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As we have told you in a past video, Russia has been trying for years to
reduce its dependence on Western economies. It has done so by reducing foreign financing,
accumulating huge reserves and promoting a policy of import substitution.
However, the result has not been particularly good. The Russian economy
is still heavily dependent on foreign supplies. Particularly when it comes to high technology.
So now the international sanctions that the allies have imposed on Russia are
beginning to hit the Russian economy hard. C1("The best estimates that I'm seeing coming
out right now suggest that the Russian economy is going to be trimmed to half
of what it was before this invasion." Daleep Singh, US Deputy National Security Advisor)
To give you an idea, in 2021, about 80% of Russian manufacturers claimed that they simply could not
find all the components they needed for their activity in Russia. This is the case of the
truck manufacturer, Kamaz, which has just acknowledged a 40% drop in production due
to a lack of components. According to the company, 15,000 jobs are at risk.
What’s more, according to a study by Moscow’s Higher School of Economics,
imports accounted for almost 75% of all sales of non-food consumer goods in 2020.
But now sanctions are closing international markets to Russia. This could be a severe blow to
its already battered economy. This is something that Vladimir Putin himself has acknowledged.
C2("Our economy will need deep structural changes in these new realities,
and I will not hide this, they will not be easy". Vladimir Putin, President of Russia)
You can already get an idea of what all this really means if Putin himself
speaks of difficulties in a country where, officially, things always go well.
Well, this is where all eyes turn to China.
Will the Asian giant rescue the Russian economy? To what extent can Moscow
count on Beijing's support? Well... VisualPolitik viewers,
in this video we are going to look at all the details.
So, let's get started.
1(IDYLL IN THE EAST)
It is no secret. In recent years, Vladimir Putin's Russia and Xi Jinping's China have
greatly strengthened their relationship, both politically and in regards to business.
The Asian giant is by far Russia's largest trading partner. In fact almost a quarter of everything
Russia buys, from clothing to televisions, comes from the People's Republic of China.
And it's not just about trade. Russia has also become one of the leading international recipients
of loans from Chinese financial institutions. Between 2000 and 2017 the Russian bear received
Chinese financing of more than $150 billion. Cooperation also extends to the military
field. As we already covered in the Patreon bulletin, the two countries
now frequently carry out joint maneuvers. Perhaps because of all this, when the two leaders
met in Beijing on 4 February 2022, on the occasion of the Winter Olympic Games, they declared that
the friendship between the two powers had no limits. A friendship without limits.
In fact during that meeting, just a few weeks before Russia launched its firestorm over Ukraine,
several agreements were signed: For example, China lifted restrictions on
Russian wheat imports and the two countries agreed to increase their energy exchanges.
In other words, over the next 30 years, China will buy more Russian gas and oil.
Precisely because of this growing courtship between Beijing and Moscow, when the allies
began to punish the Russian economy with sanctions, all eyes suddenly turned to China.
A country whose government has strongly rejected the use of economic sanctions against Russia.
C3(Since 2011, the US has imposed more than 100 sanctions on Russia. However,
have the US sanctions solved any problem? Is the world a better place because of those sanctions?
Will the Ukraine issue resolve itself thanks to the US sanctions on Russia? Will European
security be better guaranteed thanks to the US sanctions on Russia?" Hua Chunying,
a Chinese foreign ministry spokesperson) But the real question is, will China come
to Russia's rescue? Could China mitigate the impact of sanctions on the Russian economy?
Will Chinese companies consider going after assets and markets that are being
abandoned by Western companies? And pay attention, because there
is already speculation that some companies such as China National Petroleum Corporation,
China Petrochemical Corporation and China Minmetals Corporation, three public giants,
are already considering buying many Russian assets at a bargain price.
But can China really save the Russian economy? Well... the truth is that it is not so
clear that they could or that they even want to. But before we continue,
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2(CAPACITY ISSUE)
The first question we have to ask ourselves is ..... What exactly could
China do to support the Russian economy? Well, let's see, we can put several ideas
on the table: For example,
the Chinese government could facilitate trade transactions by reducing tariffs and red tape.
