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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 to 2 per cent. hundred per week. whether if this rate is maintained, Russia’s annual inflation would reach the 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 the key interest rate, punishing businesses and households, prompting experts to predict an economic recession deep.
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. Russians with me many opportunities are leaving 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Terrified by the destruction of cities in Ukraine, about 500 Western businesses operating in Russia have already withdrawn, many of them without a clear plan of how to sell the assets they have in the country and how they can recover. capital.
British oil giant British Petroleum is expected to suffer a $ 11 billion loss from its departure from Russia. Foreign business confidence is unlikely to be recovered as long as Vladimir Putin is in the Kremlin. Russia’s latest move was the condition that its natural gas exports be paid in rubles.
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 withdraw from the move. No matter how things go, Russia’s threat e has further strengthened Germany’s determination to move away from 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 false sense of national pride, so have China’s leaders refused to buy much more effective foreign vaccines against Covid-19. Although domestic vaccines do not work, they have isolated their country from the rest of the world by imposing quarantine drakoniane for visitors.
But with the advent of the particularly infectious BA.2 omicron variant, that’s not enough either. China has been forced to close economic centers like Shenzhen and Shanghai, hampering its economic growth prospects. Meanwhile, China’s financial sector is also fluctuating. Real estate developers are going bankrupt, and are being abandoned by other investors. Nearly 2/5 of bank loans are related to real estate, so this crisis is expected to infect the entire banking system.
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 replenishmentn of 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.
The populists have greatly increased their influence, traditional alliances have been destroyed, and everything from inflation to the chaotic US withdrawal from Afghanistan seemed to signal incompetence and fragility. But the Ukraine crisis has changed the situation. Of course, the conflict is far from over. But for now, the West has a great self-confidence unknown before./bota.al
By Sebastian Mallaby / “The Washington Post ”
Note: Sebastian Mallaby, associate at the Paul A.Volcker Institute for International Economics.
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