At the beginning of February, I had the chance to chat with the hosts of the Doorstep Podcast. Tetiana Serafin and Nick Gvosdev about the state of the global economy, the resilience of the Russian economy and the rerouting of global trade. An excerpt is below but you can watch or read the whole thing at the links below.
Tatiana Serafin: I am exaggerating for effect here, but can you work us through if anything has changed? We talked a year ago about a global growth crisis. Is there really a global growth crisis? Either/or, help us to understand.
RACHEL ZIEMBA: I will first say thanks for having me back. It is always great to chat with you guys. I always enjoy listening to other guests.
Yes, maybe things have not changed, but yet from some other perspectives a lot has changed. Russia may still be getting many of the goods it needs, but it is getting it from very different countries, and that sets up other problems for the future.
As I see it, at the start of the renewed invasion there were a lot of questions: Would the developed economies hang together? How would that work? We were some of the few people talking at the time about, “Oh, my god, these are two big agricultural-producing countries plus throw in Belarus for fertilizer.” We were worried about what that looked like if this persisted.
I think what we have seen, if anything, is remarkable coordination among developed economies—the G7, the G10—and it is not just about Russia. But we have seen more and more fractures between the Global West and the Global South. It maps out in different ways in different geographies.
This is not only a function of Russia’s war. It is also a function of U.S. and Western relations with China and the lingering trends of the pandemic. Yes, we have not quit trade with China, but there are a lot more barriers in place in some of what are the most sensitive industries like semiconductors, and I am sure we will come back and talk about export controls in due course.
What I think Russia has been able to do is to reroute and not only sell their products to different countries—with, I would say, the support of the United States and its allies, who are worried about what the macro impact of a sudden stop of Russian oil would look like—but also has been able to source goods from other locations. I would argue that whenever a country is subject to major sanctions, other restrictions, and embargoed trade they cannot get the best products and have to pay more for them, but at the end of the day Russia is still getting the inputs it needs for its war machine.
The other thing I do think that has changed beyond this rerouting is that Russia if anything has centralized around the state and military and has jettisoned what the liberal internationalist believed are in its strategic economic interest—Nick, you and I over Twitter and in other places, have had some of those conversations—but they have focused on the strategic aims of this conflict, the existential issues as they see it. In doing so they jettisoned opportunities in cleaner hydrogen and cleaner ammonia, and they have said, “We don’t care about being a reliable supplier of energy writ large if our customers aren’t reliable.”
The Russian growth challenge has been a long-term issue, first of demographics and then of lack of investment, and if anything all those issues are even greater because the mobilization of the whole economy is tilted toward the war machine. Their cost benefit analysis is very different.
TS: How can Russia circumvent these sanctions?
RZ: where energy is concerned is that I think there were different phases over last year. From the get-go there was what we called “self sanctioning,” at the beginning of the war either stakeholder pressure or sanctions Risk. …From the get-go, if anything the U.S. Treasury and its allies said: “Hey, guys, wait. We are not sanctioning Russian oil. We are not sanctioning the current production.” The sanctions were earmarked toward increasing the costs and degrading Russia’s future capacity. They were worried—I think justifiably—about the cost to the global economy of a sudden stop of Russian oil and other commodities.
In the first half of the war Russia actually still had a lot of energy revenues and Russia struggled to import. The Western countries wouldn’t send them items, and even the Chinese were wary. Then you hit the middle of last year, Russia cuts off natural gas, but its imports start to pick up. That is where they began finding additional supplies via Central Asian countries or the Caucasian countries or via Turkey—Turkey was one of the first countries to step up and be an intermediary—and via China. I do think the quality of those goods has maybe diminished, but again it comes back to they are surviving.
The price cap is structured so that if you want to use Western services it has to be below a certain price, but if you are willing to use non-Western services, it can be whatever price you want. The U.S. view at first was: “Our services, the Western services, are better, it is going to be costly. Who is going to want to use Russian insurance? Who is going to want to use Chinese tankers?”
I think what we found is that if the price is right people are willing to use 25-year-old tankers that the Russians bought up from the Greeks. That also means Russian interests and supporters in other countries that are making money not just on selling the oil but on contracting the tankers and the insurance.
What happens if there is an oil spill? What happens if there is an accident, and undoubtedly there will be one at some point? This market that was highly dominated—insurance highly dominated by Britain, for example, and shipping that was highly dominated by Southern European countries, Greece, Cyprus, etc.—and suddenly there are new entrants.
I think it also comes at a time where a lot of countries, especially in the Global South, are thinking about their own interests: What are the political groupings? Is it regional? Is it mini-lateral? How do they hedge? This isn’t the same nonaligned movement of many decades ago, but it is one of realignment, and I don’t think we know exactly how that is going to shake out.
Ziemba Insights 