By Bob Brewer, Braumiller Law Group
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From my perspective, as well as what seems to be many others in the west and around the globe, the incredibly long table that Vladimir Putin sits behind separating himself from his minions, as well as other countryâs visiting diplomats, whom he is ignoring, has gotten a lot longer, and itâs not a covid related stretch. I donât know if the previous two years of pandemic isolation was the catalyst for the attack on Ukraine, but regardless, the ensuing economic isolation of the Russian state from a good portion of the world is now evolving on a massive scale. In the not-too-distant future, Russia could very well be viewed as another N. Korea, that is, if the Russian people will accept this, and I highly doubt that will be the case, as outside information continues to seep in through the cracks. To draw on further comparison to N. Korea, for the leader of a supposed even semi-free country to pass a law that states anyone who uses the word âwarâ in relation to the Ukraine invasion will be imprisoned for up to 15 years, well thatâs a huge red flag. The Russian society is highly intelligent and has one of the best mass-education systems in the world, producing a literacy rate of 98% (higher than most Western European countries), but even individuals with a modicum of education in rural parts of the country would be asking, âIf it isnât true, then why the harsh punishment?â Overall, it is far less in punishment than getting shot simply trying to physically escape oneâs countryâŠ. N. Korea. Regardless, the two will be drawing far more global comparisons in the future, and not just in isolation regarding world trade. At this monumental time in history, Kim Jung Un is also firing missiles and threatening nuclear war. Japan and S. Korea will have more to say about this soon as Yoon Suk Yeo, S. Koreaâs new President, has promised a tougher line on North Korea, and a closer alliance with the U.S.
The inter-connectivity of Russianâs daily lives to the rest of the world is now highlighted on the global map, from not just an economic and financial standpoint, but via mainstream and social media as well. (Russia has gone dark internally at this time, as only state media channels remain and major social media channels are blocked, or have left) Economically speaking, itâs a true head scratcher as to why Putin pulled the trigger on the invasion. Or is it? I am not going to try and get inside Putinâs head in this article, but instead, will focus on how detrimental this incursion is to the Russian economy via trade.
At the time of this writing, mid-March of 2022, Putin seems to be publicly brushing off the now rather deep, and ever growing, mandated list of global sanctions, as if the Russian economy will be simply fine on its own and could possibly even benefit. What? Putin said, âWestern sanctions are an opportunity for Russia to strengthen its technological and economic sovereignty. Recent years have shown that where Westerners imposed restrictions against us, we acquired new competencies and restored old ones at a new technological level. This is a time of opportunity to move towards strengthening technological and economic sovereignty.â Â So, war equates to economic growth?
Letâs examine this formula regarding the strengthening of technology. Where does Russia get microchips from? It just so happens that Russia is somewhat dependent on Taiwan’s semiconductors for everything from the manufacture of laptops to military equipment, just like the rest of the world, including the U.S., and the #2 exporter S. Koreaâs Samsung is not about to assist in filling a void. Now that Taiwan has banned chip exports to Russia, I see somewhat of a disadvantage to leaps and bounds in technology in their future, as these were high end chips, and chips made in China might as well be the kind you eat, as they have been put on an entity list, and are blocked from the Dutch company that provides the extreme ultraviolet lithography equipment that is needed to manufacture high-end chips. The Russian government has been encouraging large domestic companies and banks to use Elbrus chips in their computers because the components are designed in Russia, but they have received a failing grade from all institutions in trials.
