Global supply
chains and the
green transition

Supplying these materials in sufficient quantities to keep the green transition moving at pace will require large-scale investment in mining and refining capacity. While there are concerns today about the supply of raw materials, that is nothing new. As far back as 1977, the Council of the European Communities noted the dependence of member countries on raw materials from abroad and called for action. In 2008, the European Commission launched the Raw Materials Initiative – the first integrated strategy aimed at improving access to raw materials. China, India and the United States of America took early action as well.3

The specific raw materials that are regarded as critical differ from country to country, reflecting differences in development priorities and industrial needs. Only a handful of countries published such lists prior to 2020; however, the supply chain disruption caused by the Covid-19 pandemic, the war on Ukraine and recent geopolitical tensions has prompted many others to follow suit.4 This chapter classifies a raw material as critical if it is on the International Energy Agency (IEA) list or in the EU’s proposed Critical Raw Materials Act.5 Thus far, no EBRD economies outside the EU have published critical raw materials lists of their own.

The analysis focuses on firms’ concerns about factors that could affect their future revenues. It identifies sentences relating to critical raw materials, supply chains, the environment and climate change, Covid-19, inflation, labour shortages, China’s economic outlook, the war on Ukraine and the supply of natural gas by checking for the relevant keywords, which were chosen with the aid of NL Analytics’ keyword tool.6 The analysis also tracks (i) whether the terms “risk”, “risky”, “uncertainty” or “uncertain” (or any synonyms for those terms) were used in combination with those keywords and (ii) whether the sentiment of the surrounding sentence was positive or negative. For example, someone saying “we are balancing imports with local sourcing to de-risk the company from tariffs and supply chain risks” indicates that supply chains are contributing to uncertainty, while someone talking about “the disruption felt in India, where aggressive shutdown mandates were enacted, impacting market demand and supply chain infrastructure” indicates negative sentiment regarding supply chains.

While concerns about the operating environment have fallen overall since the second quarter of 2022, they are still higher than they were prior to 2020. Such concerns are more prevalent where firms operate in sectors that are exposed to risks relating to critical raw materials (such as industrial goods, renewable energy, chemicals, automobiles and automobile parts, and technological equipment), particularly when it comes to supply chain-related risks. The perceived risks relating to critical raw materials increased markedly in key green transition-related sectors between 2015 and the second quarter of 2023 (see Chart 2.2), with the largest increase being seen for risks relating to silicon (which is used in solar panels) in the renewable energy sector.

As expected, supply chains and critical minerals are a major concern for pure electric vehicle (EV) companies such as Li Auto, Rivian Automotive and Tesla (see Chart 2.3). They are also of considerable – albeit lesser – concern for companies that produce both EVs and conventional cars with internal combustion engines, such as Volkswagen (VW), Renault and BMW.

The mining of most raw materials is concentrated to some degree. If one looks at standard measures of concentration such as a Herfindahl-Hirschman index (HHI), the minerals with the highest levels of geographical concentration are gallium and germanium (used in chips), followed by niobium (used in steel alloys) and tungsten (used in wear-resistant metals). In contrast, zinc (used to protect steel from corrosion), silver (used in solar cells) and copper are the most diversified geographically.

In 2021 – the most recent year for which detailed country-level production data are available – China dominated the production of most critical raw materials (see Chart 2.4). Other major producers of critical raw materials included Brazil (which supplied more than 90 per cent of all niobium), the United States (which accounted for almost two-thirds of all production of beryllium, an important input in the aerospace and defence industries) and the Democratic Republic of Congo (which supplied almost 70 per cent of all cobalt, which is used in rechargeable batteries).

Reserves are more diversified geographically. While China has more than half of all known reserves of tantalum (used in electronic components), as well as significant percentages of the world’s reserves of tungsten, vanadium (used in batteries and steel) and rare earth elements, almost 90 per cent of all known reserves of niobium and boron (used in fertilisers, EVs, wind turbines and solar panels) are located in Brazil and Türkiye respectively.

