The Eastward Pivot and Russia's Journey Towards Autarky
Still far from the logic of dependency theory dear to Raul Prebisch, the Russian economy is said to be increasingly dependent on China. According to Alexander Gabuev, Director of the Carnegie Russia Eurasia Centre, this dependency would not only be characterized as a long-term one but is also set to grow bigger in all possible parameters. As a matter of fact, and particularly after the many Western sanctions on Russia’s economy in 2022, one cannot argue the crucial role of China within the ranks of the Kremlin’s partners. The consideration of a dramatic dynamic shift in the two countries’ partnership is even put forward by Philipp Ivanov, scholar at the Australian-United States Alliance Studies. However, can we speak about dependency to the extent often given by specialists?
What kind of dependence is at stake?
The concept of economic dependence requires defining it properly. Regarding this approach, two ideas are fundamental: first, the multidimensional scale of the concept; second, the three main dimensions of economic dependency being international trade, external debt, and foreign investment. Those three components propose a first glance at economic dependence by focusing on a given economy's exogenous and endogenous factors. Although incomplete, the three measurements can assess the established dependence on both import and export sides, the amplitude or narrowness of one given country’s debt policy and the leverage of one country on the economic growth of another.
Considering at first the criteria of external bonds, it should be highlighted that Russia has decent control over its limited debt. Having in mind the release of debt figures in 2022 by the Russian Ministry of Finances, Russia has ₽18.78 trillion(equivalent to USD 254.66 billion on 1st January 2023 rates) in public debt with an external debt amounting to USD 57.41 billion with USD 19.64 billion in foreign currency. As a comparison, the US had USD 34.1 trillion in public debtat the end of 2022, with USD 8.2 trillion of external debt, most of it in dollars. Having half of its assets frozen by Western countries, Russia has already proven to be at risk regarding its ability to comply with its due date obligations. Additionally, considering the 34% foreign debt it has in foreign currency, the majority of which is owned by Western countries, one could argue that Russian finances still depend on the Western loan market. However, coming back to the idea of Russian dependence on China, it is yet to be proven by the foreign debt criteria since the most significant dependency previously highlighted goes in favour of the Western side, and not the Chinese one.
Regarding the foreign investment category, massive changes occurred following the beginning of the Russian invasion. Such a geopolitical storm had consequences for foreign investment going in the Russian economy. While the 2021 top 10 non-financial entities holding assets in the Russian Federation were from industrialized Western countries, Russia has since gone through a noticeable exodus. Although only around 10% of Western firms had divested from Russia in November 2022, the process has been launched, with monthly updates referring to the departure of a new Western entity from the Russian market. Many European and American actors left Russia, halted their existing investments, or cancelled the announced projects. But suppose foreign direct investment and foreign portfolio investment going in Russia were widely Western prior to the beginning of the war (up to 75% of Russian FDI between 2009 and 2017 were from European investors). In that case it appears legitimate to question the current situation. Nature abhors vacuum, and so does the Russian market. Nevertheless, it appears that Chinese actors did not deem the departure/halt of
Western investments as a sizeable opportunity
According to Vitaly Mankevich, president of the Russian- Asian Union of Industrialists and Entrepreneurs, although promising, China’s direct investment ranks 22nd among all direct investors within the Russian economy. Three reasons may be raised in order to explain such a Chinese detachment: difficulty in reaching the Russian market due to sanctions; priority given to the Chinese economy itself in order to favour a Post Covid rebound; flows of investment going to the Silk Road Economic Belt project in the last 10 years with few incentives on Russia. The Silk Road Economic Belt is one since it amounted USD 1 trillion worth of investment since its creation in 2013 and invested only USD 13 billion in Russia. Consequently, and since the Western assets in the Russian economy are not expected to be short-term replaced by the Chinese ones, the Russian government will have to come up with other sources of funds for its economy.
Russian international trade has gone through a serious reshaping in recent months. Not only did it have to search for alternatives in the global market following Western sanctions, but it also attempted to cover the unofficial supply chain coming from the very Western markets supposedly closed to it. As a consequence, keeping track of the numbers of the Russian economy has proven to be rather complicated in the recent months, but the official and current market interactions have yet been possible to record by such institutes as Bruegel or the CEIC. From the compiled data, it is possible to draw percentages of increase and decrease in the Russian trade balance. As a general comment, speaking about a reinforced Russian pivot to the East is true. While Russian exports of fossil energy and other goods to the European Union have diminished by 59% comparing January 2022 to January 2023, Russian imports have too drastically reduced by 53%, looking at the two previously used benchmarks.
