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Jan 04, 2023

Russia’s Economic Self-Destruction and Its Consequences

Russia’s war against Ukraine marks less a rupture in globalization than Russia’s self-imposed removal from the global economy. One consequence may be a more balanced relationship between China and the West.

Pipelines to be laid to transport oil to Vankor are seen at the Rosneft company owned Suzunskoye oil field, north from the Russian Siberian city of Krasnoyarsk, March 26, 2015.
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By starting its war against Ukraine, Russia opted for a radical disjunction from the outside world—at least from the West and its historical offshoots. Many experts and policymakers argued that this trend signalizes nothing less than a de-globalization. In fact it is more accurate to see Russia as having chosen to turn its back on the global economy.

Back in 1989, the Soviet Union exported 184.7 million tons of oil and petroleum products, 37.5 million tons of coal, and 101 billion cubic meters of natural gas—but in 2021 a much smaller Russia delivered 374.7 million tons of oil and petroleum products, 223 million tons of coal, and 251 billion cubic meters of gas to the world market. In all other sectors, except agriculture and some minor resource industries, Russia’s exports decreased, reflecting a profound de-industrialization of what once was an economic powerhouse for at least a half of the world.

Russia now depends entirely not only on the import of high-tech components for its defense sector, aviation, and automobile industries, as well as tele­com equipment, computers, smartphones and pharmaceuticals, but also the supply of uniforms for its troops, for example those that have been ordered recently from Turkey and North Korea. Russia’s recent path differs not only from that of China, but also those of Saudi Arabia, Qatar, and the United Arab Emirates who all opted for becoming diversified industrial and service economies deeply integrated into the global system. Russia was, and remains, a pure resource economy that the West might rely on, but is not dependent on. Therefore, the “disappearance” of Russia cannot significantly hurt the world economy or change the trends that emerged since the start of the millennium.

Most of the global companies that exited the country were not too dependent on the Russian market. For Microsoft, it accounted for 0.1 percent of global sales, for Apple, Starbucks, and Estee Lauder, around 1 percent, for Volkswagen and Coca Cola close to 2 percent, for Puma and Mango 7-8 percent. Among the international retailers, only Auchan got close to 10 percent of its revenue from Russia; among the international banks, only Raiffeisen made more than 20 percent of its revenues in the country. Therefore, the “world without Russia” will seem almost unchanged compared to one in which Russia was firmly integrated not so long ago. As I argued recently, if Russia “sinks” entirely, not even a swirl would occur at the surface of the global economic “ocean” and all the necessary “adjustments” would take just a couple of years as the Western nations have already prepared themselves for a new greener economy that is not so dependent on fossil fuels, which are the only important Russian exports.

Failed Assumptions

At the same time, many questions arise about what Russia itself will do as its leadership realizes the West can—and is willing—to decouple? This seems to be the most important issue these days since the “energy blackmail” President Vladimir Putin unleashed in recent months was based on his deeply-held assumption that Europe would not survive without Russian gas and oil supplies (this is presumably why Russia is assumed to have blown up the North Stream pipeline and why the Kremlin still is optimistic about the “new gas hub” in Turkey). The Europeans will pay a huge price for such a decoupling (some estimates put it close to €300 billion), but quite soon the Russians will be forced to reroute their export flows to much less profitable markets, and to secure their import needs through semi-official supplies and through violations of international intellectual property and copyright rules.

The first trend already appears to be quite visible: Russian oil and coal are now heading toward Asia—to China, India, and other countries. Since the start of the year, Russia’s oil deliveries to China grew by 1.8 times, and to India by five times. The coal, which was banned in Europe since August 1, now has to be sold almost exclusively to China because shipments from all of Russia’s largest deposits to any other country have been generating losses since at least September as the Russian railways increase their tariffs, and foreign shipping companies declined to facilitate Russian exports. China has also become Russia’s major source of hi-tech goods, including smartphones (in 2019, the share of Chinese smartphones on the Russian market stood at around 31 percent, while by the end of this year it will approach 90 percent) and home and office appliances. Moreover, China (or, rather, Hong Kong) appeared to become the main intermediary helping Russia to bypass the Western sanctions. It was recently reported that dozens of thousands of containers with the high-tech dual use products passed through either China or Hong Kong to Russia thus assisting struggling Russian producers. The financial sanctions also pushed Russia closer to China with the yuan-denominated assets representing now up to one third of Russia’s reserves, and the Chinese currency becoming the most used for foreign trade transactions.

