As the war in Ukraine continues, the West continues to dominate the economic battlefield. Its sanctions are severely punishing the Russian economy. Army attempts at a counterattack appear likely to fail. And the result is a psychological blow to China, whose state-capitalist system already seemed fragile.
First we get the sanctions. By freezing most of Russia’s foreign exchange reserves, the West deactivated Moscow’s main means of protecting its currency. In the first 2 weeks of the war, the ruble lost almost half of its value against the dollar.
Rising import prices, panicked purchases by Russian citizens, and shortages caused by other sanctions, pushed inflation up to 2 percent per week. If this rate is maintained, Russia’s annual inflation would reach a catastrophic level of 175 percent.
Russia’s leaders have tried to support the ruble, but this has brought new difficulties. The central bank has doubled its key interest rate, punishing businesses and households, prompting experts to predict a deep economic recession.
Authorities have cracked down on capital controls, preventing ordinary Russians from exchanging rubles for dollars, and limiting their ability to withdraw dollars from their bank accounts. The Russians are more likely to leave the country.
About 70,000 tech workers are said to have already left. Sanctions have also hit foreign investors. Russia has banned non-residents from selling their shares in Moscow. Sanctions have meanwhile hampered interest payments to foreign bondholders.
Terrified by the destruction of cities in Ukraine, about 500 Western businesses operating in Russia have already withdrawn, many of them without a clear plan on how to sell the assets they have in the country and how they can recover. capital.
Moscow’s idea is to force Germany and other energy importers to buy gas and oil in Russian currency, thus increasing its value. But the German government seems ready to reject Putin’s bluff.
Instead of agreeing to pay in rubles, it has taken the first official step towards gas rationing. Instead of depriving itself of the revenue it desperately needs, Russia may pull out of the move. Either way, Russia’s threat has further reinforced Germany’s determination to pull out of Russian exports.
And what does all this mean for China, Putin’s most important ally? The Chinese economy is much larger and more sophisticated than that of Russia. But it still seems vulnerable. First, Beijing’s $ 3 trillion foreign currency asset stock looks less robust than ever.
If it were possible to freeze Russia’s foreign exchange reserves, the same could happen to China. Likewise, if Russia can not use its energy exports as a means of pressure, it seems unlikely that China will be able to oppose sanctions, threatening to reduce exports of electronics products.
It is true that China supplies about 80 percent of the US market for industrial inputs known as “rare minerals”. But the United States is defending itself by collecting and recycling them. Moreover, China’s economy seems very sensitive for other reasons.
Just as Putin invaded Ukraine driven by a misguided sense of national pride, so China’s leaders have refused to buy much more effective foreign vaccines against Covid-19. Although local vaccines do not work, they have isolated their country from the rest of the world, imposing draconian quarantines on visitors.
China’s economy is dependent on debt, so if banks ask for their loans, the crisis will be very strong. The Chinese government has compounded its problems by hitting its impressive digital economy. It has fined major technology companies, blocked their involvement in stock exchanges, and forced their founders to emigrate abroad.
Last summer, with a drop of a pencil, it wiped out most of the $ 100 billion lucrative teaching industry. Given that China’s population is aging and its workforce is shrinking, the government needs to supplement productivity by technology companies.
That’s why Beijing’s top economic official has been doing well in the sector recently. But not everyone expects things to improve. Authoritarian governments find it difficult to tolerate divisive innovations. The West has experienced several grueling years.
But the Ukraine crisis has changed the situation. Of course, the conflict is far from over. But for now, the West has a great deal of self-confidence previously unknown.