Not to mention the forecasted decoupling of energetic European needs from the Russian market in the middle and long term, Russia is thus left with only one geographically close option for its legal and official imports and exports of fossil energy. Although the possibility for European institutions to import Russian Liquified Natural Gaz will always remain an option to counter the unpredictable tendencies of a well-known tight market. Following a coherent vein, Russian imports and exports to China have increased by 10% and 23%, respectively comparing January 2022 and January 2023. Among the top34 countries that partner with Russia and account for around 70% of its foreign trade, the Sino-Russian trade exchange is rising on both exports and imports, amounting to a total of 190$ billion in 2022, while EU-Russia still remains higher with more than USD 214 billion in 2022 (+24% compared to 2021).
What conclusions can be made from the displayed figures?
First, the Sino-Russian partnership is likely to keep growing in figures, with Russia redirecting its oil and gas productionto South and Southeast Asia while incrementally being in need of Chinese products, those being manufactured goodssuch as electronics, ships, aircraft, and machinery. The car industry may be one of the greatest examples, both in terms of numbers and symbolism, since the Chinese brand “Exeed” has been recently chosen as a means of transportation for international events such as the Economic Forum. The Chinese growing involvement in the Russian trade balance implies a gradual European replacement in the concerned case at stake. The problem is that, in this regard, trade commitment is a short-term one. One should notice the velocity of the Western World to take sanctions, cut trade ties or limit them. The multipolar world system also plays a huge role in this appreciation of short-term commitment, having more trade stability in a Hegemon dominated world system or Bipolar world system. Consequently, European short-term commitment is partially replaced by Chinese short-term commitment.
Second, the decoupling of EU-Russia’s economies is not only seen as an economic priority for Brussels but also as a political stance and is thus likely to embrace a new turn in 2023. To achieve a sustainable and ecological transition and support Ukraine in its war against Russia, European institutions will reduce more and more its demand for Russian gas in the years to come, adding that fewer and fewer products will be transiting from the Schengen zone to the Russian economy.
Thirdly, is the Chinese growing and profitable partnership likely to represent a sound and sustainable replacement of longstanding investments between the EU and Russia? At the very least, not in the short term. The first reason is that the dynamization and development of this partnership imply deep and longstanding infrastructural investments in the Far East region, such as the project of Russia- Mongolia-China corridor or the Power of Siberia 2 project. For now, China has proven to be somewhat reluctant to embrace this way. The second reason is the natural limits facing the Sino-Russian partnership: the two economies have little capacity to develop economic ties further than one of energy supplier to manufactured goods supplier. Consequently, a clientelist status given to Russia toward China is a hastened statement. Since the Russian war in Ukraine’s end is still difficult to envision, the current situation may pave the way to the fourth component of the Russian response to Western sanctions. It appears that it is not only necessary for Russia to “secure the strategic areas of economic policy, to support import substitution in strategic sectors of the economy and cultivate closer economic relations with non-Western countries”.
Therefore, given the current situation the Kremlin finds itself in, the Russian economy must and has already started to demonstrate a strategy of Russification of its economy, in order to gain resilience and autarky. On the ideological aspect, at first, the shift seems to correspond to the identified political reasons explaining such a political economic policy, such as the thrive for greater insulation from foreign economic influence and foreign political and cultural influence. This shift has already been met with a wide advertisement on public debates and strategic communication by the officials of the Kremlin, and is now more and more tangible from an economic point of view. The Kremlin’s leaning to concentrate means of wealth production into an elite’s hand and to get a grip on strategic and emergent sectors such as the internet industry may be considered as gradual autarky. In the same vein, the Russian tax framework has also been profoundly reshaped in recent months, highlighting a Russian ambition to draw a more significant proportion of funds internally and reducing the share of the shadow economy within Russian market. A greater strategic and economic autonomy has been the goal of the Kremlin after the financial crisis in 2014. However, the supposed competitive advantages proposed by a closed economy, such as competitive prices for instance, were impossible to fully set for now. Actually, such apolitical economy was made impossible by two conjugated elements: the level of economic unpreparedness Russia was found in ; the unmatched scope of the Western sanctions. As Simeon Djankov phrases it, the Russian gradual insulationis already observable and, as recorded in Russian history, will lead to economic backwardness in Russia.
Therefore, if a certain dependence is tangible from the Kremlin to Beijing, what is expected from it? Can this relation of dependence save the Russian economy from gradual autarky?
