The MultiLateral Week: Is the World too Interdependent for a Cold War? 22nd Feb 2022

Rebecca Harding, CEO Coriolis Technologies
February 22nd 2022

Welcome to our Multilateral view of the week. This week Dr Rebecca Harding looks at the impact of UK sanctions on Russia,  diplomatic hopes, and the impact of Russian actions on a global scale.

This coming week will be dominated by discussions about sanctions against Russia. If and when Russia decides to invade Ukraine there is still some optimism out there. There still may be some hope diplomatic channels have not yet fully exhausted. But if there are sanctions what does that mean for Russia and what does it mean for the rest of the world?
 
We must first look at Russian services because it is financial services and market access that the allies will be trying to restrict as much as possible. Huge amounts of money go through the London markets, through the US markets, and through Switzerland in particular, and so we have to understand exactly what might happen should we decide to impose some kind of sanction on Russian services sectors.
 
Using Coriolis Technologies data we can create a picture of the whole of Russia’s services trade; imports and exports, and you can see where it’s importing from. There is a lot from the USA, a lot from Cyprus which is interesting, Germany, Switzerland, Britain Ireland, France; all very big partners in the service sector. But most of all what we’re interested in at the moment is financial services. 
 
If we have a look at what the consequences for financial services trade might be, the number of partners for Russia diminishes quite considerably. Immediately Britain, the US, Switzerland, Cyprus, and Germany become very important in these sectors. Cyprus has become increasingly important over the last few years. That has a lot to do with it being in the European Union, but it also has looser rules and a strong relationship with Russia so there’s potential for a lot to be hidden.
 
Looking at the United Kingdom shows that trade with Russia in financial services has actually remained relatively static, but one thing that’s quite interesting is if you then add in personal, cultural and recreational services, the UK suddenly becomes a much more important partner for Russia. This is clear in terms of imports, but Russia is increasingly important in terms of exports.  There’s a lot of money being traded here, around $268 billion in fact, that Russia is trading, showing just how important the United Kingdom, the USA, Cyprus, and Switzerland are. These are countries that have an impact on Russia through financial
services trade.
 
One of the areas that should also be considered is military and in particular electronic equipment. i.e. semiconductors that go into the military processes. This is something that has been talked about as a potential sanctioned area. But who would this help the most? Looking at Russia again you’ll find China as a very important importer and a very significant importer of semiconductors. If also you look at China’s trade and compare it with Germany’s and the US’s trade, just in the last few years, you see that China’s trade is significantly more important. Germany and the United States exports into Russia have been falling back. Meaning that China, as a significant partner to Russia, is likely to be helped by any sanctions. So it actually shifts the balance of
power.
 
That leads us on to something very important that we need to think about whenever we’re thinking about sanctions against Russia as an economy. Sanctions aren’t new. In 2014 there were sanctions against agricultural products, agricultural trade finance, and there were also sanctions against energy as well. But agriculture was particularly interesting because what it did was actually create a trade diversion effect. For example, Belarus, which is land-locked, suddenly became a major importer and exporter of fish in the last financial crisis. Because Lithuania is in the European Union, it was allowed to import from Lithuania and then export those goods, so Belarus suddenly became very important in this sector. You can then see where the Russian trade was going in 2014 and where the Belarusian trade was going. What this means is that there are unforeseen consequences of sanctions.
 
Another area of action was in serials. There were embargoes against military production and against some energy sectors as well, and actually, this created a propaganda victory for Russia with its domestic population because it managed to switch a lot of its export production and a lot of its trade finance towards agriculture. This helped its domestic population in terms of employment. Russia started to switch its production into 2016-2017 and subsequently overtook the United States because of this import substitution effect as a major global exporter of cereals.
 
All of these things are important to consider with regard to sanctions. There are other areas as well. Russia is a major import partner of the European Union, and so there is a level of energy dependency on Russia by the European Union. Russia has a capacity to stave off the energy supply to Europe and that’s something that European politicians have been very keen to point out over the last week or so. Just about everything oil and gas related comes from Russia, so it’s incredibly important to the European Union.
 
So what does the European Union do if Russia tries to divert? Well, the energy supply is much more diverse across other countries if the EU loses its dependency on Russia. Now there are other types of technology like wind turbines, and looking at wind turbine imports into the EU-27 you will find that Britain is important and the USA is important. But again it looks like it’s going to create a dependency on China if there’s a big substitution effect within Europe to move towards more wind energy.
 
You could also look at other alternatives, so within Europe, wind turbines’ power generation has had an annualized growth of 3.2 per cent over the last five-years. So there has been some growth and Europe is becoming more self-dependent over time.
Electric power’s annualized growth has actually been very rapid – 7.6 per cent
over the last five years annually.
That’s significant. And Germany is switching out of coal fire, out of fossil fuels and out of nuclear meaning more electric trade and on electric power trade going on within Europe.
 
If we’re talking about sanctions, the one big thing we need to remember is just how important Russia is as an energy supplier. It’s going to create dependencies across the world. Ultimately Russia is integrated into the global financial and the global energy security system. This is a product of globalization over the last 30 years. But even if we might be looking like we’re back to the 1960s and 1970s in terms of a cold war, the reality is we are all globally interdependent. 

 

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