The West and Russia: a tit for tat game. Part 3

 By Tatiana Yugay 

The the third post of a series on the crisis in Ukraine by Tatiana Yugay, Professor at the Moscow State University of Economics.

“Preventive war is like committing suicide for fear of death”

Otto von Bismarck

While the U.S. and the EU entertain themselves introducing more and more sanctions against Russia, their target doesn't participate in this petty game. If I were the Western leaders, I would be worried, why Putin does not respond to their attacks? From the recent events, they might know that Putin's silence is a frightening sign. Yes, they are rather nervous that the Russian bear would come to Ukraine and bite off its eastern and southern provinces. At the same time, some of them have been actively provoking Russia, possibly in order to step into a military conflict. Though the atmosphere is very tense there, I strongly believe that Russia won't provide military aid to the east-Ukranian federalists. All this anxiety about Russian possible invasion of Ukraine are caused by the incapability of the West to think strategically and foresee Putin's geopolitical moves, even though they are very obvious.

Russia's U-turn to a multipolar world

Being a Eurasian superpower, Russia, as a two-faced Janus, has been looking to the West and to the East throughout its history. During two decades after the collapse of the Soviet Union, the Russian Janus was looking with hope to the West. Janus's turn to the East has been developing gradually as Russia has gradually realized that the West would never regard the country as an equal partner, but will rather continue treating it as a mere source of raw materials. The recent US hysteria about Putin's letter to the EU leadership has made it particularly clear. Putin has warned the EU about possible difficulties of gas transit from Russia due to Ukraine's $2.2 billion debt to Gazprom. 

Furthermore, the West has become less attractive for Russia from an economic point of view, since it has been weakened by the Great Recession. Meanwhile, the emerging markets have been demonstrating dynamic economic growth. Thus, the imprudent Western sanction policy has served as a strong catalyst for Russia's geopolitical shift to the East. In my opinion, we are observing not only a temporary turn, but a long-term U-turn of Russia toward the East. 

 

On March 18, the spokesperson for the Kremlin, Dmitry Peskov voiced the Russian position, "If an economic partner on the one side of the globe imposes sanctions, we will pay attention to new partners from the globe’s other side. The world is not monopolar, we will concentrate on other economic partners".

In fact, Russia's new partners aren't that new. Russia has been gradually strengthening economic and political ties with two mighty non-Western clubs - the Association of Southeast Asian Nations (ASEAN) and BRICS. According to Alexei Likhachev, Russia's Deputy Minister of Economic Development, “the ASEAN countries are attractive for Russia because their markets are "complementary" to the Russian economy unlike the European ones. Though the trade volume with Europe is significant, European exports don't contribute to the creation of high-tech jobs in Russia. Concentrating on Asia is warranted because exports in this region include high tech machinery and military equipment not only hydrocarbons. Also, Asian markets, unlike the markets in Europe, have a tremendous growth potential and significant synergies with Russian economy”. 

 

AFP Photo / Sergei Karpukhin

During the past 13 years, Russia has been developing close relations within BRICS organization, consisting of Brazil, Russia, India, China and South Africa. Currently, BRICS represents 42 percent of the world’s population and about a quarter of the world’s economy, which means that this bloc of states is an important global actor. Today, in total, there are more than 20 formats of cooperation within the BRICS. In February, the member-states came to an agreement about 11 possible projects of scientific and technical cooperation, from aeronautics to bio- and nanotechnology. Last year, Russia's trade turnover with BRICS has reached $105 billion. One of the most potent Russia's partners, which holds a membership in both clubs (ASEAN and BRICS), is China.

During the Direct Line on April 17, Vladimir Putin, responding to a question about the Russian-Chinese relations, admitted that ”they are progressing very successfully in terms of trust and collaboration, which are unprecedented. This includes political cooperation and our shared views on international affairs and global security, which is the basis for these intergovernmental relations... We have never had such trust-based relations in the military industry. We began holding joint drills at sea and on land, in both China and the Russian Federation. This gives us reason to assume that Russian-Chinese relations will be a significant factor in global policy and will substantially influence modern international relations”.

In 2013, the trade volume between Russia and China has reached $89 billion. Leaders of two states called for annual bilateral trade between the two countries to be boosted to $100 billion by 2015. Meantime, China has already overtook Germany as Russia's biggest buyer of crude oil this year, thanks to Rosneft securing deals to boost eastward oil supplies via the East Siberia-Pacific Ocean pipeline and another one through Kazakhstan. Last year, relations between Russia and China have been actively developing in different fields. In particular, in 2013 the states signed 21 trade agreements, including a new 100 million ton oil supply deal with China’s Sinopec. On October 2013, the two governments signed an agreement to build, jointly an oil refinery in Tianjin, east of Beijing. In addition, China is ready to invest $20 billion in domestic projects in Russia, focusing on transport infrastructure, highways, ports, and airports, and it hoped to increase investment in Russia fourfold by 2020.

