G7 sanctions and Russia’s pivot to China | Guide to the Global Economy
Summary
TLDRThis week's Guide to the Global Economy discusses Russia's economic stabilization two years into its invasion of Ukraine, focusing on its trade reorientation from the EU to China. It also covers a weapons swap deal between the U.S. and Ecuador, which aimed to provide old Russian military equipment to Ukraine, and the retaliatory Russian ban on Ecuadorian banana imports. Additionally, it examines concerning trends at the WTO, like the dropping number of formal trade consultations compared to informal complaints, and outlooks for reforming its dispute settlement system.
Takeaways
- 😊 The team focused this week's research on the economic implications of the 2-year anniversary of Russia's invasion of Ukraine.
- 📉 There was an initial 50%+ drop in G7 exports to Russia after the invasion due to sanctions and companies pulling out.
- 🚛 China has filled the gap, increasing exports to Russia by 43% as Russia reorients away from the EU.
- 🛢 China is exporting industrial goods to Russia to support its war effort by providing raw materials, chemicals, etc.
- 🚗 Chinese car exports to Russia jumped 900% as Western companies pulled out of Russia.
- 💊 The EU still exports some goods to Russia like pharmaceuticals and food that are exempt from sanctions.
- 😳 Russia's increasing reliance on China could leave it vulnerable as the subordinate partner long-term.
- 👨💻 President Nabeua of Ecuador proposed exchanging Russian weapons for US military equipment to send to Ukraine.
- 🍌 Russia banned Ecuadorian banana imports in retaliation, which could hurt 20% of Ecuador's banana export market.
- 🤝 There is disagreement at the WTO over reforming the dispute resolution body, so major realignment is unlikely at the upcoming ministerial conference.
Q & A
What is the main topic of the research presented in the transcript?
-The main research topic is analyzing Russia's trading relationship and economic implications two years after its invasion of Ukraine.
What happened to Russia's imports right after the invasion of Ukraine?
-Russia's imports from G7 countries dropped by over 50% right after the invasion due to sanctions, export controls, and companies pulling out of Russia.
Why have China's exports to Russia increased recently?
-China's exports to Russia have increased due to Russia reorienting its economy away from traditional suppliers like the EU and towards China. China also needs new export markets as other countries turn away from Chinese goods.
What goods is the EU still exporting to Russia and why?
-The EU is still exporting goods exempt from sanctions like pharmaceuticals, food, and other items that are important for EU producers' livelihoods. There has been pushback on sanctioning these goods further.
What deal did Ecuador try to strike with the US regarding old Russian military equipment?
-Ecuador's president proposed exchanging $200 million worth of old Russian military equipment for new US military equipment, with the intention of the US then sending the Russian equipment to Ukraine.
How did Russia retaliate when it found out about the proposed Ecuador-US deal?
-Russia banned banana imports from Ecuador's 5 biggest banana companies, which account for 20% of Ecuador's banana sales.
What is significant about the divergence in WTO trade concerns and consultations after 2019?
-It shows that while countries are raising many trade concerns, they are not moving to the formal adjudication process for resolving disputes due to issues with the WTO's appeals body.
Why has the WTO's appeals body been unable to function effectively since 2019?
-The US has blocked appointments of new appeals judges since 2019 over concerns that the body oversteps its boundaries. This has left the appeals body without the quorum it needs.
Which two WTO members file the most trade consultations and complaints?
-The United States and the European Union file the most WTO trade consultations and complaints.
What reforms are being discussed for the WTO appeals body and what is the likelihood of agreement?
-Principles to govern appeals reforms have some agreement but specifics around composition and rules still have considerable disagreement, so major realignment is unlikely at the upcoming ministerial conference.
Outlines
📈 Russia's imports stabilize after initial post-invasion drop
This paragraph discusses how Russia's imports drastically dropped after the invasion of Ukraine due to sanctions and companies pulling out. There was a 50% drop in G7 exports initially. Over time, imports have stabilized again, with a rise in imports from China making up for declines from the EU. Russia has reoriented its economy towards China.