Like two peas in an autocratic pod Putinâs statements were backed by support from the Belarusian President Lucashenko who said, âWe need to rebuild our economy, and we have all we need to restore our own economy. We can do without them. (Them = Western world) We have everything to continue normal life and work. Is this a true statement? Letâs take a look. The major Belarus trading partners are Russia, Ukraine, China, Germany, Poland, the UK, Northern Ireland, Lithuania, the Netherlands, Kazakhstan, Turkey, and Italy. Regionally, 44.2% of Belarusian commodity exports go to the EAEU countries, but the other 56% is spread out over primarily China and the EU countries, and the EU is Belarusâ 2nd largest trading partner. Belarus primarily imports Crude Petroleum ($6.52B), Petroleum Gas ($2.53B), Cars ($1.01B), Packaged Medicaments ($545M), and Vehicle Parts ($520M), mostly from Russia. Belarus’ main exports to the EU are wood (24.2% of total exports), base metals (15.5%) and mineral products (13.0%). The EU’s main exports to Belarus are machinery (31.3% of total exports), chemicals (15.8%) and transport equipment (10.2%). It paints a picture of not caring much for the exports from Belarus to the EU which amounted to 5.5 billion US, or about 20% overall, which is considerable.  As Belarus continues to provide access into Ukraine, and military assistance to Russia, additional sanctions will make it even more dependent on Russia, its main trading partner. Itâs still a baffling move though from an economic standpoint to get sideways with Germany, an EU superpower, and the EU in general.  Obviously, the Belarusian President feels very confident in Russian support to fill any gaps since the E.U. has now blocked 70% of Belarus imports. Products affected are wood, timber, steel and iron, which were not covered by previous sanctions, and combined represent nearly 40% of all Belarusian exports to the EU. Other sectors affected by the EU import ban are cement, rubber and fuels. Obviously, Lucashenko couldnât care less as the Belarusian constitution was rewritten to allow Russian troops to have military equipment, bases of operation, and nuclear weapons on its soil.
The public statements by both Putin and Lukashenko beg the question, was the planning of this invasion done so far in advance, and so meticulously, that all gaps in potential losses in global trade created by sanctions could be easily filled via pre-arrangements with other countries, like China? It certainly doesnât look like it is a feasible plan, and China is walking a rather fine line with the west in granting Russia, or Belarus, aid both economically and military which was recently requested by Putin. U.S. and Beijing diplomats met for 7 hours in Rome for some candid conversation on the topic. In the background, only stepped-up wheat exports to China from Russia thus far have gotten a less than honorable mention, but more âdealsâ are being uncovered by the day. Time will tell if maybe Putin was counting too much on these prearranged agreements regarding major assistance going around the sanctions with China to be BFF solid, however China may need the same favors as it eyes conducting a similar operation regarding Taiwan when this debacle is over, if we are not all pulled into WW3 first.
I can just imagine the discussions with Xi Jinping during the Olympics as the unity between the two countries was on full display for the world. Â China of course will be extremely cautious regarding what it provides beyond the supposed (15) deals Xi Jinping and Putin agreed upon during the Olympic visit of solidarity. However, Xi Jinping has been paying close attention to how the vast majority of nations around the world are responding and is taking notes on just how much each means to China economically in trade. The U.S., Japan, Taiwan, S. Korea, the EU and UK, are of course huge considerations when flirting with crossing a line on sanctions with Russia.
Chinaâs exports to the U.S. market in 2021 were $506 billion, so causing additional harm above and beyond the current Section 301 tariffs with the U.S. would not be fiscally responsible to say the least, and they certainly donât want to create a domino effect with Taiwan, Japan, the E.U. and S. Korea, all who have also condemned the invasion of Ukraine. Surprisingly enough, Singapore, in the top 10 in world trade, has also condemned the invasion.
Letâs dwell on top 10 for a minute. As I research and review the trade exchanges between major countries around the globe, I cannot wrap my head around how any leader of a so-called autocratic, but progressive, (not yet top 1o) economy can simply ignore the global consequences of invading another without provocation, and how the current 9 of the top 10 economies of the world with common ground could align themselves against you and create a major backlash. Oh wait, the 2014 invasion of Crimea (one of 3 by Russia in the last 15 years) in this case was a mere slap on the wrist. Sanctions were applied, lightly for that incursion, and Putin took notes on how it affected the economy and trade. Not so much. Look at it this way, they didnât even lose their âMost Favored Nationâ trade status, which in this case regarding the latest invasion was recently revoked by the G7 countries, the United States, Germany, Japan, the United Kingdom, France, Italy, and Canada, as of 3/11/2022. (It goes to a congressional vote this week) What does that mean? Most-favored-nation (MFN) status is an economic position in which a country enjoys the best trade terms given by its trading partner. Itâs just the tip of the major prehistoric iceberg that is about to cover Russia. The President will also sign an executive order outlining the latest sanctions which include a ban on imports of alcohol, seafood, and non-industrial diamonds. These products account for more than $1 billion in export revenues for Russia. He also banned U.S. exports of spirits, tobacco, clothing, jewelry, cars, and antiques to Russia.