The previous statements were not to say that China has no interest in Russia nor does it stand for its partner in a measured way. As it was displayed, China has been a gigantic source of liquidity to Russian finances, buying in huge figures gas, oil, and coal from Russia. It replaced some European suppliers on key products such as the car industry, consumer electronics goods, [etc. Finally, China has provided a critical alternative to the US dollar. Recently pointed out amid Xi Jinping’s visit to Moscow, the yuan is at the heart of Sino-Russian economic interactions, and being announced as the currency used “for settlements between Russia and the countries of Asia, Africa, and Latin America”.
As a result, it is possible to say that China is growing more and more important for Russia, but does it stand the comparison with former Western partners?
The Chinese commitment implies a vital flow of products, fossil energy, and money. But longstanding commitments, apart from those already launched between the two countries before the war, are still lacking in the Sino- Russian partnership’s panoply. One could perceive it as discomfort or fear from Chinese actors to dare explicit Western invitation not to collaborate closely with Russian economic actors, being threatened by backlash sanctions. Even during recent Xi Jinping’s visit in Moscow, no key advancements were made concerning the construction of Power of Siberia 2. Although key to Russian financial survival, China tends to contain Russia’s willingness to deepen the current collaboration.
Conversely, Russia is ready to go all in this partnership. It has lifted its former concerns regarding transferring critical civilian, military, and dual-use technologies, such as nuclear power plants, ballistic missiles, or space technologies. And if many currently nickname Russia as a gigantic gas and oil station to China, they may be concerned by the size of its resources, which do not limit themselves to the only territory of the Russian Federation. As a matter of fact, Russian technologies and involvement within Central Asian fossil energy facilities are key to the well-functioning of this industry. Uzbekistan and Kazakhstan's recent inability to cope with contractual obligations toward China may be an important instance to have in mind. While discussions about a future “Trilateral Gas Union” are still far from being concluded, Russian actors still have preponderant shares and assets within the two countries, being providers of technologies and skills in managing this industry. And as recently demonstrated, the domestic agenda of Central Asian countries tends to prioritize domestic stability rather than export contracts.
Therefore, Russia could grow to become China’s continental energetic insurance in the coming years while Saudi Arabia, Qatar, Indonesia and Australia still dominate the sea.. Looking at the current figures of the Chinese energetic supply, Russia has a say on Chinese energy imports. China’s ambition is to rebound from the Covid crisis and intends to do so by dynamizing its domestic market and reaching its former indicators of production and exports. Since the decoupling of GDP and energy growth is not yet achieved by both OECD countries as well as BRICS ones, Russia may be considered as having an indirect influence over the Chinese production of wealth.
Unbalance within Sino-Russian partnership does not imply that Russia is deprived of any leverage on its partner, even though the Kremlin would not dare use it in the current circumstances. The horizon proposed by current tensions in the Taiwan Strait may announce a regained status for Russia in Beijing’s eye, the latter perceiving a continental supply chain of energy as naturally more secure. Having a current geopolitical alignment, Beijing cannot let the Kremlin drift and collapse in its war against Ukraine. It is consequently expected to make sure Russia receives the minimum to survive and remain a decent partner in its project of a New World Order. Considering the current state of EU – Russia relations, and the prospects of the figures going along with it, China will have to step up gradually its level of involvement in the Russian economy in the coming months. Yet, with Western assets continuing to flee Russia, the current Chinese level of involvement is far from protecting the Russian economy from reaching greater level of autarky.
Conclusion
Russian reinforced pivot to the East is an important fact to consider but, although accelerated, such an enhanced partnership would have happened anyway in the long term following the 2014 events in Ukraine. Russia and China share a profitable, although unbalanced, partnership. But the key element currently going on is the forecasted inability of the Russian economy to replace Western capitals, thus compelling the Kremlin to embrace a greater autarky. This fact may constitute the most important outcome of European and Northern American reactions and sanctions on Russia. And since China is not yet (and maybe never will be) ready to take further steps toward meaningful and longstanding economic intertwining with Russia, the effect of Western sanctions may have a gradual and more significant impact. As displayed previously, one cannot imagine having sanctions working while the European Union still had such an energetic dependence and, consequently, the flow of cash directed to the Kremlin’s purse. The first year of the conflict has turned European Union’s answer to be economic, strategic, and legal. As the conflict drags on, the European Commission's successive implementation of sanctions, and their relentless pursuit of additional measures, indicate the European Union's unwavering legal preparedness. Furthermore, the Union's proactive readiness to diversify its energy sources raises the prospect of a more substantial blow to the Russian economy, surpassing the impact witnessed in 2022. An impact that current partnership with China will only soften.