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Groupings such as the BRICS and the SCO have been harmed by the sanctions regime too.
By: Antonia Colibasanu
In February 2022,
the global economy started what became an unprecedented event: The
West, led by the United States, severed trade, financial and personal
ties with Russia, a country that spans 11 time zones, sits at the heart
of Eurasia and is essential to global commerce as a supplier of key
commodities. Before that, similar punitive measures tended to target
countries on the edge of the global economy like Venezuela and Iran.
Unsurprisingly, global growth forecasts for 2023 have been revised
downward.
The International
Monetary Fund reported in April that the baseline prediction for growth
is 3.4 percent in 2022, 2.8 percent in 2023 and 3 percent in 2024. But
it also warned that in the event of increased financial sector stress,
global growth would fall to around 2.5 percent in 2023, with advanced
economies growing at or below 1 percent. Meanwhile, the IMF predicted
that Russia's economy will grow 0.7 percent more quickly than Germany's
and the United Kingdom's, both of which are forecast to enter a
recession (and experience negative growth), and will keep pace with
growth in France and Italy in 2023. In other words, Russia's economic
growth is expected to compete with, if not outperform, four of the G-7
countries leading the sanctions charge.
![IMF Forecasts for GDP Growth]()
(click to enlarge)
The West believed
that by impounding Russian foreign exchange reserves held abroad,
imposing harsh restrictions on Russian banks and individuals, and
severing trade in technology and raw materials, the Russian economy
would collapse and force President Vladimir Putin to abandon the war in
Ukraine. Less than two months after the invasion, the IMF forecast that
Russia’s economy would contract by 8.5 percent in 2022 and by 2.3
percent this year. Since then, however, the fund has revised its
estimates upward by a cumulative 9.4 percentage points. Sure, at least
some of the IMF forecasting comes from Russian figures that are arguably
inflated – but the Russian economy nonetheless resisted sanctions
during the first months of 2022.
In fact, Russia
was prepared for the sanctions. It had been under them since it took
Crimea in 2014, and the West had advertised its intentions well ahead of
the invasion. The West failed to recognize as much, and it
overestimated its power to dominate the most critical parts of the
global economy. The West was also inexplicably slow to realize that,
when cornered, authoritarian governments deprioritize rational economic
considerations and spur Western conventions.
Meanwhile, China,
India, Malaysia and Singapore have begun to import more Russian oil.
Turkey, the United Arab Emirates, Kazakhstan, Armenia and other former
Soviet republics have acted as middlemen for Western exporters and
Russian importers on anything from cell phones to machine tools. Thus
developed a network of parallel imports and informal shipping fleets.
Legal loopholes, opportunistic business activity and a lack of
collaboration by emerging economies have conspired to blunt the impact
of sanctions.
Even so, it would
be a mistake to say the sanctions have failed. There are clear
indications that they are affecting the Russian economy, so from the
West’s perspective, they are better than allowing Russia to support the
war with a limitless budget funded by export payments.
Indeed, Moscow
has already been forced to sell commodities at lower prices and to pay a
premium for technology (due to the price of avoiding legal obstacles
and the increased cost of transportation, not to mention the investment
needed to create new trade corridors). This year, Russia's federal
budget is under strain from military and security spending, which
accounts for a record-high one-third of total expenditure, and from
mandatory import substitutes. The Kremlin can afford to cover these
expenditures for now, but any external shock could severely undermine
Russian finances.
To mitigate these
risks, Russian authorities are squeezing the economy for more revenue.
In April, Putin changed the way the country taxes oil businesses by
basing levies on the Brent crude worldwide benchmark price minus a
predetermined discount, rather than the price of Urals, the country's
principal export crude, which has been trading at a lower price than
Brent in recent months. Moscow expects to net 600 billion rubles ($8
billion) in revenue from the levies. The government also announced last
month that the publication of statistics on oil, gas and condensate
production will be suspended until April 2024, indicating further
trouble may affect the industry. It’s unclear how the departure of
Western companies has affected energy production, but the Kremlin isn’t
taking any risks: It’s asking all Western firms leaving the country to
pay a contribution to the federal budget equal to at least 10 percent of
the market value of their assets (on top of a 50 percent discount on
property values). The moves are clearly meant to offset the losses in
the hydrocarbons sector, the revenue from which declined by 45 percent
year on year in the first four months of 2023 because of sales at
discounted prices.
Given Russia's
bleak fiscal outlook, the role of the country’s oligarchs will become
increasingly important. Russian elites, including senior officials and
corporate leaders, are highly pragmatic and often apolitical. Like
Moscow itself, they were prepared for sanctions but were ill-equipped to
deal with a forever war of attrition. Restoring international
operations and finding new customers is therefore their primary concern,
even though they will continue to do business with the Kremlin. Their
current reward for doing so is large cash flows from Asia and the global
south. With limited opportunities to get back on the Western market,
Moscow must make sure that Russian companies enjoy a friendly
environment elsewhere.