I get it from Putinâs perspective, and it’s also pretty obvious from even a worldwide perspective that the U.S. doesnât exactly have a handle on democracy as an institution as the storming of the capitol on January 6, 2021 painted an ugly picture of discord to what is supposed to be one of the more civilized places in the world, not to mention the ongoing daily infighting between the two political parties that puts on display major flaws in the actual demonstration of governing (or not) within a democracy in general. It looks dysfunctional and shows a weakness internationally. It also doesnât help that the past administration (Trump specifically) to this day is still praising Putin, calling him âGeniusâ and âSavvyâ for the invasion. It looks like the perfect opportunity for an autocrat to make a land grab, again. So, letâs look at who around the globe is joining the E.U, UK, Asia (to an extent) and the west, and who isnât, from a trade related perspective, and why they would accept the U.N. condemnation and sanctions, object to condemnation, or simply abstain. First of course, one must examine at least the top six countries that are Russiaâs major trade partners in 2021.
Russian exports: China $68 billion, Netherlands $42 billion, Germany $27 billion, Turkey $26 billion, Belarus $22 billion, and the U.K. 22 billion. This translates to the EU&UK representing $91 billion, yes, $23 billion more than China in trade with Russia, and Turkey canât be counted, as it is still negotiating its accession to the European Union, and has been since 2005, while some say since 1959. At a glance, almost 40% of Russia’s imports came from the EU and 40% of its exports went to the EU. Russia is the origin of 26% of the EU’s oil imports and 40% of the EU’s gas imports. So, why the heck would Russia choose to jeopardize the LNG Gazprom Nord Stream 2 pipeline, when it could have doubled output to Germany alone? Good question, but thatâs a moot point now. The Nord Stream 2 pipeline and trashing of a $13 billion dollar build along the Baltic Sea into Germany is one thing, but turning a blind eye to the E.U., thatâs insane. When I saw the look on the faces of Elvira Nabiullina, the head of the Russian central bank, and Maxim Oreshkin, Putin’s economic advisor, on a Twitter feed recently, they looked like they were about to cry, sitting 100 feet from Putin at the âbig tableâ heads bowed, as he talked about inevitable sanctions in what was probably a âpre-invasionâ meeting. Any sane economic adviser, given a voice with no anticipated brutal reprisal, would first ask why, and then, who will come to the rescue? The obvious answer is, its main trading partner China, as imports & exports between the two countries accounted for nearly $141 billion U.S. dollars,â which given todayâs current exchange rate is $18,743,104,331,753.70 rubles. What about borrowing from the filthy rich who were handed their shares in the companies they own by Putin himself? Letâs not forget the closest Putin allies who quite possibly were not invited to the âbig table,â the Russian Oligarchs, who are taking a major hit right now financially. I wonder, if it did happen, just how comprehensive the pre-invasion meeting with them was regarding looming major monetary ramifications, much less the potential to get your N.Y. luxury apartments, high end automobiles, custom jets, and mega yachts repossessed via the U.S. Department of Justice and E.U. friends who have formed a task force to do just that as their primary mission. If you didnât provide me with ample warning, as an Oligarch, and my $600 million-dollar super yacht was repossessed while docked in France, or Italy, or wherever, well, Iâd be livid.
Who can you turn to? It seems to me Russiaâs best current ally is Belarus, whose President Lukashenko said, âI am glad the war started.â Belarus and China are aligned with Russia in justification, but any good economic adviser would have to at least mention that the combined export loss with the U.S. Italy, and S. Korea within the top 10 partners is roughly $53B annually, which begs the question, why would you deliberately cut-off that revenue? Four nations – Syria, North Korea (imagine that), Eritrea and of course Belarus – voted against the U.N. resolution of condemnation of Russia. Four more – Iran, Nicaragua, Venezuela and Cuba – did not vote or abstained, and have made their pro-Russian stance very clear. A few nations entered âno commentâ like Turkmenistan, Ethiopia, and Azerbaijan, who has strong connections to both Russia and Ukraine.
