The Economic Leverage of Russia over Asian and European Nations

The Economic Leverage of Russia over Asian and European Nations

At the outset of year 2022, the outbreak of war between Russia and Ukraine turned the entire global attention towards these two countries, especially towards Russia, which was bashed by NATO countries as a major stormy petrel of global peace. On the contrary, Ukraine enjoyed the patronage of the US and other NATO countries. Thus this outbreak of war was a harbinger of global tumult which would send its shock waves across the globe and which, in fact, didn’t take too long to throw the global economy out of gear.
It was obvious that the Russian invasion would invoke sanctions from the US and other NATO countries, in order to paralyse the Russian economy. Russia became the most-sanctioned nation in 2022 and trade between Russia and the NATO nations became frozen. The US took aim at Russia’s oil refining sector with new export curbs. The new round of sanctions announced by the White House banned the export of specific refining technologies, making it harder for Russia to modernise its oil refineries. Washington and its allies also barred some of Russia’s banks from the SWIFT international payments system. The US also imposed sanctions on 24 Belarusian individuals and entities including “two significant Belarusian state-owned banks, nine defence firms, and seven regime-connected officials and elites”. The 27-country EU imposed several packages of sanctions on Russia, including a ban on the export of specific refining technologies to Russia from Europe. The bloc also banned Russian state-owned television network Russia Today and news agency Sputnik.
On Russian ally Belarus, the EU imposed a ban on imports of products from mineral fuels to tobacco, wood and timber, cement, iron and steel. The EU also decided to freeze any European assets of Russian President Vladimir Putin and his foreign minister Sergey Lavrov. Canada, Taiwan, Japan, Czech Republic, the United Kingdom, Australia, South Korea, and New Zealand also joined hands with the US and European Union to impose a package of sanctions on Russia.