🚛 EU still exports some goods to Russia out of necessity
The EU still exports about $3 billion of goods to Russia per month that are exempt from sanctions like pharmaceuticals and food. This helps support EU producers and livelihoods. Further banning these remaining EU exports to Russia will be difficult given the economic impact.
🍌 Ecuador's weapons deal with US prompts Russia to ban banana imports
Ecuador made a deal to exchange old Russian military equipment with the US for new American weapons. Russia perceived this as the weapons going to aid Ukraine's war effort. In retaliation, Russia banned Ecuadorian banana imports, which represent 20% of Ecuador's banana exports.
🌍 More weapons swaps by US likely as way to arm Ukraine
After backlash, Ecuador reversed its weapons deal with the US, prompting Russia to end its banana import ban. The incident shows the US is finding creative ways to gather Russian-made weapons to send to Ukraine, which finds them easily usable. More such weapons swaps are likely.
📉 WTO disputes increase but formal resolutions drop off
This paragraph examines WTO trade disputes and dispute resolutions over time. Trade concerns raised at WTO committees have increased sharply since 2019 while formal dispute consultations have dropped. This divergence is due to issues with the WTO's dispute resolution body.
Mindmap
Keywords
💡trade
💡sanctions
💡imports
💡WTO
💡Ukraine invasion
💡China-Russia relations
💡EU exports
💡food exports
💡automobile trade
💡weapon swaps
Highlights
Russia has restabilized its import economy after sanctions through increasing trade with China
China's exports to Russia jumped 43% from 2022 to 2023 as Russia became one of the only large economies still seeing rapid Chinese trade growth
EU pharmaceutical and food exports to Russia continue despite sanctions due to producer pushback and exemptions
China's need for new export markets as countries turn away from Chinese goods ties it closer to Russia economically
In the long run, Russia's economic reliance on China gives China dominant power in the relationship
Biden offered Ecuador modern US weapons in exchange for $200 million of old Russian military equipment to send to Ukraine
Russia retaliated by banning Ecuadorian banana imports, a major Ecuador export, after the weapons deal
The US is finding creative ways to gather Russian weapons to send to Ukraine by trading with countries that have old Soviet-era equipment
More weapon swap deals between the US and countries with Russian equipment are likely in the future as the US tries to arm Ukraine
WTO trade disputes have stalled since 2019 due to the US blockade on appointing judges to the appeals body
Despite WTO problems, the US and EU remain the most active in raising trade complaints and consultations and the US wins most of its complaints
While some WTO reform principles are agreed, substantial disagreement remains on practical changes to the appeals process
China and the EU are the most frequent targets of US trade complaints at the WTO
There is cautious optimism around potential WTO appeals reform at the upcoming ministerial conference
The US wins almost 90% of WTO cases it brings as a complainant, so has a strong interest in reforming rather than abandoning the appeals system
Transcripts
[Music]
I'm everyone welcome back to guide to
the global economy I'm Sophia Bush and
assistant director with the goo
economics Center I'm filling in for Josh
lipsky this week um and we're going to
talk about the team's research so first
we're going to talk about um Ecuador's
uh economic relationship with Russia
we're also going to talk about the
upcoming WTO ministerial conference but
first i'm going to talk to Neils Graham
about our lead hey Sophia so this week
you know commemorating the two-year
anniversary of Russia's legal invasion
of Ukraine we decided to focus on sort
of economic implications of this and we
wanted to do a real deep dive into
Russia's trading relationship and that's
been the real focus of the lead this
week okay great let's take a
look so really as you can see in the
graph you know what we're really looking
at is sort of how has Russia been able
to restabilize its economy especially
it's import economy following a
combination of sort of G7 sanctions and
sort of a broader Coalition G7 has put
together as well as broader Western
moral outrage along with Russia's
Invasion where a number of companies
have pulled out of Russia even beyond
the sort of legal requirements here and
so let's let's figure out what we're
looking at here so I'm seeing a big drop
off that's after the invasion I'm
assuming that's because of sanctions and
Export controls exactly right so in the
immediate after after the invasion you
know going back two years ago was a real
surprise I think firstly for a lot of
firms you know it was a real sudden sort
of invasion a lot of folks in the
immediate aftermath we saying this is
not going to happen this is a true
buildup so that that's the sort of a
massive drop off you see there where so
many companies so many sort of
organizations trying to figure out what
