Trade growth in Asia helps keep Russia’s war economy afloat

Three dozen Western-led countries imposed sanctions on Russia following Vladimir Putin’s invasion of Ukraine two years ago. They were unprecedented in their scope for a target of its size, including energy and other commodities, finance, technology, travel, shipping and more. Their aim was to raise the cost to Russia of continuing the war.

Three dozen Western-led countries imposed sanctions on Russia following Vladimir Putin’s invasion of Ukraine two years ago. They were unprecedented in their scope for a target of its size, including energy and other commodities, finance, technology, travel, shipping and more. Their aim was to raise the cost to Russia of continuing the war.

The realignment of trade that followed highlighted the relentless eastward shift in the world’s economic center of gravity. Asia accounts for two-fifths of the world’s GDP. Its growing commercial clout is diverting trade that Russia previously conducted with the West, undermining sanctions. Three of the six Asian countries that have joined the sanctions — Japan, Australia and South Korea — are among the region’s five biggest economies. The US should keep this in mind if it ever considers imposing similar sanctions on China.

Of course China itself, under Mr Putin’s friend Xi Jinping, has done what has undermined Western sanctions. Trade between Russia and China is set to rise 29% in 2022 and may exceed last year. China and Hong Kong are now Russia’s main suppliers of microchips, the integrated circuits vital to the war effort that frustrate Western efforts to starve Russia. China has also rapidly become Russia’s top supplier of cars and smartphones.

However, Chinese support is far from the only factor. The Insider, an online newspaper, recently revealed how Russian military companies are seizing sophisticated machine tools from Taiwan, despite severe economic sanctions there: Middlemen in Turkey and elsewhere source what Russia needs. In Central Asia, Kazakhstan and Kyrgyzstan are major conduits for shadowy „parallel imports” into Russia: their trade with neighboring Russia has boomed.

Sanctions from the start had to be designed around Asia’s apathy. Instead, the West forced its involvement and imposed massive and indiscriminate „secondary” sanctions: measures targeting third parties that aid Russia. But Asia is too important economically and geopolitically for the West to issue such threats.

Another important example is oil. Before the invasion, Europe bought three-fifths of Russia’s oil exports; It has fallen sharply since Europe banned access by sea. Meanwhile, Russia’s oil exports to Asia have risen to more than half of their total value, with India the largest buyer. Singapore is a different case. It condemned Russian aggression and was the only member of ASEAN to admit Russia. However, the oil is not covered. Singapore is a refinery and oil trading hub, as well as the world’s busiest bunkering port. Russian oil imports have almost doubled in the year to May 2023. Demand for storage has also risen, with Russian oil products being blended and sold at a juicy mark-up as non-Russian oil.

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In part, Asia’s hunger for Russian oil is helping the West. The US and Europe have tried to use maritime insurance and their control over shipping to control the price of Russian oil while ensuring it still flows, thereby avoiding a global supply crisis that could harm their own consumers. Nevertheless, Russia’s sales to Asia highlight that even if the West wanted to cut off Russian oil exports, it could not. This is ignored by the „shadow fleet”, which consists of about 10% tankers. Today, Russia earns more from oil exports than it did before the invasion.

Speculation in Asia now is how much the U.S. might lift secondary sanctions aimed at Asian firms seen as supporting Russia’s war economy. In December President Joe Biden issued an executive order detailing secondary actions against foreign companies and banks. Asian banks are keen to see compliance.

Although the West has successfully used secondary sanctions to coerce Asian countries, Cornell University sanctions scholar Nicholas Mulder says economic warfare undermines the primacy of the dollar-based financial system and America’s influence in Asia. If the US has this much trouble getting Asians to support sanctions against a relatively insignificant country like Russia, think how much more trouble it will have with China’s neighbors. A military and economic colossus of the region.

© 2024, The Economist Newspaper Limited. All rights reserved.

Reprinted under license from The Economist. Original content can be found at www.economist.com

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