mind reader. But, if Chinese President Xi Jinping is half the strategist analysts portray him to be, then I believe he is cashing in on a long-term investment. Evidence suggests that prior to the Beijing Olympics, Putin sought Xi’s support for a Russian invasion of Ukraine. Xi must have struggled to contain his excitement. The delusional dreams of a Russian dictator would trigger onerous sanctions from the West, forcing Putin to choose between going down with his ship—or handing his captainship to Xi.

This could be the cheapest geopolitical victory in history. Putin’s longing to stride into the history books as a 21st czar has instead strengthened Xi’s campaign to make China the world’s superpower. Putin, conveniently, is also allowing Xi to simulate the consequences of retaking Taiwan by force.

Xi, with his trademark little smile, will offer to spare Putin from the West’s economic assault, but only on Xi’s terms. Basically, this would turn Russia into a colony of China and Putin into Xi’s vassal. China will thus secure the right to buy Russian oil and gas at pariah prices, giving its industrial firms a competitive edge against Western companies paying a premium. And it will guarantee China access to Russia’s mining and metals, which are essential to a successful energy transition—and in very short supply.

Metal-o-mania

Every serious plan to achieve net-zero carbon emissions by 2050 (or by 2060 in China’s case) calls for mass electrification. Electric vehicles (EVs) absolutely need to displace combustion engine designs if we are to prevent more than 2° C of warming. Researchers at Princeton University estimate that the U.S., for instance, needs 50 million EVs on its roads by 2050 to achieve net-zero (as of 2020, only 1.8 million EVs were registered there). EV batteries require copious amounts of metals, and guess where a lot are mined? Russia and China.

For lithium-ion batteries alone—never mind other uses—annual demand for nickel, the primary material, is projected to grow more than eightfold by 2030. Demand for lithium will grow more than ninefold. For an energy transition by 2050, analyst firm Wood Mackenzie estimates that capital expenditure on base metals must hit $2 trillion over the next 15 years and produce a fivefold increase in supply by 2040.

Nickel prices soared after the Russian invasion of Ukraine, from $24,716 per ton on February 24 to over $100,000 on March 8 before the London Metal Exchange suspended trading indefinitely. Russia accounts for 5% of global nickel production but 20% of high-grade nickel, the type used in EV batteries. Automakers will pass the additional cost to consumers, which means fewer people will be able to afford EVs.

China, meanwhile, accounts for over 12% of world lithium production and around 70% of rare earth metals, both of which are essential to EV batteries and many electronics. In the Democratic Republic of Congo, state-owned Chinese companies have secured most of the mines extracting cobalt, another metal required for EV batteries, found only in trace amounts elsewhere in the world.

If China were to de facto control Russian resources too, Xi would have supply control over companies working on the energy transition. Unless Western nations expand mining in friendly countries—swiftly and without concomitant increases in emissions and pollution—electrification will hinge on China. Europe will merely exchange Russian pipelines for Chinese supply chains. That is not “energy independence.” And it gets worse.

Chip off the Soviet Block

Mass electrification depends not only on batteries containing metal, but on semiconductors too. COVID-19 revealed the fragility of the world’s chip supply chain, as shortages forced carmakers to delay or stop production. Russia’s invasion of Ukraine and China’s threat to Taiwan, which it claims as its own territory, have deepened this crisis. If China were to gain control over Russia and Taiwan, it would own the world’s chip industry and hence secure a stranglehold over many global industries.

How would this play out? Taiwan Semiconductor Manufacturing Company (TSMC) is the world’s largest contract chipmaker with 54% of market share. United Microelectronics Corp (UMC), also in Taiwan, is the third largest at 7% of market share, and mainland Chinese companies account for another 7%. If China were to take Taiwan by force, could the West afford to sanction China the way it has Russia if that meant losing access to 68% of global chip supply?

Semiconductors may even present a larger strategic risk than Russian metals, oil and gas. A further shortage of chips, piled on top of metal scarcity, would send EV prices (and automobile prices generally) even higher. Unless Western nations accelerate domestic mining and build their own chip factories, they could lose their traditional leadership in the automotive industry and others.

The problem goes beyond chips for automotive applications. China would love a Russian controlled Ukraine, as that country supplies one half of the world’s neon gas (derived, interestingly, from Russian steel production) and 40% of its krypton, both of which are essential in the manufacturing of semiconductors. Suppliers are running out and raising prices significantly.

The West already knows that it must boost domestic chip production, as President Joe Biden’s State of the Union address made clear. There is even more reason now to adopt new semiconductors, like gallium nitride power transistors that don’t need these Ukraine-sourced gasses and drastically improve energy efficiency.

The Real Nightmare Scenario

The West would be in a terribly weak position if China won cheap access to Russian hydrocarbons and metals, achieved chip dominance and continued to gain ground in Africa and other mining hubs. The real nightmare scenario, though, is if China does all that and wins the race to commercial fusion.

While quite a number of Western companies claim to be on track for the first commercial fusion plants in the 2030s, China is putting significant capital behind fusion and making real progress. China’s victory in the fusion race would make the Soviet Union’s 1957 victory with Sputnik, the first artificial Earth satellite, seem quaint by comparison.

The West better win this race. It was encouraging to see that on March 17, the White House convened a summit, “Developing a Bold Decadal Vision for Commercial Fusion Energy.” It was the first time that a U.S. administration backed fusion so publicly, calling out its “potential as a safe, abundant, zero-carbon source of reliable electricity.”

Without the Russian invasion of Ukraine, it is difficult to imagine the White House pledging to “accelerate fusion.” There is perhaps no stronger sign that an energy revolution is brewing.??

A Way Out of the Nightmare Scenario

To avoid the nightmare scenario where China effectively controls global energy technology, the West needs to get its act together. A combination of tactful diplomacy and economic policy could prevent this outcome.

First, the West needs to find a sweet spot between supporting Putin’s opposition and feeding Kremlin disinformation about Western infiltration and fifth columnists. The West must extend an olive branch to the Russian people—whether they are young and educated or rich and powerful—and differentiate their hopes and aspirations from those of Putin.

Perhaps Ukrainian President Volodymyr Zelensky and Alexei Navalny, Russia’s Nelson Mandela, can lead an historic reconciliation and stand for a future better than colonization under China. Ordinary Russians deserve that. Crazier things have happened in history.

Second, the new geopolitics of energy, metals and chips call upon Western states and their allies to develop local sources of supply and to accelerate the commercialization of fusion energy. No country or company can do this alone. And no, we cannot wait for the “orderly energy transition” favored by fossil fuel companies. Geopolitics have fundamentally changed.

On February 24, 2062, let’s hope we look back 40 years and see the emergence of an energy revolution that offers opportunity and justice to all people, including the Russian public. Power, whether in politics or energy, ultimately resides with the people. Putin and Xi would do well to remember that.?