The analysis that follows combines data on mine ownership with trade data at the six-digit level of the Harmonised System (HS6 – a level of disaggregation that corresponds to product groups such as cobalt ore and concentrates, for instance). Owing to a lack of detailed data, this exercise assumes that production and imports are distributed equally across the mines in a particular country, regardless of whether mines have domestic or foreign owners. The analysis provides a number of insights.

First, global sourcing of critical minerals is more diversified than the sourcing of such materials by individual countries. This indicates that countries could, in principle, further diversify their supply of critical raw materials. Their reluctance to do so may be driven by inertia and geopolitical considerations, or it may be caused by differences in the quality of supplied products that are not visible in trade data.

Second, measures of diversification differ depending on whether imports are assigned to source countries on the basis of (i) the location of mines or (ii) ownership of those mines (see Chart 2.5). For example, lithium production is geographically concentrated (with most of it taking place in Australia and Chile), but ownership of lithium mines is fairly diverse, with owners headquartered in countries around the world. Thus, producers who need a stable supply of lithium can reduce their supply risk somewhat by sourcing it from different mining companies, although the risk of export restrictions being imposed by the countries where the mines are located remains unchanged.

The biggest increases in the percentage of critical materials that are subject to export restrictions have been observed in the United States, Vietnam and China, while economies such as Armenia, Egypt, the Kyrgyz Republic and Uzbekistan have bucked the trend and reduced the percentage of critical products that are subject to restrictions. In terms of individual materials, export restrictions have been tightened for feldspar, lithium and rare earth elements, while trade in selenium, baryte and palladium has become less restricted (see Chart 2.7).

Countries impose export restrictions on critical raw materials in an attempt to capture more of their value by embedding them in other domestically manufactured products, or to make it more costly for others to obtain certain critical materials. For example, when the US CHIPS and Science Act of 2022, which provides subsidies for the construction of semiconductor manufacturing plants, prohibited recipients of such subsidies from expanding semiconductor manufacturing in China or other countries that pose a threat to US national security, China retaliated by imposing restrictions on exports of gallium and germanium. China accounts for more than 90 per cent of all global production of those two key metals, which are used in semiconductors and electric vehicles.

While export restrictions on critical raw materials have been on the rise, import tariffs for those materials – which were already less than half of the average tariff across all products in 2002 – have dropped further, to less than 1 per cent in 2022, compared with an average of 2.4 per cent across all products.

Bloc 2 dominates the known reserves of all raw materials critical for the green transition, as well as most other critical raw materials (with the exception of boron, zirconium, hafnium, helium and lead; see Chart 2.8). Box 2.2 presents related analysis for products further up the value chain, identifying areas where Bloc 1 economies could establish or scale up manufacturing of critical supply chain products.

Moreover, some countries in the EBRD regions are home to relatively large reserves of critical raw materials (see Chart 2.10). In addition to its boron reserves, Türkiye also accounts for 28 per cent of the world’s known graphite reserves, while almost 70 per cent of all phosphate rock reserves are located in Morocco. Meanwhile, Kazakhstan has over 40 per cent of the world’s known chromium reserves and more than 20 per cent of its barium reserves. European Metals Holdings Ltd (which the EBRD has an equity stake in) has been developing lithium-tin deposits in the Czech Republic with a view to producing battery-grade lithium and by-products such as tin and tungsten. The EBRD also has an equity stake in Euro Manganese Inc., which is looking to extract manganese from waste tailings in the Czech Republic.

In order to fully reap the benefits of those critical minerals, the economies in question need to update, digitise and publicise all relevant information on their geological endowments to help facilitate investment in exploration.10 For instance, new feasibility studies may be needed to check whether deposits identified by geological surveys decades ago are economically viable. Adopting the Extractive Industries Transparency Initiative (EITI) standards on contracts, revenues and beneficial ownership can help to improve transparency in the industry, in addition to providing greater clarity regarding companies’ rights and obligations, as well as fiscal and permit regimes (including fair and competitive licensing). Countries also need to invest in the acquisition and development of skills specific to the geological exploration, mining and refining of critical minerals.