What surprised me somewhat as I read down the U.N. list of responses from various countries was that of the Netherlands, whose import of crude oil from Russia in 2021 was just under $20 billion. They did not remain silent, or even somewhat reserved, but instead outright condemned the invasion. New Zealand, Australia (no surprise here), and Sweden, who are usually neutral on everything, also joined the U.N. counsel vote on condemnation. In N. America, the U.S. and Canada are no brainers with blunt force condemnation, but Mexico simply said it was wanting diplomacy. They are the 2nd largest trade partner to the U.S. with two-way trade in goods and services totaling $661 billion in 2021, but immigration at the U.S. -Mexico border has caused ongoing friction.
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Some Asian countries like Japan and S. Korea, and of course Taiwan were âall inâ, but the remainder were non-committal, and Vietnam did not condemn. Not a good stance per the U.S., and that could impact relations in the future with Vietnam, but we understand that Russia is a big supplier of military equipment to the nation. However, bilateral trade between Vietnam and the U.S. was 111.56 billion in 2021, and the U.S. is the top export destination. India, Pakistan, Bangladesh, Sri Lanka, Laos and Mongolia joined together and echoed the sound of crickets on a U.N. vote and simply demanded the end of Russia’s military operations in Ukraine. Worth mentioning, India is in a tough spot here as, like Vietnam, they also purchase a tremendous amount of military aid from Russia, but want to replace China in several areas as the favored trading partner with the U.S. Itâs complicated.
In Africa, several major economies on the continent depend on a mixed trade landscape. Nigeria, (Nigeria’s main trade partners are Brazil, China, India, Japan, US, and the European Union. Egypt, (Egypt’s most important trading partners include China, the United States, Italy, Germany, and the Gulf Arab countries. Kenya (Kenyaâs major trading partner countries for exports were Uganda, United States, Netherlands, Pakistan and United Kingdom and for imports they were China, India, United Arab Emirates, Saudi Arabia and Japan). Ghana – moved to condemn the invasion, while others – among them Algeria, South Africa and Morocco – have not judged the crisis one way or the other. Morocco is currently the 63rd largest goods trading partner with $5.1 billion in total with the U.S. in import & export combined, so thatâs a yawn, but South Africa’s main trade partners are the EU, China, U.S, Japan and India, which is a toss-up on âwho would you like to upset lessâ in this potential world war conundrum.
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Like many nations trying to remain neutral, China has praised diplomacy, but has denied calling Russiaâs move an invasion, because that is a strong word for a simple military operation that kills thousands of innocent civilians including women and children. In fact, they are currently assisting in the promotion of Russian propaganda. This is not good for the already very poor relations with the U.S.
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Other Arab states have also declined to condemn Russia’s invasion. Saudi Arabia, who is a main partner with Russia in the OPEC alliance, said it “supports international de-escalation efforts in Ukraine.” It wasnât that long ago that the Abu Dhabi Crown Prince made it known to the world that Russia was his “second home,” just as Putin was signing off on $1.3 billion worth of energy and technology deals.
Of note, at this time, around 330 internationally renowned companies have withdrawn from Russia in protest of the invasion. To highlight two standouts regarding departure, the Kremlin is going to get some major backlash from the residents as not only McDonalds, a well-loved 30-year-old Russian institution with 854 corporate owned and operated stores throughout the country are closing, but they are also losing their Starbucks. No specialty coffee, or a Big Mac. Not good, or in Russian, ĐœĐ”Ń ĐŸŃĐŸŃĐŸ.
Russia will attempt to seize the assets of departing corporations, but that would be a death wish as well, as no trust in the government equates to no foreign investment.