are we going to do now that this kind of
massive Technic shift has happened in
the geopolitical landscape and what you
really saw is particularly for G7
exports but also broadly globally and
you see this with in the China line as
well exports drastically fell so G7 in
the immediate aftermath exports dropped
some about like 50 a little bit over 50%
and um afterwards it slowly recovered
this was a combination of a few
different factors first of which was
sort of coming to terms with the
invasion a lot of things still weren't
clear you know companies were still
trying to figure out what are my
operations looking like in Russia what
are my legal obligations to the US howle
I personally feel about this on top of
that you had long-term contracts that
now returned into Force you did see some
delivery of goods overall but on top of
that you know long-term wise we do see a
decline in sort of G7 trade really
focused on the EU okay so this is not
just because of firms being directly
impacted by sanctions but them trying to
navigate the um environment okay and
what we're looking at is values not
share exactly so the graph itself shows
a three-month rolling average of imports
um and this is also why it doesn't seem
as Stark the initial drop off if you
look at the pure trade data you know the
the jump is a little bit more but we do
a three-month rolling average to kind of
uh smooth out some of the seasonality in
between the individual data but either
way we have this immediate Stark drop
50% in total Imports and we have a slow
recovery not really from uh kind of your
traditional sources of Russian Imports
namely the EU but rather this real Stark
rise in imports from China in particular
is this just part of China's postco
recovery is it just within the trend
line no I think a few different things
are at play here you know first a lot of
the attention in Washington has been
focused on really the direct support
China has provided the sort of Russian
military effort when I say that you know
I'm saying explicit direct lethal Aid
this is still a red line that China's
yet to cross but this is the sort of
industrial support sending China things
or sending sorry Russia things like
rubber chemicals raw materials iron a
range of different minerals it needs to
keep its war machine war economy running
so this is part of it on top of this you
know it speaks to a broader Trend within
Russia and you can kind of see if we go
back to kind of 2020 and even Beyond
there's been a slow rise in terms of
Chinese uh Imports or Chinese exports to
Russia overall and this speaks to a
longer term partnership Russia and China
been pursuing really since 2016 of tying
the two economies closer and closer
together so it's kind of you have to
take it within that context as well
where you would see a lot of this
increase with or without the invasion
The Invasion did however supercharge it
and really allow this partnership to
Blossom in new ways okay so is it just
these sort of industrial goods and
inputs or or is there anything else
that's going on here no it's it's Prim
industrial goods are a real large
portion of it same with the sort of
mechanical inputs that you'd need to
kind of again run a wartime economy
whether it's building different things
you need for sort of uh military
equipment but on top of this it's just a
complete reorientation of the Russian
economy away from traditional suppliers
like the EU towards China so we're
really seeing a flood of consumer goods
uh from China to Russia and I think cars
are a real great example of this you
know the immediate aftermath of the
invasion a lot of Western car
manufacturers pulled out of their joint
ventures within Russian car or within
Russian car companies on top of that
cars were one of the different Goods
that were really banned especially
luxury cars by the G7 so what you saw is
a complete reorientation towards the
Chinese car market and Chinese Imports
or Chinese exports to Russia of cars
jumped 900% when you compare 2019 to
2023 and this is shared across a range
of other Goods but I think cars are
really illustrative of this yeah I mean
that's a pretty intense data point but
okay if I'm looking at this chart again
so the EU exports Dro but then they rise
again so what is making up that rise
like what is the EU still exporting sure
so there's a range of goods that are
firstly kind of exempt from sanctions so
what you're seeing in terms of the
remaining EU exports is sort of I guess
three trillion or three billion dollars
worth of goods a month coming out of the
EU are combination of things that are
exempt entirely from sanctions and these
are things like Pharmaceuticals so
Pharmaceuticals EU is still sending
around 600 uh million a month or so on
top of that you have a lot of food
stuffs as well the EU is a large
agriculture producer this is one area
for example or China has not really been
able to pick up China is not a big food
exporter so the EU has continued to send
food to Russia overall on top of that
there are range of other Goods just kind