Deeply Unequal Partnership

So, Russia of 2020s will be economically reorienting to the “South” with the most promising new partnerships to be built with China, India, Turkey, and Iran (all four nations are now seen in Moscow not only as the destinations for an increasing amount of Russian commodities and technologies—even nuclear ones, in the case of Iran—but as sources for high-tech imports, either produced inside these countries or smuggled from the Western nations). Russia appears to be so dependent on the “peripheral” nations that the Kremlin ideologists have already developed a new geopolitical concept depicting Russia as an “anti-colonial” power with a mission of limiting Western influence in non-Western societies. It may seem implausible, but such a doctrine should be taken seriously since it represents the new Russian geopolitical vector and reiterates the “break up” with Europe and the United States. The main problem with this re-orientation, however, is the deeply unequal nature of the emerging partnership.

On the one hand, Russia had never been a major trade partner for either China, India, or even Turkey. As most developing nations are interested first of all in expanding their export capabilities, Russia—even when being politically close to all of these countries—never was a crucial market for them (in 2021, it consumed just 2.9 percent of Turkish exports, 2.2 percent of Chinese exports, and a mere 1.05 percent of India’s exports). None of these nations have been as dependent on technology transfers or business investments from Russia as they all have been on Western ones. So, the Russia-Southern “partnership” has never been based on any­thing except trade while the most lasting economic cooperation also needs invest­ment partnerships, technological transfers, and genuine connections between the people of integrating countries.

On the other hand, even though imports from Russia have been much more important to these partners they are still almost as heavily commodity-oriented as Russia’s exports to the European Union. Oil, gas, and coal accounted for 65.9 percent of Russia’s exports to the EU in 2019 while the same goods represented 67.9 percent of Russia’s exports to China and 58.1 percent of its exports to Turkey in 2021, while in 2022 their share is expected to increase further. Of course, there is nothing wrong with buying com­modities from your neighbor—but fossil fuels may be supplied from numerous sources, and it’s much easier to overcome a dependency on them than, for example, technological solutions and hi-tech products. All this suggests that Russia’s turn to these countries is a situational and forced one, and Kremlin’s new orientation depends not so much on its own calculations, as on its partners’ interests.

Therefore, the recent rift between the West and Russia cannot be taken as a disruption to globalization—it is simply a move by a nation that has voluntarily opted out of the global economy as has happened previously with Cuba, Venezuela, and North Korea. Since the end of Russia’s war in Ukraine is not in sight, and even if it might end with some kind of armistice this would not mean that Russia has become a more rule-abiding or peaceful nation. In fact, Moscow has self-excluded itself from the global economy for years, if not for decades. Russia will thus become a less-ambitious nation depending more on non-Western,  poorer countries. To my mind, this looks like a unique case of a European nation revolting against the European order and seeking alliances against the West with peripheral countries. Proving that it is unable to develop itself, Russia has chosen a radical “non-developing path,” becoming a “non-contemporary country” as I have written previously.

But while Russia’s self-exclusion from the civilized world may have little direct economic consequences, it will have profound indirect ones caused by changing global political developments.

Humiliations in Ukraine

Prior to Moscow’s attack on Ukraine, Russia was considered a major military and economic power. It owned the world’s largest nuclear arsenal, possessed a mighty army, and was thought to have significant economic (financial and resource) levers that might affect the international order. Many experts and policymakers believed Russia was one of the global superpowers alongside the United States, China, and the European Union. One of the most active debates in the US unfolded around the question of how the West could prevent an ever-closer Russia-China alliance since it was thought Russia was able to provide China with the resources and technologies it needed to become a truly global leader.