It could supply Russia with components that they can no longer buy from the West.
Or, it could also have its large State Owned Enterprises invest
in companies or projects in Russia. Or, it could advance payment of part
of the $140 billion that the Russian central bank holds in debt from the Chinese government itself.
They could even create a dummy bank to help Russia bypass some of the sanctions.
China could do all these things... But the problem is that none of this would be enough.
And you see, on the one hand, Russia has a small and underdeveloped economy that
basically exports raw materials. So as much as the Chinese would
be willing to buy things in Russia, the truth is that there is not much margin.
Besides, this country still sells its raw materials to the West, but even if that were
to change, by, for example, an oil embargo, in order to sell these materials to China,
it would require infrastructure that does not exist today and would take years to build.
So yes, it’s not as simple as changing the stickers.
For example, in 2021 China imported 10 billion cubic meters, that’s 353 billion cubic feet of
gas from Russia through the new Siberian gas pipeline. Do you know how much it exported to
Europe that same year? 175 billion cubic meters, almost 6.2 trillion cubic feet.
And that is without mentioning that Beijing will not be willing to depend excessively on
Moscow either. Then
on their side, Chinese companies alone also cannot compensate for the loss of access to advanced
Western products that Russia is facing, because sanctions now prohibit selling them to Russia.
And they can't do so for three reasons: 1) Firstly, because even though many things
are produced in China, it does not mean that they can be sold
to Russia. Products manufactured by Western
companies in China cannot be sold to Russia. 2) Secondly, because, technologically, the local
Chinese companies are either not so advanced or depend on supplies from Western companies.
Supplies that could themselves be endangered if the finished products then end up in Russia.
Take airplanes for example. International sanctions prohibit Western companies such
as Airbus or Boeing from selling aircraft, components, parts, engines or services of
any kind to Russia. Things that obviously are needed to keep planes flying. And China either
doesn't make these parts or has already said they won't sell them to Russia.
3) And thirdly, because many Chinese companies are afraid of the reputational risk that could end up
hurting them in much more lucrative markets and also that secondary sanctions could end up being
approved. That is, sanctions against Russia and any companies that work within Russian territory.
This is what has caused companies such as Volvo or TikTok, which are Chinese-owned,
to suspend some operations in Russia that were not affected by the sanctions.
And exactly the same reasons explain why two of China's "Big Four" state-owned banks, the Bank
of China and the Industrial and Commercial Bank of China, limited their operations with Russia as
soon as the invasion began. Which is also the same thing that the Asian Infrastructure Investment
Bank, basically the Chinese world bank, has done, by suspending lending to Russia and Belarus.
C4("China is trying to keep Russia at a distance. They don't
want to expose themselves by circumventing international sanctions." - Simon Harvey,
head of currency analysis at Monex Europe) Along the same lines, regarding investment
in Russia, yes, it is possible that some Chinese SOEs may end up buying assets in Russia at bargain
prices, but it does not seem very likely. Fear of sanctions, reputational risk and the
fact that the Russian market is very small are all things holding back any massive landing.
For example, consider Xiaomi, which has almost 40% of the Russian smartphone market. Yes,
it would surely benefit from the exit of companies like Apple, but it will hardly take the risk of
making large investments in a country that barely accounts for 3% of its global sales.
C5("China will not save the sinking ship of the Russian economy. Perhaps it will allow it to
float a little longer and sink a little slower." - Eswar Prasad, economist at Cornell University)
That is to say that even if Xi Jinping's government really wanted to lend Russia a
hand it may not have the capacity to do so on a large scale, [because obviously the Chinese
don't want to lose out along the way.] But the truth is that it is not even clear
that they really want to save Russia. Listen up.
3(NO MORE PROBLEMS PLEASE)
The Chinese economy is not exactly running at its peak. In 2022 it expects to grow by 5.5%,
its lowest target since 1991. And it is certainly not at all clear that they will achieve it.