of strange things that aren't sanctioned
things like Spanish perfumes for example
or maybe specific cooking wear Goods
that are built in the baltics for
example that aren't necessarily
sanctioned and that the G7 may move
towards sanctioning but they've gotten a
lot of push back up to now I think the
other real important thing to remember
is that Russia is buying a lot of these
Goods but these goods are the livelihood
of so many different EU sort of
producers
different Mom andp Pop shops and so
forth so there's a real push back right
now on uh the EU side especially on kind
of the uh increasing ban of non sort of
war effort vital Goods overall you know
we have to balance the pain that we are
putting on the Russian economy with the
sort of corresponding pain that
different producers especially in the EU
are feeling and that's the real tight
walk the G 7 has to walk right now and
that's the real reason why since really
in the past you know eight or so months
we haven't really seen substantial new
efforts to uh kind of harm trade between
the G7 and a rush overall but going
forward you know I I I think I want to
really Echo the points that it's going
to be very very hard to further
disintermediate the trade between sort
of G7 and Russia we've already touched
on kind of these key Goods but that
doesn't mean it's not necessar
necessarily possible I think one key
example of this is the recent sanctions
packages that Biden has promised around
the death of uh Russian opposition
leader Alexander naldi and we could see
this further impact trade flows
especially as the war drags onto the
third year there may be more support to
take additional action so we could see
this picture sort of muddling in the
future but as of right now as you can
kind of see in the final few bars of the
graph uh at least Russian's import story
has really stabilized and returned back
to the 2019 levels is there anything we
should be thinking about that maybe
could be risky sure so just as China or
just as Russia is increasingly turning
to China uh for these different Goods in
the short term it's really helping their
war effort in the long run it's really
building a strong dependency uh from
Russia onto China you know this is what
we're seeing when folks talk about the
new vacillation of Russia to China
overall comparing it to the relationship
maybe the Soviet Union and China had
back in the 1960s except the tables are
now flipped with China being the sort of
dominant partner here I I think that's
totally fair you know Russia has few
other places to turn and it's going to
be increasingly tying its economy its
livelihood to the Chinese economy but I
also don't want to diminish the sort of
Chinese side of this as well you know as
China is increasingly turning to Russia
to buy its different Goods it's facing
really strong headwinds around the world
you know Chinese trade from 2022 to 2023
dropped about 5% in dollar terms for
Russia this was a surge of about 43%
Russia is really the only large economy
that China is still seeing rapid trade
growth with and especially as countries
like the EU in particular turn away from
Chinese Goods with their things like
their EV probe they just recently
announced a new Probe on subsidies of
Chinese trains they are going to need
new markets to absorb these different
goods and Russia is a key example of it
so while I don't want to diminish the
sort of relationship that Russia is
incredibly reliant on China China too
needs Russia as a new sort of export
Market where it can buy the goods that
it's no longer being able to sell in its
own domestic Market or abroad in places
like the EU or the United States okay
all right well thanks Neils we'll keep
an eye on this thank
you okay for the next section we're
gonna talk to Alexandre who's one of our
young Global professionals with the GE
economics Center hi Alexandre hi Sophia
okay so you looked into Ecuador this
week um what made you look into it and
what did you find yeah uh thanks s for
this question so when I was starting
brainstorming a bit for this edition of
the uh Guide to the global economy I
wanted to find a story connected to some
major cultural pop uh events happening
during the season and of course I
thought about Carnival so I started
doing a research on Latin America and
then I found this story very interesting
story about Ecuador basically I
discovered this tweet um published by
the new elect newly elected president um
president
naboa um of Ecuador he's only 36 year
old so a very young leader uh that uh
published this video when he uh tells
about this exchange that he was planning
to do with the us and this exchange
involved um weapons and particular L
they wanted to exchange scrub metal
coming from Ecuador to the US in
exchange of uh new modern US made uh
military equipment okay so he's saying
this on social media yeah so what is it
scrap metal is it what what exactly is
actually happen well it's not really
scrap metal actually um he's referring
to Russian uh old military equipment uh
that was uh created during the Soviet
era and its value is about $200 million
