Only one person can save Russia from the worst consequences of the shattering international sanctions imposed on it in the past week. It’s not Vladimir Putin. The fate of Russia’s economy and Putin’s regime is now in the hands of the man he describes as his “best friend”.
China’s President Xi Jinping alone has the power to keep the Russian economy functional and Putin in power. The Moscow share and derivatives market remains shut because the authorities know what would be revealed if it allowed them to open. How?
Because the securities of 27 of Russia’s biggest companies continued trading in London for a few days until they were suspended last week. And the losses were horrendous. Before suspension, they’d lost between 90 and 100 percent of their value since the beginning of the invasion of Ukraine. The sanction-hit Sberbank was down by 99.7 percent to trade for just one penny, for instance. Oil giant Lukoil had lost 99.2 per cent.
Russian government bonds have been downgraded to junk status. The ruble has fallen further in the past week than it did during the country’s 1998 default. In other words, world financial markets consider Russia to be all but bankrupt.
The crafty Putin spent years anticipating Western sanctions on Russian banks by building a substantial foreign exchange warchest of $630 billion in the central bank to keep the country solvent. He didn’t expect the West would hit his central bank as well as the commercial banks. Most of those reserves are now unavailable to Russia.
Yes, Russia’s oil and gas wells, Putin’s vaunted trump card, are still pumping and earning foreign exchange. Joe Biden isn’t so brave that he wants the cost of petrol in America to explode. He is resisting congressional calls to boycott product from the world’s biggest oil exporter.
But even here, the world is wary. One country, Canada, has barred Russian oil imports and others are debating it. Some 70 per cent of Russian crude was “struggling to find buyers” this week, said the consultancy Energy Aspects. As a result, Russian oil was selling at a discount of more than $18 a barrel.
“In reality,” reported London’s Financial Times, “many Western banks, refineries and shipowners are in effect ‘self sanctioning’ – behaving as if Russian oil has already been placed under sanctions. ‘Russia’s oil has effectively become toxic,’ said one banker.”
The prominent Russian economist Maxim Mironov writes: “I’m often asked about economic sanctions. In short, my scientific conclusion, as a finance professor and PhD from Chicago University – the Russian economy is fucked.”
Even worse, he wrote, was that most Russian citizens, “even the educated ones, for the most part don’t realize what awaits them,” according to an English translation supplied by the former Australian diplomat Dmitry Grozoubinski on Twitter.
And that is? “Very soon, Russians will be faced with shortfalls of basic products. I’m not talking about iPhones, the import of which was already banned, but about food, clothing, cars, whitegoods, etc.” Planes, almost all imported, eventually would stop flying because their makers are cutting off supply of parts. And so on.
As for the Russian central bank’s remaining foreign exchange reserves, says Mironov, “it’s going to be hard to find a central bank on earth willing to buy from the Russian central bank, so as not to find itself sanctioned or facing massive fines”.
Well, there might be one. And, if not China’s central bank, some of its state-owned enterprises. As world markets have recoiled from Russian products, the rulers of world’s second biggest economy have taken a markedly different stance.
“China and Russia will continue to conduct normal trade co-operation in the spirit of mutual respect, equality and mutual benefit,” China’s Foreign Ministry spokesperson Wang Wenbin said on Wednesday.
Actually, Beijing is going beyond “normal trade co-operation”. It’s giving Russia special assistance. For example, it’s been widely noted that China last week dropped its restrictions on imports of wheat from Russia. Wheat is one of Russia’s top export items.
Was it just a remarkable coincidence that Beijing’s concerns over phytosanitary problems with Russian wheat were resolved on the very day that Putin’s missiles started to slam into the Ukrainian capital? It was not. The wheat concession was one of a package of more than ten agreements struck between Putin and Xi when they signed their so-called “no limits” partnership agreement at the opening of the Beijing Winter Olympics last month.
Russia’s invasion of Ukraine began the day after the Olympics closing ceremony. This was no coincidence, either, according to a report by The New York Times. It reported this week that China had asked Russia to delay the invasion until the Games were finished, according to what the NYT described as Western intelligence reports.