Meeting demand for the critical raw materials that are required for the green and digital transitions will require significant increases in mining and refining capacity, as well as the establishment of manufacturing facilities for intermediate products such as batteries.12 Setting up new mines takes time, with various permits needing to be obtained and any legal challenges relating to the social and environmental impact of mining needing to be addressed. For instance, when LKAB, a state-owned mining company in Sweden, announced the discovery of a large deposit of rare earth elements in Kiruna, Sweden, it estimated that it would be at least 10 to 15 years before mining could start.13 Long investment lags increase the risks associated with such projects, given that demand for certain minerals can change quickly as technology evolves or alternative supplies come on stream. For example, 60 per cent of China’s EVs are predicted to use cobalt-free batteries in 2023, up from just 18 per cent in 2020.14

Processing facilities can be built faster, but they may face shortages of ore and/or skilled labour. Shortages of skilled engineers and other experts can be acute throughout the supply chain, while interest rate rises can significantly increase the effective cost of exploiting new deposits.

While many critical raw materials reduce pollution at the point of consumption (as in the case of the emissions savings associated with driving an EV), the processes involved in producing the relevant goods may be far from green. Refining rare earth elements, for instance, produces extremely large amounts of pollution, releasing toxic and radioactive waste. Emissions produced by the mining and production of metals account for about 10 per cent of total greenhouse gas (GHG) emissions worldwide, most of them stemming from the production of aluminium and steel.

Moreover, the extraction of mineral ore has knock-on effects on local ecosystems and biodiversity as a result of changes to local land use, the movement of large amounts of rock and the accumulation of left-over materials. Although mining plays a more limited role in deforestation and other forms of biodiversity loss than agriculture, it can affect ecosystems indirectly through the construction of roads and other infrastructure required to establish a mine or a processing facility.15 Other issues include the degradation of local air, water and land quality, corruption and tax avoidance, as well as inadequate standards in terms of health and safety, human rights abuses and the use of child labour. (See Box 2.3 for a detailed discussion of the impact that air pollution has on health and labour market outcomes.) For these reasons, it is often the case that countries’ tariff schedules effectively encourage imports of pollution-intensive inputs by imposing lower import tariffs on those goods relative to other imports.16

These changes have, in turn, led to a rapid increase in the use of currencies other than the US dollar and the euro for settling trade between third countries. These shifts may reflect a preference for not clearing payments through the US or eurozone banking systems when dealing with sanctioned countries or fears that assets denominated in those currencies (including central bank reserves) could be frozen. They may also reflect difficulties with the clearing of payments denominated in those currencies, as well as the steady decline in the number of cross-border correspondent banking relationships (visible in data compiled by the Bank for International Settlements), which largely reflects the rising cost of compliance with sanctions and other restrictive regimes.

Notably, countries that did not impose economic sanctions in the aftermath of the invasion of Ukraine have made greater use of the Chinese yuan in their trade with Russia (see Box 2.4). Increased geopolitical risk has also affected the choice of trade finance instruments, with increased recourse to advance payments for riskier trades (see Box 2.5).

IPAs are government bodies tasked with attracting international investors. That focus on promoting investment reflects the fact that FDI can produce multiple benefits, including technological expertise, skills and jobs, helping to raise the quality of countries’ exports and increase value added.22

More than 80 per cent of all IPAs across the EBRD regions regard the reshaping of global value chains as an opportunity for their country, and many are actively seeking to attract foreign investors that are looking to diversify their supply chains or plan to do so in the future (see Chart 2.13). Almost all IPAs have a stated interest in attracting investors to sectors relevant for the green transition.

Inward FDI is generally regarded as being at least as attractive now as it was five years ago, with IPAs in most countries in eastern Europe and the Caucasus (EEC) and Central Asia reporting an increased interest in FDI (perhaps reflecting recent success in this area).23

IPAs often focus on priority sectors when it comes to investment promotion, helping to concentrate efforts and increase FDI inflows (see Box 2.6 for details of developments in Egypt and Morocco, for instance).24 The percentage of IPAs reporting such prioritisation ranges from 50 per cent of respondents in the EEC region and Central Asia to 100 per cent of respondents in the southern and eastern Mediterranean (SEMED) and Türkiye. There is substantial variation across countries in terms of the sectors that are targeted, as IPAs tend to focus on sectors where their economies have comparative advantages in terms of skills, production inputs, infrastructure or consumer markets. However, there are also remarkable similarities across countries.

