The economic weight of Asia keeps the Russian economy going

Omar Adan

Global Courant

Thirty-seven countries have imposed economic sanctions on Russia since the invasion of Ukraine in February 2022. The scale of this campaign has few precedents in recent history.

The sanctions in finance, energy, technology, travel, shipping, avionics and commodities target one of the 10 largest global economies.

Yet the economic pressure on Moscow is not nearly as hermetic as previous anti-war sanctions, such as the UN sanctions against Iraq following Saddam Hussein’s invasion of Kuwait in 1990.

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A year after its imposition, a number of things are clear. Sanctions have damaged the Russian economy and its future growth prospects. But they neither caused the collapse nor helped end the war in Ukraine.

Much attention has been paid to how the dominance of the US dollar enables Western financial sanctions. But the mixed results of the economic campaign against Russia show that a powerful countertrend has gone largely unnoticed: the rise of Asian commercial power as a facilitator of trade diversion that dulls Western sanctions.

Modern economic sanctions were introduced in the early twentieth century at a time of undisputed European dominion over the world economy, a mantle that was then handed over to the United States. This Western economic dominance was the basis for the expansion of sanctions during the Cold War. But the global economic center of gravity has since shifted to the east.

In 2021 Asian economies composed 39% of global nominal GDP, making them the only one largest continental block. Asian exports accounted for 36% of global exports, while the five largest Asian economies combined – China and Hong Kong, Japan, South Korea, Singapore and India – accounted for a quarter of all global imports.

Asia today makes up three quartersand China and India full halfof global annual GDP growth.

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The sanctions campaign against Russia in 2022 has exposed the strategic consequences of this shift. Sanctions against Moscow were intended as a whole An official of the US National Security Council said so, as a form of economic ‘shock and awe’. But after a brief financial crisis, Russia shifted much of its trade to Asian economies and weathered the initial sanctions.

Asian economies acted as alternative destinations for Russian exports and new sources of imports. Trade relations with China, India, Turkey, Gulf countries and Central Asian countries have boosted the Russian economy. Bilateral trade between Russia and China grew by 29% in 2022 and by 39% in the first quarter of 2023.

An oil pump jack at an oil and gas field in the Krasnodar region of Russia. Vitaly Timkiv / Sputnik

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It’s possible amount to 237 billion dollars by the end of 2023 – an amount greater than China’s total bilateral trade with economies such as Australia, Germany or Vietnam. In 2022, Russian trade with the United Arab Emirates increased by 68% compared to Turkey increased by 87%. Russian-Indian trade rose 205% to $40 billion.

Export diversion has been a lifesaver for Russia’s energy sales, which make up a large portion of its trade. In January 2022, European countries imported 1.3 million Russian barrels per day, while Asian customers bought 1.2 million. By January 2023, Russian sales to Europe had fallen below 100,000 barrels per day, but export to Asia had risen to 2.8 million.

Asian demand has more than replaced the loss of oil exports to Europe. India has become the largest buyer of Russian crude oil by sea, buying more than 1.4 million barrels per day since early 2023.

Chinese importers are not far behind, buying between 800,000 and 1.2 million barrels per day by 2022. In one year, India, China, Turkey and the Gulf states completely replaced European demand for Russian oil exports.

Asian exporters have also filled some of the gap left by Western suppliers of advanced manufacturing and high-tech equipment. Chinese companies now account for 40% of new car sales and 70% of smartphone sales in Russia.

The withdrawal of Western foreign direct investment has had a serious impact on the domestic auto industry. Russia has switched to importing used European and Japanese cars through third countries, with new cars mainly from China.

China and Hong Kong have become major microchip suppliers, which Russia began to store before the war. In 2022, Russian companies switched to importing more advanced chips, with the value of semiconductor and electronic circuit imports increases by 36% between January and September compared to 2021.

It remains to be seen how effective these import channels will be in the long run. But in the short term, Western export controls on technology have not led to a chip hunger in Russia.

Russia’s trading partners in the Eurasian Economic Union have also played a role in circumventing technology export restrictions. Central Asian economies operate as channels for parallel import and transit trade.

The European Bank for Reconstruction and Development closed that while Russian trade with the United States, the United Kingdom and the European Union has fallen significantly, “EU(s) exports from the UK to Armenia, Kazakhstan and Kyrgyzstan … have increased significantly in a pattern that is consistent with (the) diversion of trade to Russia.”

This diversion effect through Central Asia is noticeable in the import of machinery and chemical products. By October 2022 year-on-year increase in exports to Russia from China, Belarus, Turkey, Kazakhstan, Kyrgyzstan and Armenia almost matched the fall in European, American and British exports to Russia.

The direction of Russian gas pipelines is shifting from west to east. Photo: iStock

By acting as ersatz suppliers to the Russian economy, as substantial new customers for commodity sales, and as price setters for Russian oil exports in world markets, Asian economies have significantly mitigated the impact of Western sanctions.

Although the sanctions have reduced Russia’s growth potential, the economy is supported by a major trade realignment. The participation of Japan, South Korea, Taiwan and Singapore in financial and technological sanctions has had little effect, in part because commercial ties between these East Asian states and Russia in manufacturing and energy trade continue.

Asia’s sanctions-blunting commercial power therefore rests primarily with China and India and various economies in the Middle East and Central Asia. This geo-economic reality seems to inevitably complicate the future Western use of sanctions.

Nicholas Mulder is an assistant professor of history and a Milstein Faculty Fellow at Cornell University. He is the author of The Economic Weapon: The Rise of Sanctions as a Tool of Modern War (2022).

This article was originally published by East Asia Forum and has been republished under a Creative Commons license.


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