Another win for China

3 min read

In the time when German Christian Democrats are reconsidering their long-term pragmatic approach to China, Russia decided to take yet another step towards Beijing. During the state visit of Xi Jinping to Moscow, Russia pledged to further monetary cooperation.

As Western financial networks are out of reach for the country, Moscow took the most logical step available and embraced the alternative: the Chinese yuan. From companies through households to the state itself (at least the sovereign-wealth fund) have increasingly been using the Chinese currency. The process started back in 2014, after the annexation of Crimea, but got fastened after sanctions were introduced against Russia.

Turning to the yuan to keep Russian assets safe was probably the safest bet, especially after Russian assets worth about € 300 million got frozen by Western countries (and now word is about using those assets to finance the reconstruction of Ukraine).

As with everything in their recently flourishing “bromance”, Russia is the junior player in the partnership that serves Beijing more. Not in the least by giving a huge push to its efforts to offer the yuan as an alternative to dollar and a more prominent feature of global finance. Growing dependence on the yuan means that Russian economy is exposed and linked to the Chinese economy, and to Chinese foreign policy influence.

But the sanctions left not much room for manoeuvre for President Putin.

The step of embracing the renminbi, also draws attention (again) to the limits of economic warfare (sanctions). As long as “economy” or “social wellbeing” is not within the strategic calculations, because, for whatever reason, the country doesn’t have to count with serious backlash from its own population, sanctions can limit the abilities of a regime, but cannot force it down.

While sanctions had and continue to have effects on the markets (Moscow Stock Exchange lost a third of its value since the start of the invasion), but (though not everybody is willing to say it out loud or to question the effectiveness of sanctions) Russia weathered the storm far better than most experts or politicians had anticipated.

According to various reports published by the IMF, OECD or the World Bank, Russia’s GPD dropped by at least 2.2 percent in 2022 and is expected to shrink further in 2023. (Or not, as the IMF expects a 0.3 percent growth.) A sharp turn compared to the estimated 5.5 percent growth, but nowhere near the 5-10-15 percent envisioned at the introduction of sanctions. French Finance Minister Bruno Le Maire predicted an outright and imminent collapse, for example.

Not in the least, because Russian economy is, to a large extent, at the bottom of the supply chain: instead of producing high end chips and semi-conductors, it provides raw materials, fuel and minerals to others. Things for which demand is ever present, especially at the prices Russia currently asks for. And with other countries willing to give support (or provide it with the materials it needs, either from their own sources, or, like Kyrgyzstan or Armenia, with importing Western goods) in exchange for its precious raw materials, it will hold on.

While the EU managed to reduce its dependence on Russian natural gas (reducing the import of gas by 55 percent), Russia found new buyers without much difficulty, turning to Turkey, India and China. For example, gas deliveries through the Power of Siberia pipeline have increased by 48 percent. By some estimates, oil shipments to Asia account for about 75 percent of what used to be shipped to Europe (shipments to China alone increased by 45 percent). That means that though the volume of Russian oil and gas export to Europe fell in 2022, its energy revenues actually surged (to $168 billion), enabling the country to end the year with a current account surplus of $227 billion.

 Agricultural sector could also adapt and rebound, allowing President Putin to declare that “by the end of the agricultural year, that is by June 23, 2023, we will be able to bring the total volume of grain exports to 55-60 million tons”. So did arms manufacturing.

Having made sure in advance to have friends at hand, would its quest against the West turn serious, Russia has worked on strengthening its ties with China, India and countries all over the world, including the Middle East and Africa. In countries affected by Western colonialism or failed “interventions” based on various reasons, Russian messages of “anti-Western narratives” resonate far better than any message the U.S., the G7 or the EU tried and tries to send. A fact clearly proved by the reluctance of those states to join the sanctions regime, limiting its effectiveness.

The situation created at least one triumphant moment to President Putin, who could declare at the beginning of 2023 that “2022 was a challenging year for us and we managed to get through the risks that emerged … quite successfully”, adding “we have ensured the stability of the economic situation and protected our citizens” and that “the West had failed to destabilize Russian society”.

It is a short-term victory, without doubt. Just like Iran, Venezuela, North Korea or any other country affected by economic sanctions, Russia will, step by step lag behind the global economy. It is already in recession and will continue to be so, unlikely to achieve significant growth.

But while half of France is on the streets, burning public buildings for the planned raise of the age of retirement, Russian population is unlikely to resort to widespread protests or social or political unrest. For now, anyways. In many years, they might, just like the population of Iran tries it from time to time, but the actual results of protests show the limits of public uprising against repressive regimes.

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