Investment in software development is targeted across the board (see Chart 2.14). Most higher-income economies (including EU member states in the EBRD regions) also emphasise digital services, sectors requiring large amounts of research and development (R&D) and the green economy. In contrast, other economies in the EBRD regions remain focused on the automotive sector, transport equipment, other manufacturing industries, agriculture and food processing.

The analysis first identifies products where economies in the EBRD regions currently have a revealed comparative advantage (that is to say, products whose share of a country’s exports exceeds their share of total international trade). For example, in 2022, lithium-ion batteries accounted for 2.4 per cent of Poland’s total exports, but just 0.4 per cent of all international trade worldwide, so Poland has a revealed comparative advantage in exporting lithium-ion batteries.

The analysis then assesses those products’ proximity to the products that are needed to supply fast-growing green transition sectors. This proximity is measured in terms of the probability of product A being exported by a country (with a revealed comparative advantage) conditional on that country already exporting product B (and, conversely, the probability of a country exporting product B conditional on it already exporting product A). The higher the lower of those two probabilities is, the greater the proximity of the two products is considered to be (typically reflecting similar requirements in terms of technology, skills and other production inputs), and this is fixed globally. For example, the proximity score for transistors and diodes is around 0.8, while transistors and phosphorus have a score of 0 using this metric. In contrast, the “distance” between two products captures an individual country’s ability to make a product in terms of technology, skills and other production inputs. A country that already exports transistors will find it easier to start producing diodes than phosphorus, for example.

If a product that a country has a revealed comparative advantage in is close to another product which is in a supply chain critical for the green transition, the country has a higher chance of successfully exporting that second product in the future, building on its existing production capabilities and leveraging the high level of global demand. With that in mind, the analysis presented in Chart 2.15 calculates the average distance between (i) the products that a country already produces and (ii) products in critical supply chain clusters (such as those related to fuel cells), plotting that distance (on the vertical axis) against the percentage of total products in the selected sector that the country currently exports with a revealed comparative advantage (on the horizontal axis).

This analysis suggests that, for the majority of countries, the most promising critical supply chain products to diversify into are those required by the solar power, fuel cell, wind power and platinum group metal sectors. The countries with the greatest potential can be found in the top-right corner of Chart 2.15. For example, Croatia already successfully exports 30 per cent of all critical supply chain products required by the solar power sector and its exports generally lie in reasonable proximity to the solar power sector. In the case of Türkiye, the distance between its existing revealed comparative advantages as an exporter and supply chain products required by the solar power sector is even smaller.

Fuel cell supply chains hold the greatest promise for the Czech Republic (which already exports 44 per cent of all products required by the fuel cell sector) and Poland (given that its existing exports lie in close proximity to that sector). Diversifying into products required by the wind power sector is the most promising option for Estonia, which has both the greatest average proximity to that sector and the largest established presence. Meanwhile, Kazakhstan and Mongolia have the most potential when it comes to platinum group metals (with most of the related products being raw materials).

When it comes to the fastest-growing green energy sector – large-capacity batteries – opportunities for the EBRD regions are less clear-cut on the basis of existing export structures. Türkiye has the largest established presence in terms of exporting products required by that sector, while Poland’s export structure is most compatible with an expansion into that sector based on existing know-how and capabilities.

While supply chain decisions are based primarily on cost and the reliability of supply, they effectively involve outsourcing some of a firm’s carbon emissions to foreign suppliers. In the case of US firms, that outsourced component’s share of companies’ total Scope 3 emissions has been rising over time.26

The disclosure of Scope 3 emissions may soon become a requirement under the EU’s European Sustainability Reporting Standards (ESRSs), which were adopted on 31 July 2023. Moreover, the EU’s proposed Corporate Sustainability Due Diligence Directive (CS3D) obliges firms to prepare and disclose a transition plan demonstrating that their business model and strategy are compatible with the transition to a sustainable economy and limiting global warming to 1.5° C (see Box 2.7 for more details). In parallel, the US Securities and Exchange Commission (SEC) and the International Sustainability Standards Board (ISSB) have also proposed climate disclosure rules and standards.