If you are so inclined, Reuters put together a pretty good, somewhat updated list of countries and sanctions, as well as actions taken by various companies:
https://graphics.reuters.com/UKRAINE-CRISIS/SANCTIONS/byvrjenzmve/
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To say the least, which is hard for me in this case, Russia is going to be leaning on China a great deal to get through this economic crisis, and they are currently facing a nationwide surge in covid cases, which is their priority. The trade between the two nations reached $147 billion last year, according to data from Chinese customs. The world’s second-largest economy is Russia’s No. 1 trading partner, accounting for 16% of the value of its foreign trade. However, for China, Russia matters a lot less, and that should be concerning to Russia when it comes to keeping Olympic size promises. Trade between the two countries made up just 2% of China’s total trade volume. Itâs Beijing lunch money. On the other hand, the European Union and the United States have much bigger shares, accounting for 13.7% and 12.5% respectively, according to Chinese customs statistics for last year. As far as other global partners of Russia, the following is an overview of exports and the subsequent U.N. votes on condemnation of the invasion of Ukraine, or not, and why:
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Russiaâs largest exports by far are fossil fuels and oil, to mainly the E.U. representing 42%.  China makes up about 14% of the exports, and the U.S. block on Russian oil imports represents only around 8% of our intake and only 2% of our supply annually, so the Biden Administration told us we will feel the brunt for a while at the pump, but weâll be O.K. That being said, the U.S. was recently in discussions with Venezuela to replace the Russian oil until it was revealed that Roszarubezhneft, a Russian company, holds 40% stakes in five joint ventures with the Venezuelan state-run oil giant PDVSA. Together, they produce nearly 120,000 barrels a day of crude, or 15% of the countryâs current output. Whoops! Next up, the Saudiâs, but thatâs a strained relationship that needs time to heal after the Khashoggi incident.
The other stand-out exports are gems, precious metals, iron, and steel. Russiaâs second tier of exports include wood, fertilizers, aluminum, machinery, and wheat.
Energy aside, (Russia is the world’s biggest exporter of oil to global markets and the second-largest exporter of crude oil behind Saudi Arabia) the Netherlands is a key destination for imports of relatively large quantities of metals such as copper and nickel from Russia, so as mentioned it was notable that they condemned the invasion, but of course, they are also a NATO country. They, along with Germany, the U.S., Poland and South Korea now look for options, which should have been in place at least a decade ago.
Talk about a self-inflicted major wound, the UK overwhelmingly buys more precious stones and metals from Russia than any other country. The majority of these exports are gold and platinum including palladium. Good-bye.
The biggest buyer of Russian iron and steel is Turkey, who has close ties with Russia. Werenât the previously purchased Turkish TB2 drones causing the most damage to the incoming Russian tanks? The Turkish government made it abundantly clear to the world, and of course Russia, that the drones were a âpre-invasionâ purchase. Dude, sorry about the tanks, we still friends?
China is the top buyer of Russiaâs wood exports and buys more than any other country. These products make up 37% of Chinaâs wood imports. I expect China to start ramping up trade in a lot of areas with Russia.
Russian fertilizers are the gold standard for agriculture in Brazil. Brazil imports more fertilizers from Russia than any other country which solidifies the relationship. Therefore, Bolsonaro wouldnât/couldnât condemn the invasion. The fertilizers are both mineral and chemical, and account for almost 70% of Brazilâs fertilizer imports, and that is huge. For some reason, Brazilâs Bolsonaro felt obliged to add, âThatâs what Ukraine gets for trusting a comedian with the fate of a nation.” Not a good image for Brazil to the rest of the world at the time of this humanitarian crisis.
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Of special note, Russian goods account for 26.7% of the worldâs exports in nuclear reactors and their parts. The products are Russiaâs second biggest machinery export following turbojets, gas turbines, and their parts, which should mean they are familiar with the nuclear plants they just captured in Ukraine. So quit setting them on fire! Who is the biggest buyer? China. Their machinery imports from Russia are largely nuclear reactors and parts representing around 13% of Chinaâs imports in the category. Are the Ukraine nuclear facilities going to be stripped of parts for resale? If so, thatâs incredibly dangerous as decommissioning a nuclear power plant, if done correctly, can take up to 7 years.
Food products such as wheat and barley from Russia account for almost 30% of the worldâs exports in those grains. Turkey and Egypt are the biggest buyers, so that wonât be taking a nosedive anytime soon. China recently picked up some slack in wheat exports from Russia, Turkey as mentioned is a close ally, and according to a recent Kremlin statement regarding the conversation between Putin and Egyptian President Abdel Fattah al-Sisi, âThe Presidents discussed further development of the strategic partnership between Russia and Egypt, including major joint projects in nuclear energy and industrial production.