However, a millennium deal between the two giants is still to be concluded, though, it is already nicknamed as "Holy Grail" by the media. The Russian Gazprom and the Chinese National Petroleum Corporation (CNOOC) are ready to strike a thirty-year gas deal on supplies of 68 billion cubic meters per year by two routes. Fast growing China desperately needs Russian gas. According to expert assessments, China's demand for gas will reach 300-350 billion cubic meters per year by 2020. China's own production can provide about 115 billion cubic meters. Experts predict that by 2030 total gas consumption in China will exceed the European one, which now makes about 600 billion cubic meters. Russia and China have been negotiating on gas deal since 2004. A stumbling block in the negotiations has been a basic price. Recently a high-level Russian delegation visited China. Following the talks, Chairman of OAO "Gazprom" Alexey Miller stated, "During this round of negotiations, we agreed on all technical issues of the project. Progress has been made in the negotiations on the price of gas. The parties agreed that the contract will enter into force before the end of 2014”. It is expected that the long-awaited contract will be signed during Putin's May visit to China (in Russia, we keep fingers crossed!).

Currently, Russian gas is not supplied to China, though in 2013 Russia’s biggest independent natural gas producer, Novatek, signed preliminary memorandums with CNPC to sell at least 3 million tons of LNG per year between Yamal LNG and PetroChina International. Another Russian company, Rosneft, which is 75 percent state-owned, is vastly expanding its LNG projects to diversify its portfolio, and is focusing heavily on eastern markets, like Japan and China.

Besides the energy sector, the two countries look forward for further partnerships in the defense sphere. It is expected that Moscow and Beijing will sign a $3.5 billion contract on the sale of 100 Su-35 fighters to China ahead of Putin's visit to Beijing in May. In 2014, Russia and China have got a full agenda for bilateral cooperation, which includes not only trade but also such spheres as energy, aircraft building, mechanical engineering, military and science cooperation, tourism, etc. 

The second largest Russia's trading partner within BRICS is India. In 2012, the volume of bilateral trade reached $11 billion, which is rather modest in comparison with China. In 2013 this index slightly decreased. It is expected that in the near future India would sign the Economic Cooperation Agreement with the Customs Union of Russia, Belarus and Kazakhstan. In case of joining India to the free trade zone, its trade with the members of the Customs Union and, particularly, with Russia will boost. Traditionally, Russia and India have been closely cooperating in the defense sphere. At that, almost every defense contract provides for creation of joint ventures or licensed production. In 2013, India’s import of Russian weapons reached $4.78 billion. Another industry which attracts India is computer-guided weapons, produced by the Russian Morinformsystem-Agat Concern.

In February, the two states confirmed their plans to boost cooperation in nuclear energy, with the former backing the construction of more units at the Kudankulam Nuclear Power Project (KNPP) and other parts of the country. Besides, India and Russia are set to sign an agreement aimed at productive cooperation in many spheres: space and military cooperation, trade, construction of a pipeline from Russia to India, and plans to set up a Joint Study Group to look into the scope of the CECA (Comprehensive Economic Cooperation Agreement) with member-countries of the Customs Union (the Russian Federation, Kazakhstan and Belarus).

Brazil is a much smaller trading partner for Russia. The total trade volume between Russia and Brazil made $5.7 billion in 2013, however, the two states seek to increase it up to $10 billion in the near future. Russia imports Brazilian meat, coffee, sugar, juices and alcohol; and exports mainly fertilizers. However, in December 2012 the states signed a treaty on supplies of Russian helicopters to Brazil.

Farewell to the dollar

 

Boosting trade relations with non-western partners would inevitably raise a problem of currency for mutual settlements. Up to date, Russia has been using US dollar in its oil and gas trade by default. However, in a situation where the western partners have become less reliable and, moreover, are threatening with trade and financial sanction the instinct of economic self-preservation demands to use more secure means of payment. Since Russia sells its own raw materials, it can change the rules. In 2013, Russian exports of crude oil and oil products accounted for $283 billion, natural gas exports made $67 billion and LNG - $5.5 billion. Taking into account the future gas deal with China and other hydrocarbon projects, Russia can count on a big chunk of the pie on the global fuel and energy market which can be nominated in any type of liquid assets. Besides, Russia is close to entering a goods-for-oil swap transaction with Iran that will give Rosneft around 500,000 barrels of Iranian oil per day to sell in the global market.