The combination of those various standards may strengthen incentives for large firms to monitor and reduce emissions across the whole of their supply chains (see Box 2.8 on the greening of supply chains using sustainable supply chain finance for a discussion). The new emphasis on comprehensive reporting of embedded emissions may, in turn, lead to a review of outsourcing decisions. India, for example, has long been a preferred outsourcing destination for IT services owing to its low labour costs and its well-established software industry, but the associated emissions may prove to be large or hard to verify.

The potential reshaping of outsourcing with Scope 3 emissions in mind may present opportunities for other providers of services, from basic back-office processing of transactions to knowledge-intensive services. In the EBRD regions, exports of commercial ICT services per capita increased markedly between 2006 and 2021 (see Chart 2.16), rising more than fivefold in almost a third of economies. Despite that, those exports were still well below the level seen in India and the average for high-income economies.

In order to leverage the expansion and reshaping of cross-border exports of services, economies can invest in digitalisation and reduce administrative barriers to trade in services. Indeed, exports of commercial ICT services per capita tend to be higher in economies with less restrictive trade in services (as measured by an OECD index) and higher levels of digitalisation (including better digital infrastructure and more sophisticated regulations governing the provision of digital solutions and the use of digital technology by firms and individuals).27

The materials in the combined set are mapped to the critical mineral list. A mine can be mapped to more than one mineral. For example, “heavy mineral sands” in the S&P dataset of mines is mapped to zirconium, titanium, tungsten and rare earth elements, while in the country-level analysis, this mine is only counted once. Chromite and ferrochrome, on the other hand, are both mapped to chromium. The mapping is based on the primary commodity: a mine producing gold as the primary output and silver as the secondary output is considered to be a gold mine. The analysis also disregards closed or relinquished mines (which account for around 10 per cent of the total number); it also disregards mines where S&P was unable to obtain data for two years or more.

The owner of a mine is defined as the company that owns the largest equity share. The country of ownership is based on the location of the owner’s headquarters. In the absence of equity shares, the first shareholder is considered to be the owner. Reserves are based on the most recent estimates/reports. Analysis of reserve ownership is based on S&P data, as other sources are not available.

Names of critical raw materials were manually assigned to relevant HS6 codes. For example, manganese ore (260200), manganese dioxide (282010), manganese articles, waste and scrap (811100), and bars and rods of silico-manganese steel (722820) were all classified as manganese. (Manganese dioxide, for instance, is also used as a cathode in the production of lithium-ion batteries.) For the analysis of mines, minerals were, in turn, mapped to the subset of HS6 codes that is closest to mined ores (for example, 260200 in the case of manganese and 250410 and 250490 in the case of graphite).

For each of those products, the analysis identifies the top three exporters among Bloc 1 economies (see Table 2.2.1). For example, the Czech Republic is one of the top three exporters of certain computer parts and insulated electrical conductors, while Poland and Hungary are two of the top three exporters of lithium-ion accumulators, and Jordan is one of the top suppliers of inorganic acids (largely derived from minerals mined around the Dead Sea).

The analysis also identifies the three economies where existing export structures have the lowest average distance to the product in question (a group which may overlap with the top three exporters for that product). While those distance lists are dominated by the United States, Japan and larger economies in the EU, reflecting the diversified nature of their existing export bases, Poland is one of the economies that has the greatest potential to scale up exports of electrical machines and electrical static converters.

In 1982, the GDR significantly increased its mining of lignite, following the abrupt discontinuation of its supply of cheap energy from the Soviet Union. Lignite ore cannot be transported cost-effectively over great distances, so it inevitably ends up being processed close to mines. Consequently, GDR districts located close to lignite mines were significantly more exposed to air pollution than districts located further away. Because freedom to change employers was severely curtailed under central planning, people living in mining areas were typically unable to respond to rising pollution by moving elsewhere. Freedom of movement then increased following the collapse of the Berlin Wall in 1989 and the reunification of Germany in 1990.

