A shift to Asia won’t solve Russia’s economic woes
20 Sep 2022|

Russian President Vladimir Putin sought this month to contrast the vibrant economies of Asia with the decadence of the West, signalling that Russia’s future lay with the East.

The economic and political dominance of the United States was waning, he told an economic forum in Vladivostok, and the Western elites were blind to the ‘irreversible, or should I say tectonic shifts’ in international relations as emerging nations, led by the Asia–Pacific, played a much bigger role.

‘Asia–Pacific countries emerged as new centres of economic and technological growth, attracting human resources, capital and manufacturing.’

He cited International Monetary Fund estimates showing that Asia’s share of the world economy would rise from the 37% it held in 2015 to 47% by 2027.

He contrasted the Asia–Pacific’s average growth over the past decade of 5% with the United States’ growth of 2% and the European Union’s 1.2%.

He didn’t mention Russia’s average growth of 0.9% over that period, or the IMF’s forecast that the country’s share of the global economy will shrink from a high of 3.5% in 2013 to 2.3% by 2027.

While Russia straddles both the east and the west of the Eurasian landmass, 80% of its population and nearly all its manufacturing lie west of the Urals in the European zone.

Figures from 2020 show that Europe accounted for 50% of Russia’s imports and 50% of its exports, while the Asian share was 42% for trade in both directions. Collectively, those sanctioning Russia, including the EU, the US, Japan and South Korea, account for 60% of Russia’s pre-war trade.

Russia’s ‘forever friend’ in China, by contrast, accounted for about 15% of Russia’s exports and 23% of its imports.

Putin is right to point to the dynamism of Asian economies, particularly China and the ASEAN group; however, much of the growth in prosperity in the region has been generated by its integration into Western-controlled supply chains and is aimed at satisfying Western markets. Foreign affiliates accounted for more than a third of China’s exports in 2021, and the share is likely higher across the ASEAN nations. The West, particularly the US, remains the principal driver of transformative technological innovation.

It will take time to see how Russia’s trade evolves, but it has permanently damaged its most important markets. Europe and especially Germany will not again allow themselves to become dependent on Russia for energy and vulnerable to Russian economic sabotage.

Although Russia has reaped profits from soaring oil, gas and coal prices, the volume of its fossil fuel sales is down about 20%, with further falls in prospect as the EU imposes new sanctions.

OPEC provides an object lesson on the perils of using the supply of a commodity for geopolitical advantage.

On the eve of the 1973 embargo, the OPEC nations were producing 1,500 million tonnes of oil a year while the rest of the world’s output was 1,400 million tonnes. Within a decade, OPEC annual production had dropped to 850 million tonnes while the rest of the world’s output had soared to 2,000 million tonnes.

Russia’s oil and gas industry will not recover. Many of Russia’s most important fields have declining production and were looking at partnerships with major Western oil companies and service providers to introduce new technologies for lateral drilling to extend their lives. Those partnerships have now dissolved. Western technology would also be crucial for the construction of LNG plants capable of turning a meaningful share of the gas Russia used to pipe to Europe into liquids that could be shipped to global markets.

Although Russia already pipes gas to China and has another pipeline under construction, its capacity is only a small share of the gas it used to send to Europe.

Sanction regimes are never watertight, particularly for commodities that account for about two-thirds of Russia’s exports. Russia will continue to earn export revenue. However, the loss of access to Western technology will hobble the development of Russia’s more advanced industries over the medium term.

Putin declared that Russia was ‘coping well with the economic, financial and technological aggression of the West’, although he conceded that ‘sectors, regions and enterprises’ that depended on Europe either for supplies or as a market were facing some problems.

He described Western sanctions as an ‘aggressive attempt to impose models of behaviour on other countries, to deprive them of their sovereignty and subordinate them to their will’.

There have been claims that Western sanctions have met with little success as life goes on as usual in Moscow apart from a few Western shops having shut.

But Russia’s own public statistics show that the sanctions are cutting deep in some sectors. Motor vehicle production in the first half of the year was down 62%, while production of fridges was down 40% and washing machines 35%. Production of electric motors was down 36%, while fibre cables were down by 33%.

Most of the sectors with big falls are technology intensive, although there have been drops of at least 15% in the manufacture of an array of goods including cigarettes, knitted fabrics and plywood, which presumably reflect the difficulty of importing basic materials because of financial sanctions.

Russian airlines have been affected because of difficulties in maintenance. Domestic air travel was down 83% and air freight was down 70%.

Putin railed against the financial sanctions, saying that Russia was taking steps to reduce its reliance on ‘unreliable and compromised foreign currencies’. China has now agreed to settle its gas purchases from Russia half in yuan and half in roubles.

‘In an attempt to resist the course of history, Western countries are undermining the key pillars of the world economic system built over centuries. It is in front of our eyes that the dollar, euro and pound sterling have lost trust as currencies suitable for performing transactions, storing reserves and denominating assets,’ he said.

In reality, the value of the US dollar is soaring, and it remains on one side of around 90% of all international transactions. Its dominant role reflects the depth of its liquidity (transactions of any size can be completed without affecting the exchange rate) and the size of US capital markets. While Russia and China can settle their trade in whatever currency they wish, global businesses want to use US dollars to intermediate trade.

The combined force of sanctions, capital flight and export controls have not consigned Russia to ‘economic oblivion’, as claimed in a recent and overstated paper from academics at Yale University, but they will have a significant and long-lasting impact on Russian standards of living that no pivot to Asia can overcome.