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Western sanctions against Belarus and Russia – good opportunity for building a new economy

The "Pivot to Asia" as a sanctions antidote

Two weeks after the events in Ukraine began, a series of restrictive measures by the collective West, led by the United States, made Russia (according to Castellum.ai database) the world "leader" in terms of the number of sanctions imposed against it (5.5 thousand). It is obvious to everyone: this is an economic confrontation on a planetary scale. Within one week of the active phase of the crisis, world prices for oil, gas, aluminum, copper, nickel, gold, titanium and uranium rose to record historical levels, which might entail a shortages in the global economy and a sharp rise in global inflation.

Cанкции Запада в отношении Беларуси и России — хорошая возможность начать выстраивать новую экономику


Backfiring on EU

Russian President Vladimir Putin by his decree allowed Russian companies to temporarily repay their creditors from unfriendly countries in rubles, which is a powerful countermeasure. The second package of economic support launched the mechanism of nationalizing the property of foreign companies (upon termination of their activity), more than 25% of shares of which are owned by representatives of such states.

At the same time, while Singapore stops trading Gazprom securities, Hong Kong is continuing to trade Rusal shares, which underlines the attractiveness of this location for business with Asia. During a recent conversation with Vladimir Putin, Turkish leader Recep Erdogan announced the possibility to use the ruble in mutual trade.

Unlike most of the early unilateral U.S. measures against Russia and other economies, the current wave of sanctions is unprecedented in terms of scale, sectoral coverage and intensity. Moreover, such a harsh approach disorients and confuses even opponents of the Russian special operation and ideological supporters of the West.

But history has proven more than once that unilateral sanctions are most often a double-¬edged weapon in terms of destructive effect.

Based on the European Central Bank estimates, sanctions against Russia will cost the EU 0.5 percent of growth in 2022 alone, or 108.7 billion for 2022-2023. At the same time, the forecast of economic growth has been lowered to 3.7 percent for 2022 and to 2.8 percent for 2023 (growth of 4.2 and 2.9 percent, respectively, had been expected before).

Attempts to isolate Russia will eventually backfire on the interests of Europe itself: the sharp rise in the price of energy products undermines the capacities of Europeans to import them.

This truth is best understood in Asia. For example, amid the recent refusal of Indian Prime Minister Narendra Modi to join the anti-Russian campaign within the QUAD (Australia, India, USA and Japan), the position of the local Oil & Natural Gas Corp. is illustrative: it doesn't see any problems with selling its share of oil from Russian fields or receiving dividends.

However, Indian authorities are studying the possibility of payments entries with the Russian Federation through foreign banks of third countries, through which oil transactions with Iran were previously paid.

Plans to replace Russian oil with Iranian have no real prospects yet — daily production in Iran is 4 times lower. The EU can reduce gas consumption by reducing the heating temperature, but it will not be able to completely abandon Russian supplies. And this is confirmed by Western industry experts. According to ex-commissioner of the Texas Oil Regulator (USA) Ryan Sitton, the world would require five to ten years to replace Russia's oil supplies.

Political analysts believe that the events in Ukraine are likely to repeat the oil shock of the 1970s: then Arab countries imposed an embargo on oil supplies to Western countries that supported Israel. Similar to those events, the ongoing crisis is capable of starting a new period of global stagflation, which would mean for the West (and not only) an increase in poverty and a spike in crime.

Financial Times experts predict that international investors may lose up to $170 billion in Russian assets. Following JP Morgan estimates, the volume of foreign financial investments in Russia is 120 billion as assets of foreign banks, 220 billion – as Russian securities held by non-residents. Thus, their amount is roughly comparable to the Russian foreign exchange reserves frozen by the USA and the EU.

Limitations and risks

It looks like the potential of financial sanctions is close to its peak, which is usually followed by de-escalation. This hypothesis is supported by the EU's refusal to support the USA energy embargo against Russia, as well as the rejection of Saudi Prince and the Sheikh of the UAE to increase oil supplies to the United States. This was recently officially confirmed by the Head of EU diplomacy. It is obvious, however, that it will take years to surmount the overall damage from Western sanctions.

It is logical and natural that the United States maintain schemes to legally circumvent sanctions while trading Russian oil, offering sanctioned banks to service oil and gas transactions in dollars through intermediaries in other countries.

The United States also tried in a hurry to make an oil deal with Iran and Venezuela, for which illegitimate restrictions had been imposed recently, which leads to the question of possible future analogies with respect to Russia.

Due to the sabotage of supplies by a number of foreign logistics companies, farmers in Europe and other countries may remain without Russian (and Belarusian too) fertilizers. Russian Ministry of Industry and Trade has already recommended its manufacturers to suspend exports of fertilizers until the market situation normalizes. Such a scenario in the medium term creates risks of crop failure, food shortages and famine in Europe, Latin America, South and Southeast Asia, where it is extremely difficult or almost impossible to replace our fertilizers. Meanwhile, wheat futures are hitting highs being up 32 per cent in two weeks.