As one looks at trade stats for Russia, itâs interesting to see that a big part of Russiaâs trade is obscured, which translates to, much of what Russia exports is unknown from its statistics. Military related product? Itâs the second largest trade category and is listed under âcommodities not elsewhere specified,â and if we told you, we would have to kill you. These are products the country either wants to hide to protect certain trade information, or the reported data is incomplete. My guess is the former. Germany is the top importer of Russiaâs mystery products, followed by Italy and Turkey. Apparently in 2021 clandestine exports of Russian goods (including weapons, aircraft, nuclear materials, etc.) to NATO countries increased sharply. Exports of goods in this category totaled US$8.1 billion. For the second year in a row, the top buyer is Algeria (US$985 million), and China and India are consistently in the top 10. To their surprise, a number of NATO countries unexpectedly found themselves on the list as well, including the U.S.
One last thing, which couldnât have possibly been well thought out, much like the invasion, is how far along was Russia in the manufacturing of its own aviation parts for domestic   planes as both Boeing and Airbus have cut-off the supply of parts. To the rescue, China of course. Nope. A top Russian official confirmed that China refused support with aircraft parts as they now look to source components elsewhere following tough aviation sanctions. Whoops. Russia will now put more pressure on its own manufacturing conglomerate, PJSC United Aircraft Corporation (UAC), who manufactures both civilian and military aviation products, but over the years, and via many changes in ownership stakes, it is now state owned via ROSTEC. The focus has therefore been on military.Â
In addition to this within the aviation sector, AerCap, a Dublin-based firm that is the largest aircraft leasing company in the world, owns 152 commercial aircraft across Russia and Ukraine valued at almost $2.4 billion, and has demanded the return of its aircraft from the Russian carrier Aeroflot in the next 30 days. Can you imagine just how dangerous it will be for commercial airline passengers in Russia knowing that maintenance is soon going to be nonexistent via replacement parts, not to mention concerns that the aircraft could be repossessed while waiting to board? Itâs a moot point really, as most commercial airspace has been cut-off outside of Russia, and Amadeus and Sabre, the two major reservation booking systems have blocked them within the software. So, Russian domestic flights are now relegated to flight paths within its 11 different time zones only as they run from their owners. Given the size of the land mass in Siberia, (5,100 square miles) that is a lot of desolate area for something to go wrong. Putin has signed a law that turns the planes over to Russian airlines. More directly, he plans to seize the assets. Aeroflot suspended all international flights as of March 8th. The Russian Federation has a 57% stake in the company. In 2021, Aeroflotâs revenue amounted to RUB 491.7 billion, which was an increase of 62.7% from 2020.  All forecasts (from me) now predict that there will be a decrease of 95% within the next fiscal year.
In conclusion, it’s an incredibly pointless war, without provocation, and along with the people physically suffering and dying in Ukraine, there will be grand scale economic suffering in Russia. Itâs what happens when your leader unilaterally decides on a plan to unite 90% of the worldâs economies against you. I truly feel for the Russians who âknow the truthâ, and thatâs primarily the people 35 and under who have other means of getting information besides state owned media outlets, via VPNâs, circumvention technologies, and outside contacts from friends and relatives. Thus far, roughly 15,000 Russian protestors have been arrested. The younger generationâs life in Russia has drastically changed, and not for the better. A blackout of western media has been accompanied by an exodus of younger Russians leaving the country. Many will pack their bags if/when they get out of jail. The beginning of a great brain drain.
In this day and age of advanced technology in communication, the truth cannot be stopped. An example during this invasion comes from the global hacking network Anonymous who hacked into Russian state television with video clips of the destruction. Given the inter-connectivity of the globe, via social media, major business in general, not to mention SWIFT and the world banking system, you have to ask, how could this invasion of a peaceful and sovereign nation have possibly been seen only in a Russian narrative, and therefore, how could it in any way be to Russiaâs advantage? The short answer, it couldnât, and it was therefore economic suicide. (Not to mention mass murder)
As some countryâs relations may be further strained based on response to the invasion, it is noteworthy that Xi Jinping has recently called Putin his âBest Friend,â and said that their relationship has no limits. IMO, there are always limits based on behavior, and that âwarm fuzzy feelingâ could someday soon turn into sandpaper rubbing against your skin, as the best way to lose a good friend is when they continuously need help (like food, fuel, and ammo for their invading troops) and never seem to share in the cost when you get the group together for some cheers. It gets tiring quickly when itâs their turn to buy the next round of drinks and they always seem to have disappeared into the bathroom, forgot their wallet, or itâs just empty, and they keep making excuses as to why, making promises to pay you back with verbal IOUâs that they know full well, as do you, will never be repaid.
