Page 81 - bne Magazine August 2022

bne August 2022
Opinion 81
Secondly, even the EU countries are not as unified as US President Joe Biden and European Commission President Ursula von der Leyen would like you to believe. Note too that Erdogan also said this week that Turkey will not participate in sanctions.
I won’t go into the details here, but to make this work you would have to reopen the sixth package of sanctions where the rules on insurance are now and no one wants to do that, as it will kick off more really hard talks that would lead to the sixth package being watered down from the original proposals.
There is a fundamental flaw in the West’s economic war with Russia: it is trying to hurt Russia as much as possible but will not accept any pain itself (two-way sanctions).
The six packages in place now are full of exemptions and exclusions to protect Western interests. Extremely harsh sanctions were placed on Belarus in 2020, yet EU trade with Belarus doubled that year for the same reason. With Russia, an energy embargo and self-sanctions have been imposed on Russia’s oil business, yet Putin will earn the biggest current account surplus on record this year. What should have happened is the EU should have banned oil and gas imports from Russia in the first week of the war (with the summer to look forward to) and the Kremlin’s finances would probably have collapsed within a few months as Russia came close
to a financial crisis with just the SWIFT and CBR reserve sanctions. But that would have come with a huge shock to the EU’s economy, which no one is prepared to accept. Even now, these exemptions are still being put in place: Greek shipping has been exempted from the sixth package bans on carrying Russian oil as it makes up half the international oil tanker fleet. Likewise, in Russia the largest insurer Ingosstrakh is part-owned (36%) by Italian insurance giant Generali, which has refused to sell its stake and makes the largest share of its money from marine insurance. Allianz, Europe’s biggest insurer, has a big Russian business and is also not leaving.
More generally, the International Association of Classification Societies (IACS) that gives out safety certificates that oil tankers need to get insurance has 11 members but only four of them (France, UK, Norway and the US) have stopped certifying Russian ships. And the Indian Register of Shipping (IRClass), which is the official Indian member of IACS, has just certified all of Sovcomflot’s tankers.
The conflict has catalysed a process of EMs maturing politically that had already started. Until now the EM story has largely been an economic one about fast “catch up” growth and huge returns investors can make. Increasingly it is now going to be political as well. The BRICS is one obvious focus that has gone from a Goldman Sachs marketing term to a powerful political organisation, and Russian Foreign Minister Sergei Lavrov called for Argentina and Iran to join this week as well.
The biggest change is that China and Russia have been driven together and clearly the Kremlin has to work as hard as it can to build up its non-aligned alliances in order to avoid being simply consumed by China and becoming little more than
a raw materials warehouse.
Although China has kept Russia at arm’s length to avoid being sanctioned itself, there is no chance of driving a wedge between Moscow and Beijing now, as China can see its next opportunity. Biden used the G7 summit to hype a new US infrastructure fund that is designed to challenge China’s Belt and Road Initiative (BRI). While the non-aligned countries will happily take the US money, unless the US also opens its lucrative markets to them, I doubt that this will make much difference.
Trade is the key to China and Russia’s offering and this is Russia’s ace thanks to its cornucopia of raw materials (and its arms and nuclear power industries). Putin is going to work very hard to build up Russia’s relations with the non-aligned nations and actually has already been working on that for years, with especially notable progress in the Middle East.
That will continue in November at the G20 summit, to counterpoint the G7, and also the second Russian-Africa summit that will be held in Ethiopia – both important platforms for promoting Russia’s soft power.
The West has run out of one-way sanctions, and it is hard to see what it can do next without going onto a war footing. The same
is true of the military campaign in Ukraine. As this increasingly looks like it will be a much longer war than expected, the West needs to go on to a war footing militarily too. The West has largely used up its stock of Soviet-era armaments and I’m seeing an increasing number of reports saying that despite the massive US defence budget it doesn’t have the manufacturing capabilities to churn out a lot more weapons quickly. Russia has used up a lot of its high-tech weapons like smart missiles, but it has huge stores of “dumb” artillery shells and as the war in Ukraine is turning into an artillery duel slugfest, that is what will make the difference.
Increasingly it seems that the US has overestimated its
own economic and military power (will Ukraine turn into another Afghanistan?) and underestimated how deeply Russia is integrated into the global economy, which is causing significant leakage to the sanctions regime already. Now that one-way sanctions are exhausted, the West will have to start using two-way sanctions and the failure of the G7 summit to produce anything concrete shows how hard that will be. The West is already spending huge amounts of political capital in its effort to isolate Russia, and frankly it is not working.
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