Scale of Europe’s Dependence on Russia
In spite of being encumbered with multifarious sanctions, Russia didn’t face the economic debacle of the intensity that was planned by the US and many other NATO countries, because of its geo-strategical advantage and for being the major exporter of oil and gas, especially to European nations, and to Asian countries as well. Rather, the European countries are themselves facing the brunt of the Russian sanctions, which they never anticipated would take such an ugly turn for them and its ramifications would harrow the European world to a large extent. Across Europe, signs of distress are multiplying as Russia’s sanctions drag on. Food banks in Italy are feeding more people. German officials are turning down the air conditioning as they prepare plans to ration natural gas and restart coal plants. The Euro has sagged to a 20-year low against the Dollar, and recession predictions are on the rise. Those pressure points are signs of how the conflict — and the Kremlin gradually choking off natural gas that keeps industry humming — provoked an energy crisis in Europe and raised the likelihood of a plunge back into recession just as the economy was rebounding from the COVID-19 pandemic.
Meanwhile, high energy costs fuelled by the war are benefiting Russia, a major oil and natural gas exporter whose agile central bank and years of experience living with sanctions have stabilised the Ruble and inflation despite economic isolation. Europe’s most pressing challenge is of shorter term: battle record inflation of 8.6% and get through the winter without crippling energy shortages. The continent relies on Russian natural gas, and higher energy prices are flowing through to factories, food costs and fuel tanks. French President Emmanuel Macron says the government aims to conserve energy by switching off public lights at night and taking other steps. Similarly, German officials are begging people and businesses to save energy and ordering lower heat and air-conditioning settings in public buildings. This follows Russia cutting off or reducing natural gas to a dozen European countries.
While Europe is suffering, Russia has stabilised its Ruble exchange rate, stock market and inflation through extensive government intervention. Russian oil is finding more buyers in Asia, albeit at discounted prices, as Western customers back off.
In 2020, Europe, including Turkey, imported about 185 billion cubic meters (bcm) of Russian gas: 168 bcm of pipeline gas and 17 bcm of liquefied natural gas (LNG). This equates to about 36 percent of Europe’s total gas demand of 512 bcm. In 2021, by my estimates, Europe imported the same amount and in the same pipeline/LNG proportion, now approximately 34 percent of the higher 540 bcm of demand. Meanwhile, the European Union imported 155 bcm of Russian gas in 2021, consisting in 142 bcm of pipeline gas and 14 bcm of LNG. The EU depends on Russian gas for 45 percent of its imports and around 40 percent of its consumption. Russia is by far Europe’s largest supplier. The second largest source of external gas supply in 2021 was LNG from various nations (excluding Russia), at 90 bcm. Other pipeline suppliers such as Algeria, Azerbaijan, Iran, and Libya contributed about 60 bcm. Europe’s domestic gas production is about 190 bcm. Russia’s pipeline gas exports to Europe are equivalent to about a third of global LNG trade as of 2021.
If Europe were to replace all Russian pipeline gas with LNG, it would need to import about 275 bcm (based on Europe’s balance in 2021): this represents more than 53 percent of the global LNG trade. Europe would also need to find alternative LNG sources to replace Russian LNG. Germany, Europe’s largest economy depends on Russia for 65% of its natural gas needs, while Italy gets 43% of its gas from Russia, and France, a little over 16%. Other smaller countries, such as Czech Republic, Hungary and Slovakia are almost fully dependent on Russia for their requirements of natural gas, while Poland gets 50% of its gas from the latter. If Europe wanted to replace the equivalent of Russian gas imports with renewable energy, it would need to build an additional 370 gig watts (GW) of wind power to replace this gas (on top of 215 GW installed as of 2020). Europe has installed on average 14 GW of wind capacity per year between 2015 and 2020. Alternatively, Europe would need to add another 105 GW of nuclear capacity, close to the existing capacity installed in 2021 (115 GW). Therefore, the European world would need considerable steps in both financial as well as in building stupendous energy infrastructure to overcome the dependence on Russia.
The Asian countries fetch substantial amount of imports from Russia, especially food items, oil and gas and defence equipment. Russia shipped US$335.5 billion worth of goods around the globe in 2020, but of that, 49.3% of Russia’s exports by value were delivered to European countries while 42.2% were sold to importers in Asia. Of these, China, Kazakhstan, South Korea, and Japan were the largest markets. In new export trends to Asia, the regional appetite for gold and jewellery continues – Chinese and Indian consumers are among the world’s top buyers. Accordingly, it is no surprise that Russia, with its gold and gemstone reserves among the largest in the world, has seen its exports to Asia increase by a whopping 98.9% between 2019-2020. Cereal exports also rose by 20.4% during the same period – China is home to 20% of the global population yet with just 5% of its arable land, while the huge, young, and more vegetarian diets in Asian are again a good match – Russia is the world’s largest producer of grains and especially wheat.
Russian IT is also in demand – computers and related products accounted for export values of about US$8.3 billion. China’s trade with Russia in the first seven months of 2022 rose 29 percent year-on-year to $97.71 billion, accelerating 1.8 percentage points from first half of the year, as the two countries maintain normal cooperation despite US-led Western sanctions. China-Russia trade could surpass last year’s levels as Russia accelerates the shift of its economic pivot to Asia amid escalating sanctions from the West and both sides aim to expand their economic and trade cooperation in the spirit of mutual benefit. China’s imports of mineral fuels, oil and asphalt products from Russia reached 247 billion Yuan ($36.53 billion) in the first six months of 2022, while China’s exports of mechanical and electrical products to Russia reached 77 billion Yuan, according to customs data.
India being a decades-old trade partner of Russia since the times of the Soviet Union, imports a wide array of products from Russia, from food items to defence equipment, and there has been steady and gradual increase in imports from Russia over the years. Indian imports from Russia were worth US$8.7 billion during 2021, according to the United Nations COMTRADE database on international trade. India’s oil imports from Russia have gone up from 0.2 percent of total crude imports to 10 percent since April 2022, with imports rising from 25,000 barrels a day at the beginning of 2022 to 600,000 barrels a day in May–June. The imports rose as Moscow offered crude at discounted rates, seeking to shift its customer base after European companies shunned Russian crude in opposition to its invasion of Ukraine. The two countries intend to increase bilateral investment to US$50 billion and bilateral trade to US$30 billion by 2025.
Meanwhile, India has refrained from condemning Russia, with which it has longstanding political and security ties, while calling for an end to violence in Ukraine. New Delhi defends its purchases of Russian goods as part of an effort to diversify supplies and argues a sudden halt would jack up world prices and hurt its consumers.
The underlying message is clear that Asia will replace Europe very soon as Russia’s largest export market, and this will have clear implications for the current importance the EU feels it has over Russia – which is clearly diminishing. And with the passage of time, it will be quite engrossing for everyone whether Russia will be able to sustain its indomitable economic locus by bolstering its economic ties with Asian world and circumventing the sanctions or else its economic ascendancy will wither away in years under these formidable sanctions.

The writer is a gold-medalist in Business & Financial studies from Kashmir University. He is working as Economics lecturer at Kashmir Harvard higher secondary school, Naseem Bagh.

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