The implication, of course, is that Beijing had advance knowledge of Putin’s invasion plans.
Other deals signed by the two autocrats as part of the “no limits” partnership were long-term supply contracts for China to buy an estimated $117 billion worth of Russian oil and gas. Total Sino-Russia trade boomed last year by 36 percent from a year earlier to a record high of $147 billion. They’ve set themselves a target of $250 billion in two-way trade by 2025. War crimes? What war crimes?
It’s pretty much effortless for China to support Russia economically. China’s annual economic output was worth $16 trillion last year, exactly ten times the size of Russia’s $1.6 trillion. And, after the collapse of the ruble last week, Russia’s economy is axiomatically worth about one-third less than it was two week ago, measured in US dollars.
China is attracting a rising chorus of Western criticism, led by Australia’s Scott Morrison, for its tacit approval of the Russian invasion. China conspicuously has refused to condemn the invasion, or even use the word. It has stuck to Putin’s talking points by calling it “a special military operation”. And Beijing has abstained from voting on UN resolutions critical of Moscow’s unprovoked attack on Ukraine.
Morrison, closely mimicked by Labor, has been doing his best to inflict reputational damage on Xi. He’s on solid ground. After 70 years of declaring sovereign borders to be sacrosanct, the Chinese Communist Party is now prepared to condone, even support, a blatant Russian violation of Ukraine’s sovereign borders.
Morrison is putting Xi’s hypocrisy up in lights for the world to see for two reasons. First, he hopes it will help harden international opposition to the unprincipled expansionism of China, as well as Russia. Second, it boosts Morrison’s election campaign priority of national security, allowing him to draw attention to the threats to Australia which, he’ll claim, only a Coalition government can handle.
Some Western analysts believe Beijing has made a terrible mistake. In Washington, Jude Blanchette of the Centre for Strategic and International Studies described it as “an extraordinary blunder” by Xi. And Elizabeth Wishnick, a senior research scientist at American non-profit research outfit CNA, said “China is in a lose-lose situation with respect to Ukraine”, according to The South China Morning Post. “If a Russian puppet state results from this conflict, Chinese companies will face sanctions.”
Lose-lose? That’s not how China’s leader sees it. A Russian puppet state sounds perfect to Xi. Till now, Moscow has been a junior partner in the relationship. What is the loss of a junior partner if he can acquire a puppet, at rock bottom price?
In truth, Xi wasn’t gulled by a Machiavellian Putin into pre-emptive support for an atrocity, now finding himself helplessly handcuffed to an international pariah accused of war crimes. On the contrary, Xi was the chief architect of their “no limits” pact. Xi initiated work on the agreement in November, according to Lingling Wei’s reporting in The Wall Street Journal. It was Beijing that proposed the signature term “no limits”. The evidence is mounting that Xi knew of the forthcoming invasion and positioned China to be uniquely supportive.
What will Xi do now? Kevin Rudd, an authority on China, has no doubt: “China’s statecraft is always long-term. There’s no way in the world, having secured Russia’s foot in the Chinese camp, that Xi will abandon Putin in his hour of financial and economic need.”
“In fact, Xi will see this as an opportunity to entrench China’s influence over Russia. At the same time, China will seek to limit the hit on themselves by acting as mediator. It’s an open question whether that would have any effect [in protecting China’s reputation] in the real world.”
“China’s leadership has been stunned by the level of global reaction to the invasion of Ukraine and stunned, furthermore, that rather than forcing the Europeans to capitulate, it’s caused European strategic determination to harden, as evidenced by the 180-degree turnaround by Germany.”
For Xi, an accelerating confrontation with the West would be a fair price to pay for acquiring Russia as a vassal state. Russia would owe China its viability as a functioning state, and Vladimir Putin would be indebted to Xi for the survival of his regime.
A “no limits” condominium indeed. On the evidence to date, there is no limit to the atrocities Putin will commit to aggrandize himself. And there is no limit to the outrages Xi will accept for the opportunity to achieve his China Dream, even if it is the world’s nightmare.
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