By Bob Brewer, Braumiller Law Group
China’s trade with Russia hit a record $190 billion U.S. in 2022, key operative word “record.” China is setting a course to become Russia’s top trade partner and prove to the world just what the “no limits” partnership can produce. An additional “maybe some limits” friend to Russia among the world’s larger economies is India. Not just via the buying of the cheap Russian oil, but other goods as well. India’s imports from Russia rose to $32.88 billion in the last nine months of 2022, up from roughly $7 billion a year ago. Yep, almost 5x’s greater than the prior calendar year. Impressive to those ignoring the war. India’s longstanding friendship with Russia isn’t going away anytime soon, as the dependence on military gear and direction makes it rather dependent on the Kremlin. In my humble opinion, India and Modi have plenty of other options for those same goods, especially when it comes to military gear in their build up regarding keeping China in check. In the meantime, Xi Jinping couldn’t care less what the U.S. thinks of its trade with Russia, but it does have to walk a fine line regardless simply based on the economies being so intertwined.
When it comes to sanctions and subsequently looking elsewhere in the world for various resources, I’d like to site an example. India’s Minister of Defense had recently stated that their exports of cruise missiles to Southeast Asian states couldn’t function without Russian propulsion systems. Raksha Mantri Shri Rajnath Singh is India’s highest-ranking minister as well as the head of the Ministry of Defense. A well-educated man, who has a master’s degree in Physics, and who, as crazy as it sounds, was born in 1951, the same year that Northrup Grumman started manufacturing some of the world’s first, and to date most sophisticated propulsion systems. For grins, here is a link to their website for further information: https://www.northropgrumman.com/space/propelling-space-and-defense-missions-solid-rocket-motor-expertise/ (Be sure to check out their Global presence)
To look further into who provides what to whom, global resourcing options, and who should therefore tread lightly when threatening to cut a country off from various resources, The Kremlin truly miscalculated with Europe, and just what the hydrocarbon dependence meant to the E.U. population. Well, in a nutshell, this threat of “shutting down a lifeline” didn’t so much fall on deaf ears but was instead the catalyst for a major change in sourcing. All around Europe’s coasts new LNG import terminal projects are being planned as Qatar and the U.S. are in the mix to fill the void. Thanks in part to climate change, and warmer weather this winter, the E.U. has managed to do just fine without the Russian resources, making the Gazprom2 pipeline an absolute waste of around $16 billion U.S. The cap of $60 per barrel on oil, as well as the E.U. ban has hurt Russia as well. Both India and China are taking full advantage of the cheap oil, assisting Russia with at least a trickle of the funds they used to secure from this part of the planet, which I am sure Putin will devote entirely to the war effort. Priorities first and foremost. Although, this will have to change as Russia does a very good job of supporting its citizens with free healthcare and education, housing, etc. There will come a time in the near future where these funds will start to be vice-like squeezed, and that will be the catalyst for a major revolt if the system starts to fail. Can those in the U.S. imagine President Biden stating that U.S. Social Security had to be cut by 15% annually in order to fund a war? I think not.
Funding the war in Ukraine through trade. It just sounds like a crime in itself, and it is if you look at the sanctions imposed on exports to Russia. (A totally separate article) According to a Reuters analysis for the remainder of this paragraph, shipments of Chinese goods to Russia have grown for six months in a row. Russia more than doubled its rail exports of liquefied petroleum gas to China in 2022 as part of the Kremlin’s initiative to diversify its energy export sales. China’s imports of Russian natural gas through the Power of Siberia pipeline are set to have risen by at least 50% in 2022, according to Russia’s top producer, Gazprom. China’s Russian crude oil imports expanded 10% on year in the first 11 months at nearly 80 million tons. Russian fuel oil flows to India have also surged, almost doubling month-on-month in December to more than 137,000 barrels a day. India’s imports from Russia included fertilizers for its farming community, coffee, tea, spices, and of course nuclear reactors, however, fertilizers and fuel alone accounted for over 91% of imports in 2022. (Note: Russian fertilizer accounts for the same grip it has on Brazil at 75% of what it imports globally. Brazilian farmers consider it gold)
Regardless of the trade surplus with India and China, Russia is learning another valuable lesson in world trade and the invasion’s consequences via many large companies and shipping firms who are unwilling to ship goods through the country due to the sanctions. A substantial gap in trade flow has therefore been created and many surrounding country’s governments are trying to capitalize by filling it. Sad but true, with war, there is economic opportunity. The refocus on shipments away from the northern rail Russian routes also received the backing of many of the larger Chinese logistics companies. As an alternative, there is now a middle corridor in Asia gaining a great deal of investment and attention. According to the Trans-Caspian International Transport Route Association, cargo shipments across Central Asia reached 3.2 million metric tons in 2022, 6x’s greater than the previous year. The Trans-Caspian International Transport Route starts from Southeast Asia and China, runs through Kazakhstan, the Caspian Sea, Azerbaijan, Georgia and further to European countries, which could be problematic. It received a significant lift when Maersk, one of the world’s largest logistics companies, cancelled new bookings through Russia and jump started a rail service along the Middle Corridor. Moving trade routes out of and around Russia has become “the plan” for many of the largest logistics companies who simply don’t want to deal with the fallout from the sanctions imposed on Russia. This is glaringly obvious when it comes to ocean freight, as the western ship insurers terminated coverage for Russia’s leading shipping companies, including Sovcomflot.