The analysis in Lubczyk and Waldinger (2023) focuses on individuals from the GDR who moved between German regions straight after the fall of the Berlin Wall and follows them over a 40-year period. In particular, it compares (i) individuals who moved to a certain destination post-reunification from a district located within 60 km of a lignite mine established after 1982 with (ii) individuals who moved to the same destination from other parts of the GDR. Other than being home to mines, the affected districts were similar to other parts of the GDR in terms of various regional characteristics.

That study finds that, up to four decades after the initial air pollution shock, individuals who had previously lived close to lignite mines experienced significantly worse labour market outcomes relative to those who had lived further away. On average, they earned 3 per cent less, spent four months less in employment and retired two months earlier. These effects alone add up to a cost in terms of social security payments which is equivalent to 1 per cent of the GDP of West Germany in 1989.

Prior to March 2022, up to 80 per cent of Russia’s imports were invoiced using those two currencies, with most of those imports coming from third countries (such as China) that were using the US dollar and the euro as “vehicle” currencies for trade (see Chart 2.4.1). Historically, the percentages of total trade that were denominated in the various currencies were fairly stable.

However, after Russia’s invasion of Ukraine in February 2022, the United States, the EU and a number of other advanced economies imposed economic sanctions on Russia, which covered imports and exports of a wide range of goods, certain types of investment, the provision of financial services, and transactions involving a wide range of companies and individuals. Following the imposition of economic sanctions, more of Russia’s imports began to be invoiced using the Chinese yuan (see Chart 2.4.1).

By the end of 2022, invoices in Chinese yuan accounted for 20 per cent of Russia’s imports, up from just 3 per cent a year earlier, while the combined share of the US dollar and the euro fell to 67 per cent. Only part of this shift reflected the fall in exports from sanctioning economies and the growth in trade with China.34 Indeed, by the end of 2022, yuan-denominated invoices accounted for 63 per cent of imports from China, up from 23 per cent a year earlier, with China’s currency having displaced the US dollar (as well as the Russian rouble) as the currency of choice for such trade.

In trade with third countries (that is to say, countries that do not have the US dollar, the euro or the yuan as their national currency), the yuan’s share of imports rose from 1.2 per cent to 4.2 per cent over the same period. Use of the yuan as a vehicle currency increased significantly more rapidly for trading partners that have an active currency swap line with the People’s Bank of China (such as Mongolia and Tajikistan).35 Such swap lines aim to promote trade and investment and make it easier for an exporter to make use of yuan received from a Russian importer.36 However, the effect that swap lines have on use of the yuan can be seen only for third countries that have not imposed economic sanctions on Russia.

Use of the currencies of other exporters that have not imposed economic sanctions on Russia, such as the Turkish lira and the Indian rupee, has also increased, albeit such use has remained much more limited overall. For instance, rupee-denominated trade accounted for 12.5 per cent of India’s exports to Russia in the fourth quarter of 2022, although this amounted to only 0.2 per cent of Russia’s total imports.

This analysis covers only a relatively small percentage of international trade – the bilateral transactions of the 11th-largest economy in the world. However, it illustrates a broader point: rising geopolitical tensions, and the use of trade sanctions in particular, may reduce the attractiveness of the US dollar as a vehicle currency in international trade and facilitate the rise of new vehicle currencies, as well as greater use of producers’ or importers’ currencies for the settling of trades. This, in turn, could lead to greater fragmentation of global payment systems.

This box uses detailed monthly Turkstat data on Turkish exports at the level of destination countries and six-digit HS product codes to investigate the channels through which international trade has responded to the Russian invasion of Ukraine.38 The data used for this empirical analysis are broken down by payment method (open account, cash in advance, letter of credit or documentary collection) and invoicing currency (such as the US dollar, the euro or the Turkish lira). These unique additional dimensions allow us to look at the trade-offs faced by Turkish exporters to Russia during a period characterised by heightened risks.

