Geopolitical Risk Premium: China-Russia Alignment and the Commodity Markets

The strategic partnership between China and Russia, deepened by Western sanctions and energy diplomacy, has reshaped global commodity markets. Investors are now pricing in geopolitical risk premiums across energy and rare earth metals, as supply chain fragility becomes the new normal. This article explores how China's implicit support for Russia sustains market disruptions—and why this creates long-term opportunities in sectors exposed to geopolitical volatility.

The Energy Crossroads: Sanctions, Supply Chains, and Pricing Power

The U.S. and EU's sanctions on Russia's energy sector have had unintended consequences. Despite targeting oil exports, Russia has pivoted to Asia, with China absorbing 47% of Russia's crude exports in early 2025 (see ). This shift has created a dual pricing dynamic: discounted Russian crude competes with Middle Eastern suppliers, while Western buyers face tighter supply and higher prices for compliant alternatives.

The geopolitical risk premium in energy is already embedded in prices. Brent crude, for instance, trades at a $5–$10 premium to Russian Urals crude due to compliance risks. Meanwhile, Russian LNG finds a ready market in China, even as Western buyers retreat. This dynamic is likely to persist, as China's energy security hinges on diversifying away from U.S.-allied suppliers.

Rare Earths: The New Geopolitical Battleground

China's dominance in rare earth production and refining—90% of global refining capacity—is now weaponized. Export restrictions on heavy rare earths (e.g., terbium, dysprosium) since April 2025 have disrupted supply chains for defense and EV manufacturers. The U.S., which relies on China for 85% of its rare earth imports, faces a stark choice: accept dependency or accelerate costly domestic production.

Russia's alignment with China amplifies this disruption. While explicit trade data for rare earths is scarce, Russia's uranium and mineral reserves (e.g., titanium, palladium) are increasingly critical to China's industrial strategy. For instance, Russia's VSMPO-AVISMA supplies 90% of the world's titanium sponge, a material essential for aerospace and EV batteries. Sanctions on Russian titanium exports could further squeeze global supplies, driving prices higher.

The risk premium here is clear: rare earth and critical mineral equities now trade at a 20–30% premium to their historical averages, reflecting supply chain fragility. Companies like Lynas Corporation (ASX:LYC) and MP Materials (NYSE:MP) are positioned to benefit from this scarcity.

Investment Implications: Position for Volatility, Not Stability

The China-Russia axis ensures that geopolitical risk premiums will dominate commodity markets for years. Investors should consider:

1. Energy Equities:
2. Geographically Diversified Producers: Companies with exposure to China's energy pivot (e.g., Sinopec (SNP), Rosneft) may outperform as Asian demand grows.

3. Sanction-Proof Infrastructure: Firms like Mitsui OSK Lines (TYO:9104) that operate non-G7 tankers could profit from Russia's shipping challenges.

4. Rare Earth and Critical Minerals:

5. Diversification Plays: Invest in miners with projects outside China, such as IAMGOLD (NYSE:IAG) or First Quantum Minerals (TSX:FMG), which hold reserves in politically stable regions.

6. Refining Capacity: Firms like Solvay (BRussels: SOLB) and Shenghe Resources (HK:688783) that control processing stages will command pricing power.

7. Hedging with Derivatives:

8. Use oil futures (e.g., CL=F) to capture volatility in Russian crude discounts.
9. Rare earth ETFs like Global X Rare Earth & Strategic Metals ETF (REMX) offer broad exposure to the sector.

Conclusion: Embrace the New Normal

The China-Russia strategic alignment has rewritten the rules of commodity markets. Geopolitical risk premiums are here to stay, driven by sanctions, supply chain fragmentation, and the weaponization of resources. Investors who ignore these dynamics risk missing out on asymmetric opportunities in energy and critical minerals.

Positioning in rare earth producers and energy equities is not just a tactical move—it's a bet on the enduring influence of geopolitics on global markets.