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The Great Eurasian Economic Realignment

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The Great Eurasian Economic Realignment

Western sanctions may accelerate Russia’s economic integration with Asia. March 17, 2022
Politics and law
Economy, finance, and budgets

Since Vladimir Putin ordered the Russian Armed Forces to launch a full-scale invasion of Ukraine on February 24, Western countries and their close allies have hit Russia with a raft of sweeping and unprecedented sanctions. Several major Russian banks were cut off from the Belgium-based SWIFT international financial messaging system. Transactions with Russia’s central bank were banned by the United States, United Kingdom, and European Union, effectively preventing Russia from utilizing much of its $640 billion of foreign exchange reserves. Targeted asset freezes and seizures were carried out against high-level members of Russia’s political and economic elite, Russian planes were denied access to essentially all European and North American airspace, and an unofficial boycott of Russia has seen over 300 international businesses suspend operations in or with the country, including major brands such as Apple, Disney, Zara, Visa, IKEA, and Coca-Cola. The Russian ruble has lost about 40 percent of its value against the U.S. dollar in a matter of weeks.

This kind of economic warfare is designed to isolate Putin’s government and bring an end to the invasion. But Russia’s vast exports of oil, coal, and natural gas to Europe have been notably exempt from the sanctions so far. Europe heavily relies on Russia to meet its energy needs: Russia alone supplies 40 percent of the European Union’s natural gas imports, 46 percent of EU coal imports, and 27 percent of EU oil imports. Russia is also the world’s largest wheat exporter, a leading producer of fertilizer, and possesses vast mineral reserves. The sanctions and boycotts against Russia are thus perhaps better termed financial warfare. Despite the belief that financial pain for the Russian populace will translate into political change, the nature of the Russian government remains the same. And while such bureaucratic and accounting moves can certainly cause significant pain in the short and medium term, they cannot change the fact that Russia possesses valuable and useful natural resources.

But as the energy-independent U.S. pushes for energy sanctions, Germany in particular finds itself in an increasingly difficult position. For decades, Germany’s political and business elites have been implementing a wide-ranging transition from reliance on fossil fuels and nuclear energy to wind, solar, and biofuels. This energy transition, called the Energiewende in German, was always a precariously ambitious strategy for Europe’s premier industrial and manufacturing power. Heavy industry requires consistent and abundant energy—something that photovoltaic solar panels could provide in theory but not in dim and cloudy Germany. With its nuclear plants now almost entirely shuttered, Germany’s energy transition has instead resulted in a reliance on Russian energy significantly higher than the EU average, with 55 percent of natural gas imports coming from Russia in 2020.

Will that change? In the wake of Russia’s invasion of Ukraine, the German government briefly floated the possibility of delaying shutdowns of its few remaining nuclear plants, before ultimately deciding against it and instead emphasizing plans to increase liquefied natural gas (LNG) imports and development of renewables. While the U.S. has announced plans to ban Russian energy imports immediately, new European plans to reduce energy imports from Russia are less ambitious on paper but could prove harder to achieve.

Political considerations may ultimately outweigh economic ones in Europe. All that is stopping European countries from eventually reducing energy imports from Russia to zero is their willingness to pay the costs of higher energy import prices, such as by importing LNG from the United States, the Middle East, or Africa, or by continuing to subsidize the construction and operation of renewable-energy installations. Much as Westerners overrate the effects of economic hardship on political outcomes in Russia, Iran, or North Korea, it would be a mistake for Russia to overrate the effects of economic hardship on political outcomes in Europe. For while Russia is Europe’s largest energy supplier, Europe is Russia’s largest trade partner. The complete loss of this trade relationship would have far harsher impacts on Russia’s economy and state coffers than even the current round of financial sanctions.

What has not been widely considered, however, is the possibility that Russia welcomes this outcome. If Russia is betting on economic divorce from Europe, including in energy, then sanctions and boycotts counterintuitively support, rather than frustrate, Russian strategy. Indeed, Putin’s government is already planning to retaliate with economic warfare of its own: it has prepared its own list of “unfriendly” countries to which to ban exports of natural resources, and has threatened to shut down gas to Germany via the Nord Stream 1 pipeline in retaliation for Germany halting the certification of Nord Stream 2.

Perhaps these moves can be written off as symbolic reactions, but they may fit a broader strategy of replacing Europe with Asia as Russia’s key customer for natural resources. Russia has been heavily investing in development and infrastructure in its Arctic and subarctic regions, which produce an overwhelming majority of its fossil fuels and a substantial portion of its valuable minerals. The Russian government has gone so far as to plan a “Northern Sea Route” to Asia across Russia’s vast Arctic coastline, normally considered far too icy and dangerous for regular maritime shipping. Such a route could prove geopolitically vital, even if uneconomical, in case Russian ships are denied access to Western ports, as the United Kingdom has already done. To this end, Russia has also revived its fleet of nuclear-powered icebreakers and built the world’s first floating nuclear power station to supply electricity to remote regions of Siberia, with more of each on the way.

Russia already depends on natural resource exports. That won’t change. But over the coming decades, it will not be the stagnant economies of Europe that will have the greatest demand for energy and minerals. Rather, the maturing industrial economy of China, in addition to the still-industrializing economies of India and other Asian and African countries, will be the primary growth markets for Russia’s natural resources. Neither China, India, Indonesia, the Gulf States, nor any of the many countries in Africa and Latin America chose to sanction Russia over the invasion of Ukraine. Today’s economic disassociation may well have unintended consequences for Europe.

Photo by ALEXEY DRUZHININ/SPUTNIK/AFP via Getty Images

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