So, if there is a will, there is a way, when it comes to getting around the sanctions via the development of new trade routes. It really comes down to opportunity, and all is fair in love and war. For example, Russia and Iran, no love lost here regarding the United States, as both are heavily sanctioned, are working on a new shipping corridor that bypasses Europe and subsequently the sanctions and are apparently in talks with India regarding a partnership in this endeavor. The managing director of Iran’s Construction and Development of Transportation Infrastructures Company (CDTIC) has said that 950 railway and freeway projects are currently underway across the country many to be completed in March 2023. The China Communications Construction Company is to take part in the second and third construction phases of Tehran’s north highway project. Let us not forget the China-Tehran agreement with $400 billion of Chinese investments to be made in dozens of fields, including infrastructure and banking in return for a heavily discounted supply of Iranian oil. Iran has the resources and desire to be a significant transport hub between Asia, Russia and Europe. Also of note, there is history to consider. Moscow, New Delhi and Tehran signed an agreement back in 2000 laying out ambitious plans for the International North-South Transport Corridor, which connects India and Russia through Iran and Azerbaijan, bypassing the Suez Canal, which I do not understand why since the canal is operated and maintained by the state-owned Suez Canal Authority (SCA) of Egypt and may be used “in time of war as in time of peace, by every vessel of commerce or of war, without distinction of flag.” Very much unlike Turkey’s control over military ships passing between the Mediterranean and Black Sea, which is also somewhat perplexing as Turkey does not endorse the U.S. sanctions on Russia, at all, but has said ”no” to the Russian ships passage. (The tightrope with also being a member of NATO) Together, in the face of western sanctions, Russia and Iran have been building closer economic ties. A far cry from decades of bitter rivalry. BTW, the International North-South Transport Corridor is land-and sea-based comprised of roughly 4500 miles of rail, highway, and water routes, so it’s quite significant in trade flow.
Ah, negotiating loyal alliances, in a time of global instability. It still comes down to getting what one needs, and some have greater needs right now than others as military might takes the stage. As in the headline of this article, and at the time of this writing, Russia is still on good terms with China and India, but they aren’t getting everything they need to win the war they started that was so poorly planned. Imagine that, as world trade moves around Putin’s master plan of reunification, (and country) he has to be thinking, in total solitude of course, “Damn, this has definitely not worked out like I thought it would.” Despite his claims that Western economic sanctions have had little impact to date, evidence suggests otherwise. Making simple business transactions has become a lot more difficult and supplies of essential goods have been much more limited, and subsequently the ability for many Russian businesses to navigate through overseas commercial centers, has become quite cumbersome in many cases. To date, giving credit, where some credit is due, Modi has openly condemned the war and Xi has not, but has also not sent military aid directly to Russia, that we know of. (Worst foul being noted here is that I just ended a sentence with a preposition) As mentioned in my original article referencing Russia’s invasion, “How to Commit Economic Suicide for your Country in 2022” Incursion and World Trade, Part 2: How to Commit Economic Suicide (braumillerlaw.com) some 1,200 foreign companies have now left Russia, and regardless of what some locals may say, they miss the original McDonalds. (Previously, there were 800+ McDonalds franchises in Russia) McDonald’s sold its Russian restaurants to businessman Alexander Govor for an undisclosed sum. He made his money in oil, so he had a good idea as to the secret behind the taste in the famous fries.
We in the international trade community obviously have a vested interest in where the major shifts in economic power are realigning, as well as the status quo. China has continued to be Russia’s largest trading partner, while Russia is China’s fourteenth largest trading partner. China’s determination not to join in sanctions has fed Russia’s dependence on what China’s markets and financial systems provide, and that is of course to their advantage. At some point, as Russia continues to weaken economically and militarily, China’s favorable posture on the alliance may as well. This makes one ponder the timetable and current status dating back to months ago when Xi Jinping and Putin met to discuss China-Russia relations during the summit of the Shanghai Cooperation Organization. While China policy observers noted Putin’s admission that China had general questions about the war in Ukraine, Xi continued to proclaim confidence in China-Russia relations as a “strategic, comprehensive partnership” with expectations for the alliance to deepen bilaterally and internationally. It’s a not-so-subtle message to the western alliance. It’s however a vailed threat, as reality keeps it in check. China holds a great deal of American debt, so it’s important for China to have confidence in U.S. policymaking, and the debt ceiling being reached is a big deal to us, and to them. So, the war rages on in Ukraine, and India and China are capitalizing on the economic fallout as Russia looks everywhere for ways in sustaining revenue streams to fund its effort. In the meantime, the tanks are coming to Ukraine. The jets need to be as well as this unjustified invasion needs to come to an end. Had this equipment already been within Ukraine back in early February of 2022, with trained operators and ammunition in place, maybe this war never would have started, or at a minimum, would have come to a conclusion long before now. I am saddened, frustrated, outraged, and exhausted by all of the pointless death and destruction, and I am watching it from the comfort of my home on CNN.