This is why for
the past year Moscow has focused on building its leadership role within
the Eurasian Economic Union and promoting its interests in multinational
organizations such as the BRICS and the Shanghai Cooperation
Organization. These groups are designed to challenge the U.S. hegemony
by promoting their members' view of a multipolar world. But they are
often too mired in rivalry and conflicting interests to get much done.
Larger members like Brazil and India see these organizations as places
to confer with their peers while maintaining their strategy of
non-alignment. The smaller players seek access to wider markets for
growing their profits.
Larger emerging
markets such as Brazil and India have actually benefitted from Russia’s
parallel imports, but for the most part, smaller ones were hurt, however
indirectly, by the Western sanctions regime. They may be indifferent to
the Ukraine conflict itself, but they have every reason to try to
insulate themselves against further risk, even if that means cooperating
with Russia. And the BRICS is an ideal forum within which to do so. The
bloc focuses on economic policy coordination to establish better terms
for its members to participate in the world economy. It eschews the
imposition of values on its members, most of whom broadly share the
belief that a multipolar world is a more profitable world for them. This
explains the bloc’s appeal to less affluent countries that can’t go
toe-to-toe with the G-7, and it explains why 18 more countries have
applied for membership since its founding in 2006. The 15th BRICS summit
will be held in South Africa in August, where it will examine, among
other things, the admission of 17 new members from Asia, Africa, South
America and the Middle East. (The United States asked to attend the
meeting but was denied.)
![BRICS and NDB Membership]()
(click to enlarge)
More recently, a
two-day summit of the Shanghai Cooperation Organization in Goa, India,
brought together the majority of the Asian and Eurasian members of the
nascent BRICS grouping. The meeting was advertised as an opportunity to
begin working through internal conflicts and to capitalize on the
economic opportunities from improved relations. The SCO is similar to
BRICS in that it is dominated by China and Russia, but the organization
is primarily concerned with regional security challenges, including the
fight against regional terrorism, ethnic separatism and religious
extremism. It has largely focused on Asia but has slowly expanded its
aperture as new members join.
![Shanghai Cooperation Organization Members]()
(click to enlarge)
Perhaps the most
important takeaway from the meeting in Goa was that Russia and India
concluded that they can’t fully de-dollarize their bilateral trade. The
value of India's Russian imports increased from $9.86 billion to $41.55
billion in the previous fiscal year, while Russia's contribution to
Indian imports rose from 1.6 percent to 6.5 percent. During the same
period, India's exports to Russia reached $2.8 billion, resulting in a
$38.74 billion imbalance for New Delhi.
All of this is
impressive. Russia is currently making money by exporting crude oil to
India, but it is having difficulty accessing the funds since the rupee
is not freely convertible. As a result, $400 million in Russian
dividends belonging to Indian corporations have been stranded in Russia.
According to Russia’s foreign minister, Moscow has acquired "billions"
of limited convertible rupees from accounts in Indian banks in trade
settlements it cannot use.
Russia now has a
significant trade surplus with India, but it has no purpose for all the
rupees it has amassed because India produces little that Russia wants to
buy. And, because India has a large trade imbalance, it has been unable
to earn enough foreign money to completely pay for its Russian imports
in other currencies. And though many believe bilateral payments are
still made in U.S. dollars, as well as dirhams, yuans and "several other
currencies," Russia hoped to convince India to agree on a rupee
settlement mechanism to help lower currency conversion costs and make
sure it can continue working with India if the West imposes sanctions on
third countries. Having a bilateral mechanism gives Moscow the
flexibility it needs, especially since India has no interest in making
its rupee fully convertible.
Moscow’s failure
to reach an agreement with India shows the limit of its influence on one
of the prominent BRICS members. Moreover, the fact that Beijing
announced its foreign minister would visit Germany and France days after
the SCO summit ended – the same day Brussels said it would consider
sanctions on Chinese companies for supporting Russia’s war machine –
suggests Moscow hasn’t convinced Beijing to side with it and help the
de-dollarization process either. The potential for the West to tighten
sanctions and hit third countries that are facilitating trade with
Moscow is clearly a concern among larger BRICS members.
Though the
expansion of the SCO and the BRICS is one of the unintended consequences
of Western sanctions, bucking U.S. hegemony is impossible so long as
all emerging countries want dollars to fund growth – and so long as they
are unwilling to give up the Western market. In that sense, they can’t
form a realistic alliance that Russia can use against the West. If
anything, the groupings demonstrate why Western sanctions against Russia
are working, albeit slowly and problematically for everyone involved. |