 

Instead of feeding the U.S. with petrodollars, Russia can switch to petrorubles, regional currencies and even gold. In addition to the oil and gas trade, Rosoboronexport, state company specialized in weapon exports, can start trading in rubles. Prominent US trader Jim Sinclair believes that Russia can easily cause the collapse of the US economy. The economist, famous for his forecasts, explains that the strength of the dollar is based on the US agreement with Saudi Arabia that all contracts for fuel deliveries be in the US dollars. Now, Moscow can cancel the petrodollar and bring down a colossus with feet of clay.

As Tyler Durden justly admits, "If it was the intent of the West to bring Russia and China together - one a natural resource (if "somewhat" corrupt) superpower and the other a fixed capital/labor output (if "somewhat" capital misallocating and credit bubbleicious) powerhouse - in the process marginalizing the dollar and encouraging Ruble and Renminbi bilateral trade, then things are surely "going according to plan."

Moreover, BRICS countries have been repeatedly expressing their determination to abandon the dollar in their mutual trade. And it is not a threat which the U.S. can easily ignore. In 2012, the mutual trade between BRICS member states was about $280 billion. Besides, BRICS has an ambitious task to raise the trade volume up to $500 billion in 2015. One more bad news for the buck is in the air. It is expected that in the nearest future China will declare the yuan as a gold-backed world reserve currency. These expectations are heated by China's recent activity in accumulating monetary gold and its huge official international reserves, which reached $3,7 trillion at the end of 2013. China’s central bank may have stocked up heavily on gold in the past few years, and might own about 2,710 tons as of the end of 2013, according to an industry expert. According to Jim Rickards, next April China will shock the world announcing that it has accumulated 5,000 tonnes of gold. 

 

Besides shifting away from the dollar, emerging markets have been making further arrangements for redesigning the global finance. In order to modernize the global economic system, which now is US&EU-centric, member states have created the BRICS Stock Alliance and are working on launching their own development bank to finance large infrastructure projects. One more direct consequence of ill-considered US sanctions is Russia's strong decision to create its own payment processing system. As a result of financial sanctions imposed by the U.S. on Russian financial institutions over Crimea, Visa and MasterCard stopped processing transactions for several Russian banks. Currently, Visa and MasterCard control about 85 percent of all card transactions in Russia. At that, 90 percent of transactions are carried out within Russia's territory. Recently, Russia’s biggest financial institute Sberbank said the PRO 100 payment system, that’s been in development for a couple of years, will be launched on a massive scale within months. Russian banking community presume that Russia can develop its own digital card payment system in cooperation with China, particularly, on the basis of the UnionPay processing system. When the national payment processing system will be created Visa and MasterCard would lose a big piece of Russia's market.

What really the West is to gain at the end of the play? 

 

Now it's pretty clear, why Russia doesn't participate in ridiculous sanctions game notwithstanding US never-ending threats. Putin and his partners are busy reconfiguring the global political and economic landscape. The biggest loser will be the U.S. since its brand new American dream or long-declared pivot to Asia would be hardly realized. Partly, because the U.S. has too much bogged down in  Ukraine and, mainly, because Russia but not the U.S. has been pivoting to Asia just now. Obama can enjoy himself building houses of cards from tons of dollars which the FRS has been printing diligently. The EU can lose its loyal and reliable partner and get instead struggling fragments of the Ukraine.

Conclusion

It is clear that the Russian economy would suffer a serious damage if the EU were to introduce a full-scale economic sanctions' regime. However, far-reaching consequences of the above-mentioned geopolitical shifts would more than compensate for this temporary damage. Russian leaders and ordinary people are fully aware of future difficulties and are ready to pay the price for regaining Crimea. When I returned from Italy to Moscow at the end of March, I spoke with a taxi driver who met me at the airport. He was very enthusiastic about the Crimea story and told me that he and his family weren't afraid of any future sanctions. “The main thing is that the Crimea is again ours. We, Russians, are accustomed to difficulties. But we don't want war”. In fact, I've never seen such a unanimity of opinions during all post-communist period. It seems that the Russian people have finally restored its self-esteem and identity. For the first time since the collapse of the USSR, we are proud of our country. I believe that further sanctions would only reinforce these feelings. Following the successful Olympic and Paralympic Games and the peaceful reintegration of Crimea with Russia, Putin's rating has skyrocketed. According to the VCIOM All-Russian Public Opinion Research Center, since the beginning of 2014, Vladimir Putin’s rating has risen 15 percent and stands at 75.7 percent – the highest in the last five years. While enjoying the powerful support of his citizens, Putin can proceed with geopolitical redesigning together with the ASEAN and BRICS partners.

The West and Russia: a tit for tat game. Part 1.

TheWest and Russia: a tit for tat game. Part2.