Russia has a secret weapon against the West, and it’s not oil, gas or nukes

Energy markets have been a bit more volatile recently, thanks to sporadic violence in Ukraine and the war of words between Russia and the West. Both sides of the conflict are playing pipeline politics, with threats and counter-threats flying between some of the world’s biggest energy suppliers and consumers. As tempers flare, the threat of crucial pipelines running dry is enough to frighten even the steeliest traders.

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Although oil and gas are top of mind, they aren’t necessarily the only commodities that traders are worried about. Palladium prices spiked to a three-year high today:

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Russia is the world’s largest producer of the metal, a crucial ingredient for catalytic converters in cars, capacitors in electronics, dental crowns, jewelry, and much else besides. As the West threatens tougher sanctions against Russia for its perceived provocations in eastern Ukraine, Russia may try to do equal damage with trade restrictions of its own. Limiting palladium exports may be a useful weapon—harsher than the travel bans imposed on key Western officials, but not as provocative as oil or gas embargoes.

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What gives Russia a strong hand in a potential game of “palladium politics” is that miners are on strike in South Africa, which happens to be the world’s second-largest palladium producer. Some 80,000 miners walked out in January over a pay dispute, and have yet to return to work. Between them, Russia and South Africa control more than three-quarters of the world’s palladium supply, according to Johnson Matthey. Last year, global palladium demand outstripped supply by 23 tonnes (25.4 tons), so stocks were already running low.

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Europeans are rightly worried about the reliability of Russian energy supplies, while the US has begun to throw its weight around as a potential swing producer in the oil markets. But the initial skirmishes in the economic war between Russia and the West won’t be fought over pipelines.

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The US has already leveraged its financial-sector might to hobble a Russian bank and disrupt the country’s payment systems, while European countries have frozen Russian defense contracts. Russia’s control of an obscure but important precious metal gives it a means to retaliate; the price of palladium is up 13% in the spot market so far this year, with futures suggesting further gains ahead. It may sound strange, but a dispute over territory in Ukraine might push up prices in European car showrooms and American dental clinics.