Russian Fixed Income - Implications of EU CBAM for Russian Exporters

In mid-July, the EC presented a draft Carbon Border Adjustment Mechanism (CBAM). Once approved and enforced (starting in 2026), it will mean that importers of certain goods will have to pay for carbon emissions associated with imported goods at the same rates as for goods produced in the EU. This should reduce carbon leakage risks and encourage producers in non-EU countries to make their production processes greener. In this report, we discuss the implications for Russian companies directly affected by the CBAM. > CBAM to be applied to certain industries, while actual payments start in 2026. In the first stage, the CBAM will be applied only to sectors with high risks of carbon leakage - iron and steel, cement, fertilizers, aluminum and electricity generation. The reporting system should be in place by 2023, while actual payments will start only in 2026.> Gradual implementation; link to EU ETS allowances price. For now, the sectors with high carbon leakage risks get free carbon allowances, but these are expected to be gradually phased out once the CBAM is implemented. Doing so should ensure an equal playing field for both EU and external producers.> Impact on Russian M&M to be minimal in first stage of CBAM, for Russian steelmakers no more than 2% of EBITDA at current prices. Severstal and NLMK, which have significant export volumes to the EU, have healthy carbon intensity levels and plans for further improvement. MMK, which is currently the most carbon intensive, has very low export volumes.> Financial impact on Russian fertilizer producers to be limited. We estimate that when CBAM is set to launch in 2026 the negative impact will represent about 1-2% of EBITDA. This is due to a relatively low share of exports to the EU in terms of the revenue mix. The impact on pure nitrogen fertilizer exports will be substantially more pronounced due to several factors that we examine later in the report. > Additional costs most likely to be partially offset by higher prices. As both EU producers and importers will pay the same price for carbon, at least some of these costs will be passed on to the end consumer. The cost (or gain for greener producers) will depend on the difference between emissions costs implied in EU market prices and actual emission costs for a particular producer.