The empirical analysis estimates the differential change in Turkish exports to Russia relative to exports to other destination countries following the invasion of Ukraine in February 2022, taking into account time-varying product-specific demand and time-invariant factors that determine product-country-level Turkish exports. The relative change in export-related outcomes for Russia is estimated on a monthly basis for a 26-month period starting in January 2021, with January 2022 being the base period.

The results suggest that the rise observed in the total value of exports to Russia primarily reflects growth in volumes, rather than increases in the unit values of goods being shipped. Relative to other countries and its value in January 2022, the typical value of monthly product-level Turkish exports to Russia increased by an average of 105 percentage points following the start of the war, 77 per cent of which was due to growth in volumes. The remaining 23 per cent is explained by higher unit values.

In the face of increased payment and currency-related risks owing to the war, Turkish exporters have not only adjusted their prices, but also reconsidered their payment methods for Russian importers. In particular, the heightened risks have led to a shift towards payment on cash-in-advance terms – the safest payment method for exporters, since it places all of the risks associated with an international trade transaction on the importer’s shoulders. In 2021, three-quarters of Turkish exports to Russia were on open account terms (with trades needing to be settled within a certain time frame). That fell to about 65 per cent after the invasion of Ukraine – a decline that was almost completely matched by an increase in the percentage of payments made on cash-in-advance terms. Similar – albeit more limited – substitution (totalling about 6 percentage points) was observed for Turkish exports to other members of the Eurasian Economic Union.

In conclusion, price changes and adjustments to payment terms have both been used to counter the increased risks of exporting to Russia, with exporters typically choosing either one or the other. About half of the total value adjustment seen for Turkish exports to Russia following the invasion is explained by unit prices for exports on open account terms (the riskiest method of payment for exporters), and less than 8 per cent is explained by unit prices for exports on cash-in-advance terms (the safest method for exporters).

Another significant issue faced by firms that engage in international trade is currency risk. The volatility of the rouble’s exchange rates has increased since the start of the war. As a result, the percentage of exports to Russia that are denominated in Turkish lira has increased by around 2.3 percentage points (see Chart 2.5.1).

At the same time, in order to compensate for increases in currency risk, Turkish exports to Russia that are denominated in roubles now have a higher price premium (see Chart 2.5.2). Increases in the prices of exports explain less than 40 per cent of growth in the total value of lira-denominated trade, but almost 85 per cent of growth in the total value of rouble-denominated trade.

For example, Morocco has become a major automotive manufacturing hub, with strong integration into global value chains. Building on the legacy of the state-owned Moroccan Society of Automotive Construction, which was established in the 1960s, Renault and Peugeot (PSA) set up a series of automotive production facilities in 2012 and 2019 respectively, taking advantage of Morocco’s relative economic and political stability, its proximity to Europe and its lower labour costs relative to central and eastern Europe.

Morocco’s Agency for the Promotion of Investment and Exports, which was created in 2017, sought to foster a consensus across government entities that the automotive value chain should be prioritised by attracting and accommodating key global manufacturers. With that in mind, it developed a package of incentives focusing on access to local labour. The Moroccan government committed to covering the cost of recruiting employees for greenfield production facilities and established a specialist training facility (the Institut de Formation aux Métiers de l’Industrie Automobile), with the training curriculum being determined in close cooperation with firms and leveraging technical assistance from international partners such as the EBRD.

The automotive sector accounted for around a third of Morocco’s manufacturing FDI between 2013 and 2018 (a total of US$ 2.6 billion), while the sector’s exports increased from US$ 14 billion in 2007 to US$ 41 billion in 2022. While foreign inputs continue to account for a large percentage of the value-added content of exports, domestic content has increased over time. By 2026, Morocco expects to be using 15 per cent of its production capacity for the manufacture of electric vehicles.

Egypt, meanwhile, established its General Authority for Investment and Free Zones (GAFI) many years earlier (in 1971), tasking it with promoting investment, managing special zones, and supporting entrepreneurship and innovation. Between 2010 and 2015, Egypt saw a decline in foreign investment-driven manufacturing. Recent efforts to reverse that decline have focused on (i) improving the business environment for investors in the Suez Canal Economic Zone, with technical assistance from international partners such as the EBRD, and (ii) establishing a manufacturing hub for green hydrogen in that area. Administrative formalities have been streamlined with the introduction of a one-stop shop, and work on the digitalisation of investor services is ongoing.

