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The big question is how it will change the structure of its trade.
By: Ekaterina Zolotova
As the Ukraine
crisis drags on, it’s becoming increasingly clear that economic and
diplomatic ties between Russia and the West won’t be restored any time
soon. Even if the conflict were to end now, it’s not guaranteed that the
sanctions would be lifted or that Western companies would return to the
Russian market. Getting international firms to reenter Russia would,
after all, require things like reliable transport networks, protection
for investors and functioning payment systems – all of which will take
time to restore.
The Kremlin is
therefore beginning to make contingencies. In recent months, it has sent
government officials abroad in an effort to strengthen ties with
non-Western states. Moscow is beginning to mold its new foreign policy
approach – though in some ways it doesn’t look all that different from
its previous one.
Resilience
Following the
Soviet Union’s collapse, the Russian economy opened up to the world.
Moscow increased its export of natural resources, allowed international
investment in Russian enterprises and joined multinational institutions
such as the World Trade Organization. So when Western governments
imposed severe sanctions following Russia’s invasion of Ukraine, and
Western companies pulled out of the Russian market in droves, many
expected the Russian economy to all but collapse. That hasn’t happened.
In fact, the economy has been much more resilient than many anticipated.
Russia’s gross domestic product in 2022 decreased by 2.1 percent –
significantly better than forecasts, which ranged from a 4.7 percent to a
5.6 percent decline. The Bank of Russia also upgraded its 2023 forecast
to between a 1 percent decrease and 1 percent increase, compared to its
previous projection, released in October, of a 1 percent to 4 percent
decline in GDP. Investment increased 5.9 percent in annual terms in
January-September 2022 and by 3.1 percent in real terms in the third
quarter. This was facilitated by structural changes in the economy,
including the implementation of import substitution policies.
The question,
however, is whether this resilience will last in the longer term. The
capital that has returned to Russia since the exodus a year ago has
already been invested, and new cash injections are unlikely. Applying
all the changes needed for an import substitution model to work will
take years. It’ll also take time to find reliable new trade partners and
construct the infrastructure needed to deliver Russian oil and gas to
new markets. Increasing its market share in countries where Russia
already has a substantial presence is also a long process that will
include the signing of a raft of bilateral agreements and hashing out
logistics and a currency for payments.
The structure of
Russian trade will make these changes even more difficult. It’s long
been concentrated on a small group of countries – namely the countries
of the European Union and China. Before the Ukraine conflict began, the
EU accounted for a third of Russia's trade, while the Asia-Pacific
region accounted for nearly another third. Its exports and imports were
also a short list. Natural gas, oil and oil products accounted for a
huge share of its exports, while machinery and high-tech equipment were
its most critical imports. This hasn’t changed much in the past year.
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Moscow’s Plan
Thus, the Kremlin
has developed a plan to carry the economy through the next five years –
or as long as it takes for its import substitution program to be fully
operational. This plan has three components.
The first is to
circumvent the sanctions regime and regain access to the EU market. The
easiest way to do this is by strengthening cooperation with transit
countries – i.e., intermediaries through which Russia can covertly sell
its goods to its traditional customers and access much-needed technology
and high-tech equipment. Russia remains dependent on imports for
high-tech products and components, so finding an intermediary is
critical in this regard. Last year, the European Union determined that
Russia was dependent on Europe for 45 percent of its advanced technology
products and on China for only 11 percent.
Transit countries
will likely include post-Soviet states, which have significantly
increased trade with Russia over the past year. In 2022, trade turnover
between Georgia and Russia exceeded $2.4 billion, a 52 percent increase
from 2021. Armenia, meanwhile, says its exports to Russia have spiked by
nearly 50 percent, which raises questions about whether the country is
supplying Moscow with goods the Kremlin is increasingly unable to
purchase from abroad. Kazakhstan’s exports to Russia totaled $8.8
billion in 2022, a 25 percent increase over the previous year. Notably,
European exports to some of Russia’s neighbors – Belarus, Armenia,
Kazakhstan, Georgia, Uzbekistan and Kyrgyzstan – grew by 48 percent, to
20.3 billion euros, over the same period.
Russia will also
rely on intermediaries that are active in the energy sector and can
supply Russian gas, oil and oil products to the Kremlin’s traditional
customers in Europe. One of the most critical intermediaries in this
sphere is Turkey. Between January and September, trade turnover between
Russia and Turkey was valued at $47 billion, twice the total in the
first nine months of 2021. Russian exports of diesel fuel and other oil
products to North Africa have also surged as Europe’s purchases have
declined. In January, Morocco imported 2 million barrels of diesel,
compared to roughly 600,000 barrels in all of 2021. Tunisia, Egypt,
Libya and Algeria also increased their purchases. This could be a way
for Moscow to skirt sanctions because its fuel can be mixed with
domestic supplies in these countries and then resold to European
markets.
The second
component is to increase exports to markets where the demand for energy
is high – namely, China and India. In December, Russia’s oil exports to
India increased by 25 percent compared to the previous month. In
February, deliveries of Russian crude to India reached a record high.
Moscow is also launching new energy projects in Central Asia aimed at
increasing sales to China, with whom Russia is also setting new export
records.
The third
component is to strengthen ties, on both the economic and security
fronts, with countries in which the United States has a particular
interest. The Kremlin can do this by leveraging its relationships in
parts of the world where it has historical connections and loyalties.
This includes the Asia-Pacific, where Russian firms have been granted
contracts to construct nuclear power plants, and Latin America, where
Russia’s presence irritates Washington. Since the beginning of the
Ukraine crisis, most Latin American countries have stayed relatively
neutral by refusing to join the Western sanctions regime or condemn
Russia at the U.N. and other international institutions. However,
Russia’s closest allies in the region (Venezuela, Cuba and Nicaragua)
have come out in support of Moscow. Although Russia’s trade and economic
ties with Latin America are still relatively small, Russian companies
have increasingly shown interest in doing business with them. In
January, Russia confirmed its willingness to supply Brazil with the
fertilizers its agricultural sector needs.
Questions Remain
In December,
Russia indicated it was seeking to develop a new foreign policy
doctrine, one that would vaguely focus on three regions: Asia, Africa
and Latin America. However, before Moscow releases it to the public,
it’s testing the waters, making sure that the transit countries it’s
planning to rely on will receive enough benefits from their relationship
to withstand the pressure they’ll get from the West, particularly the
United States. Washington has already pressed Turkey and the United Arab
Emirates about their help in Russia’s efforts to circumvent sanctions.
It also stepped up talks with Central Asia, which included a visit last
week by Secretary of State Antony Blinken to Kazakhstan and Uzbekistan.
Moscow, for its part, has also increased official government visits to
foreign countries. Russian Foreign Minister Sergei Lavrov was at the
G-20 foreign ministers' summit in India last week, while Security
Council Secretary Nikolai Patrushev visited Algeria, Cuba and Venezuela.
Prime Minister Mikhail Mishustin visited Tajikistan on March 2-3 for
talks with his Tajik counterpart. Notably, Lavrov has also gone on three
separate Africa tours since the beginning of Russia's invasion of
Ukraine.
The Kremlin
clearly sees a need to update its foreign policy doctrine, but the big
question is how it will change the structure of its trade, which will be
key to its ability to weather the sanctions storm in the future. More
than a year on, its trade patterns haven’t shifted dramatically since
the conflict began. But considering how long it will take to develop
ties with new trade partners, the Kremlin will for now continue to focus
on its traditional ones. |