China is currently dealing with a real estate crisis, a potential financial crisis,
the aftermath of state intervention in the technology sector, competition from new production
markets such as Vietnam, a Congress that has to re-elect Xi Jinping, a demographic crisis
and to top it all off, the dreaded coronavirus. Because yes, in China they are still
locking people in their homes. N1(Pressure mounts in Shanghai,
a city of 25 million, as Covid-19 closures remain in effect. CNN)
Crazy! In other words,
China is not exactly celebrating its success. Xi Jinping's government already has enough
headaches without risking sanctions and problems of all kinds for supporting an
economy as small as the Russian one. Take a look at this graph, for example:
While capital is flowing into most emerging economies, it is flowing out of China – which
may exacerbate the crisis there. It is possible that the Russian invasion of Ukraine
has changed the perception of many investors and that they no longer trust China as much.
A capital outflow that could be aggravated by the US Federal Reserve's rate hike,
why? Because when a country like the United States raises rates, investors prefer to
invest in US debt, for example, rather than in the debt of riskier countries,
as the yield gap with emerging economies narrows. This could jeopardize a large part of these
investments //indicate headline///: N2("Foreign holdings of Chinese bonds
top $500 bln in December (2021), up nearly 50% in 2020". Nasdaq)
And that's not all. To top it all off, the war in Ukraine has contributed to
increasing the price of energy, raw materials and food. Yet another old chestnut for China.
It’s an economy, VisualPolitik fans, that now needs foreign investment and international markets
more than ever for its exports. And do you know what? The United States
and the European Union are far, far, far more important to China than the Russian economy.
Don't believe me? Just take a look at the numbers:
In 2021, trade between China and Russia was about $147 billion. With the United
States the figure exceeded $825 billion and with the European Union; $750 billion.
In other words, trade with the United States and the European Union was almost 11 times greater
than trade with Russia in 2021. And all this is without mentioning allied countries such as Japan,
South Korea and Australia that would almost certainly comply with any international sanction.
This is true for trade. As far as investment flows are concerned, it is even more exaggerated.
So, to sum up: China has problems, China needs the markets and international investors, and Russia in
the global economy matters rather little. And we're not done yet.
4(A FIRE OR AN OPPORTUNITY?)
For China the Russian invasion of Ukraine is gradually turning into a huge nightmare.
Energy costs have skyrocketed; investor fear has grown; the war is slowing down rail routes
connecting China to Europe via Russia; and to top it all off, China's neighbors are now
announcing record increases in their military budgets. Which clearly does not amuse Beijing.
Shinzo Abe, the former Prime Minister of Japan, has even been in favor of reaching an agreement
for the United States to deploy nuclear weapons in the Land of the Rising Sun.
So we could say that, with each passing day, the invasion of Ukraine is less funny in China.
Wait a minute, though, because one good thing may have come out of it for Beijing. Check it out.
N3(Xi Jinping urged Joe Biden to work together for peace: "War benefits no one" - France 24)
Yes, China can now use its "neutrality" to negotiate with the United States in exchange
for certain benefits. For example, eliminating part of the tariffs approved by Trump.
In fact, shortly after the Russian invasion on 18 March 2022,
Xi Jinping and Joe Biden held a telephone summit that improved the tone of the
talks. And as a gesture of goodwill, the Biden Administration has just eliminated
tariffs on 352 Chinese products and US-listed Chinese companies soared in
the stock market on the hope that relations between the two countries will normalize.
So yes, it is possible that Chinese companies will buy assets at bargain prices in Russia.
And even Xi Jinping's government may make a gesture to the gallery, but it is
unlikely that things will go much further. Most likely, China will not even attempt to
rescue the Russian economy. Bad luck for Moscow.
So, how is Russia preparing to face the sanctions? How does Vladimir Putin's
government expect to withstand the punishment that the allied countries are imposing on Russia?
Well, VisualPolitik fans, we will look at that in an upcoming video here on
VisualPolitik. So don't forget to subscribe to the channel if you haven't already.
And of course, if you found this video interesting, give us a hand by liking it and
leaving your impressions in the comments. All the best and see you next time.