The proposed CS3D requires companies to address any adverse impact that their operations have on human rights and the environment, including by conducting proper due diligence on human rights and environmental risks arising from their supply chains and the operations of their subsidiaries. The scope of the CS3D’s application in terms of company size and sector coverage has yet to be agreed. This is being discussed by the European Commission, the European Parliament and the Council of the European Union in the context of “trilogue” negotiations.

Meanwhile, due diligence obligations in respect of certain specific raw materials are set out in other EU instruments. For example, the Conflict Minerals Regulation (Regulation (EU)2017/821) requires EU importers that are buying tin, tantalum, tungsten and their ores from conflict-affected or high-risk areas to undertake supply chain due diligence and arrange independent third-party audits to verify the fulfilment of disclosure obligations. Furthermore, the new Batteries Regulation (Regulation (EU) 2023/1542) requires companies of a certain size which are selling batteries above a certain capacity to establish due diligence policies that check for actual and potential environmental and human rights issues in their supply chains, including as regards four critical materials for battery production: cobalt, natural graphite, lithium and nickel.

The EU’s supply chain due diligence legislation will complement and strengthen its corporate sustainability disclosure framework. The CS3D’s sustainability-related due diligence obligations, combined with the reporting obligations under the Corporate Sustainability Reporting Directive (CSRD; Directive (EU) 2022/2464), are designed to provide detailed sustainability-related information on supply chains. The CSRD applies to both EU and non-EU companies with employment and turnover above certain thresholds. Companies within its scope must comply with mandatory reporting requirements for environmental, social and governance-related matters under the European Sustainability Reporting Standards (ESRS) adopted in July 2023.

Under the ESRS, the identification and assessment of a company’s sustainability-related risks, impacts and opportunities must cover its supply chain. This is in line with the IFRS Sustainability Disclosure Standards that were published by the ISSB in June 2023. Those IFRS standards require disclosure of the risks and opportunities that are material to a company’s financial position.

In practice, supply chain due diligence and sustainability reporting requirements entail significant legal obligations and costs. Strong internal governance and operational arrangements will be critical if firms are to deliver on these requirements.

The Corporate Climate Governance (CCG) facility established by the EBRD aims to help its clients to assess and manage climate-related and other sustainability-related risks and opportunities by enhancing their governance arrangements, strategy, disclosure practices and risk management policies. For example, building on technical assistance provided by the EBRD, ofi (a major food and agribusiness company) is working towards improving the resilience of Turkish hazelnut farms in its supply chains in the face of climate change, including by providing new suppliers with training on sustainable agricultural practices.

Having signed up to targets under the Science Based Targets initiative, Metso has expanded its decarbonisation efforts to encompass its supply chain and is participating in a sustainable supply chain finance programme designed by Citibank and the EBRD. Under that programme, selected suppliers of Metso in Türkiye which commit to science-based targets will become eligible for a discount on the cost of supply chain finance offered by Citibank. Supply chain finance involves a bank extending – for a fee – advance funds to a company against future payments due to be received from off-takers of the company’s products (in this case, Metso). The advantage of this scheme is that the bank has recourse to a larger firm with a better credit rating, rather than small and medium-sized enterprises (SMEs) in the relevant supply chain.

Participants in the programme are offered donor-funded incentive payments administered by the EBRD, which are conditional on the achievement of certain outcomes (such as reductions in greenhouse gas emissions). The EBRD also provides technical assistance to suppliers to help them develop expertise in the area of environmental practices. That assistance starts with an energy-efficiency audit, which includes a baseline assessment of a supplier’s Scope 1, Scope 2 and, if agreed, Scope 3 emissions, as well as recommending improvements to the firm’s environmental practices. On the basis of those recommendations, an energy-efficiency investment plan assesses opportunities for improving energy efficiency and the associated investment needs. Consultants also carry out monitoring and verification of suppliers’ performance against the agreed outcomes.