The Ministry of Industry and Trade of Russia has hinted at the possibility of stopping the export of artificial sapphires applied in industrial production, including semiconductors¬, as well as in jewelry. Just to make it clear, Russia's share in global supplies of this raw material is estimated at about 40 per cent.

Diverting from Russia to China of 29 per cent of Europe's $12 billion of its exports of timber products (35 per cent of exports to China) due to the limited capacity of the Trans-Siberian Railway, infrastructure issues and a shortage of its own vessels can stimulate the creation of its own container fleet, roads and ports in the Far East, as well as state investment in the share capital of pulp projects in Siberia.

As the conflict escalates, it becomes apparent that China is the only state capable to meaningfully influence the parties to the conflict. Although there are many nuances in Beijing's position regarding the events in Ukraine, it always acts independently, based on its national interests, the implementation of which requires silence.

Sanctions due to the situation in Ukraine will affect the stability of global finance, energy, supply chains, and will become a new burden for the world economy already affected by the pandemic, Chinese President Xi Jinping said. That is why China is becoming more actively involved in the Ukrainian agenda. At the same time, the statements are increasingly correlated with Moscow's theses on the principle of indivisibility of security and the negative impact of military alliances expansion.

The speed with which Russia is cut off from the outside world is proportional to the loss of confidence in the dollar as a global means of payment and a tool for storing reserves, increasing the internationalization of the yuan. The Chinese economy is more deeply intertwined with the outside world than that of Russia, therefore Beijing is interested in enhancing its economic security by consolidating its own national currency.

There has been an increase in the number of requests from Russian companies willing to open accounts in Chinese banks. Russian banks under sanctions are starting to switch to yuan. 11 Russian banks have been reported to start issuing cards using Russia's Mir payments system combined with UnionPay, the China's national payment system which owing to the size of domestic market, had overtaken Visa and Mastercard in the number of transactions in the world. It operates in 180 countries and is a good alternative to the usual payment systems.

Shared interests and values

For Chinese companies, Western sanctions against Russia have provided an excellent opportunity for development — in banking, production and technologies.

Since the events in Ukraine began, the shares of more than a dozen Chinese companies involved in trade with Russia showed rapid growth. Jinzhou Port, a port operator in the north-east province of Liaoning, became the leader with its shares being up 80 per cent in less than a week. Amateur investors who are convinced of the imminent increase of trade turnover between Russia and China have become the driver of growth. Market sentiment is fueled by news about lifting of restrictions on the importation of Russian wheat, as well as raising the targeted volume of bilateral trade to 250 billion per year. However, even with the doubling of trade turnover, Russia will account for only 4 per cent of China's total foreign trade.

It is likely that Chinese investors may acquire assets which have been left in Russia by large Western corporations and which are losing value. According to Bloomberg, Beijing is in talks with its state-owned firms on any opportunities for investments in Gazprom and Rusal.

China is already one of the largest Russian importers of mobile phones, electronics and telecommunication equipment. As Western tech giants Google, Apple and Amazon withdraw from Russia, Chinese Baidu, Huawei and Meituan may occupy their part of the market.

The Chinese automaker Great Wall Motor has invested more than one billion dollars in the Russian Federation over the past three years. After withdrawal of Ford, Volvo and Toyota, the number of its competitors in one of the ten largest car markets in the world has significantly decreased.

Based on experts, the Russia-Ukrain conflict may spur Russian sales of oil, gas and other raw materials to China, that will enable China to dictate prices. At the same time, Russia's purchases of Chinese goods and equipment will increase. Russia's ban from SWFT will accelerate the use of the China Interbank Payments System (CIPS). The U.S. will pay less attention to the Asia-¬Pacific region, which will contribute to the weakening of the AUKUS and QUAD alliances.

The impact of the Ukrainian conflict may manifest for a long time. It is important to realise that although the United States and the West remain threats to security, in general they help China become a global power, which requires maintaining a shaky balance between competition and cooperation. Russia, by virtue of common interests and values, will also remain a significant partner. But the Russian economy is not capable to assist in full the Celestial Empire in proper modernizing its economy, and excessive rapprochement presents a risk. Therefore, the optimal strategy would be to monitor and keep the balance between relations with the United States and Russia, which China needs for development and security (respectively).

One way or another, China's progress in achieving long-term economic self-sufficiency and striving to minimize systemic risks from Western influence in the current crisis makes its yuan-centric trading ecosystem attractive to Russia and Belarus in the emerging Asian century.

Thus, Western sanctions against Belarus and Russia are a good opportunity for the society, state and business of our countries to consolidate, create their own authentic image of the future, articulate a ¬national idea and start building a new economy and way of life on this basis.

With all the nuances and ambiguity of the current situation, the optimal solution to ensure survivability is precisely the intensification of work with Asian countries. Although, here it is important not to fall into another extreme. The strategically optimal model is a balanced development based primarily on its own resources and forces, as well as on the support of fraternal Russia.

The "Pivot to Asia" becomes irreversible and inevitable…