After 2022 almost all these estimates were proven wrong. The Russian army has suffered several humiliating defeats in Ukraine, its once famous defense industry appears useless without Western components, its “energy grip” over Europe might be considered a huge exaggeration. Of course, the soundness of the Russian economy has been overstated for years, but for a rather long time President Putin was quite successful in presenting its economic progress as well as its rearmaments programs as a sign that Russia was back to the global stage—but in just 10 months all this appeared to be a bust. The main consequence of this was that China rethought its global positions—if up until the summer of 2022 the Beijing leadership continuously expressed its commitment to the concept of a “multipolar world” this doctrine was forgotten almost immediately once it appeared the Russians were losing their Ukrainian adventure.

At the 20th Congress of the Chinese Communist Party Chairman Xi Jinping, the new paramount leader of the nation, presented his vision of a bipolar world where the United States and China would be the major stakeholders, while Russia was not even mentioned in his speech. Quite soon, meeting with the US President Joe Biden at G20 summit in Bali, President Xi called for “competition” rather than “confrontation,” between both nations. I might be mistaken, but I would say that the Russian failure in Ukraine will have an extraordinary effect on how the world views China and how China interacts with the world.

A Changing Relationship with China

The Chinese leadership will learn a lot of lessons from Russia’s experience—and the most valuable ones will be those about the weakness of an army built on Soviet-era military doctrines; about the dangers of overestimation of its economic and technological potential; about the amount of economic pain the West is willing to take on to react to a breach of the current international order. The Chinese proclamation of a bipolar world says that Beijing is taking greater responsibility than it did before, and the new international system may appear more stable than the recent one, resembling one that existed during the Cold War when the cooperation between “East” and “West” was less intensive but more predictable than today.

It seems that China will become not less (as it was expected by many), but rather more moderate in its economic policies, trying to be seen as a more cooperative partner. The Beijing leaders will profit from the Russia’s troubles, but not support (or save) the Moscow clique. Economically, China is profiting from Russia’s humiliation, and politically it may benefit from improving its relations with both the United States and the European Union. President Putin made Russia the world’s most celebrated rogue for years, and therefore refocused the West’s attention from China on which it has been focused since 2017.

Under such new circumstances I would expect that the United States and Europe will pay less attention to their dependence on China, while China will become more collaborative with the West in the economic domain. There are good chances for implementing the US-China agreement concluded back in 2020 and never respected since—if there would be some progress on this path, many current tensions may ease.

Moreover, in addition to the situation whereby China is substituted by Russia as the world’s biggest threat, there is another factor that will deeply influence the future developments in the relations between the West and China. After almost 30 years of an uninterrupted and breathtaking growth, China is almost on the brink of a serious economic crisis. Growth rates are plunging, the wellbeing of the people is failing to improve, the financial and real estate bubbles are almost ready to burst, the stock market valuations are almost half of their 2008 readings. While China becomes geopolitically strong, it seems to be economically vulnerable, and this creates new opportunities if not for a reconciliation than for a more balanced partnership.

For years, European (and, more widely, the Western) analysts speculated about Europe’s dependency on Russia and on Russia’s ability to dictate its will to the Western leaders. But after Russian forces attacked Ukraine, it appeared that such a “dependence” has been nothing more than a “reliance.” It was very easy and convenient to rely on Russian resources for securing the needs of European industry, and on the Russian market to increase the sales of European products. But as the political quarrels started to dominate the landscape, Europe has shown that it may be able to overcome this reliance in one to two years (even while paying a high pri­ce for this).

This looks like the main lesson for both China and the West: The Western world relies on China, and may do this even more in the future, but even now it is not dependent on it. The coming years will show whether the Chinese leadership adjusts its policies for turning a new bipolar world into a realm of a “peaceful coexistence” that keeps globalization alive, and whether China will implode economically in a way Japan did after 1989. If everything develops smoothly enough, a rather peaceful and cooperative decade could be envisioned, witnessing the creation of a new global order that replaces today’s chaos.

Vladislav Inozemtsev, Special Advisor to MEMRI’s Russian Media Studies Project, is Founder and Director of Moscow-based Center for Post-Industrial Studies.

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