so it's not really scrub M scrub metal
and it can actually be very useful for
uh military purposes especially maybe
Ukraine okay so the US doesn't actually
want these old weapons that they're
calling scrap metal but how are they
able to send it to Ukraine how is all of
this actually happening yeah it's
interesting so basically the US made
this deal with NOOA saying that they
will give to Ecuador this uh us made um
equipment in exchange of uh russian-made
weapons the point here is that the US
does not really want to use that Russian
made uh weapons but instead uh um
President Biden wants to direct this uh
equipment to a third country which is
indeed Ukraine um this was uh not super
clear from the original deal um but it
was then discovered that this was the
real intentions behind this agreement
between the two countries okay so but
why does Ukraine want old weapons why
wouldn't we just be able to send them
the new weapons yeah so it's very
convenient for ukrainians using uh old
russian-made weapons for several reasons
um first of all they most of their um
equipment uh the beginning of the war
was made of Russian made weapons
especially coming from the Soviet era um
so they are feeling already comfortable
with using these type of weapons and
also um this type of donation
complements what they already have so
it's quite useful in addition to that um
sending us made weapons will not really
be convenient uh because uh it will also
involve the sending um American soldiers
to explain to ukrainians house to use
this uh uh this equipment and another
aspect to consider is that through these
swaps the US can also engage with other
count countries in this case Ecuador so
it's also a way for the US to um improve
their alliances in other region so it's
a it's a mix of the of factors right
okay that makes
sense but I mean I'm sure Russia
couldn't have been happy about this and
even though they're calling it scrap
metal I'm I'm sure that's you know a
pretty easy thing to see through exactly
they knew that it wasn't about scrub
metal uh it was about serious military
equipment and uh because of that after a
few days after this deal between noo and
and Biden um the Russian foreign
Ministry decided to ban um banana
Imports coming from the five biggest
banana companies in Ecuador and this is
actually a very important decision
because Russia is the uh Main uh
importer of uh Ecuador's banana sales
and uh this would represent a a
significant hit causing potentially 20%
of Market drop so it's uh yeah it's
pretty significant and uh of course this
uh was uh the reason why they uh put
this decision in place was uh not so
clear cut uh they first said that this
was because of a suspected disease found
found in previous shipments but in the
the Ecuador food agency disagree with
this position they said that only 0.3%
of previous shipments was affected by
this pest so probably there are other
reasons behind this Choice okay that's
pretty uh pretty interesting so it seems
like it would be really reasonable to
conclude that this was a retaliatory
economic measure it's it's reasonable
and uh uh we can also further um justify
this conclusion uh by considering the
most recent updates about this story
because just a few days ago we
discovered that actually um Ecuador
reversed his decision its decision to
engage with us in this uh exchange of
weapons
and just after Ecuador made this um
change his position um Russia decided to
end its ban on banana sales so okay so
they made the decision Russia retaliated
and now everything's reversed exactly
yeah okay I mean that's okay so this is
really interesting but is this I mean it
seems kind of like a niche issue is it
just like us Ecuador Russia or are there
any other impacts or Global um
implications apparently it's not that
Niche so from what we can really
understand from this story is that the
US is finding new ways to arm Ukraine um
and to support Ukraine's war efforts uh
the way the US is trying to do that is
by gathering um Russian made weapons for
the reasons we said before and they can
uh find this type of of situation in
other countries not only Ecuador uh we
can have countries rich in Russian made
weapons especially in Latin American so
we can expect um an increase in this
type of swaps and exchanges in that
region but uh on top of that we can also
say that us is already engaging with
other countries in this type of
exchanges like Greece so even outside
this region so um we will probably going
to look at these
exchanges um happening more often in the
future okay so do you have any examples
of like other Latin American countries
that could be involved here yeah one
country for example is uh Brazil uh we
also have Nicaragua so there are many
there are many different countries that
we could mention the main point is um
that the US is looking for countries
rich in this old type of uh of equipment
okay well thanks alisandra that was a
really interesting find and really good
research and I think we should keep our
eye on uh Brazil thank you
sofhia okay for by the Numbers this week
I'm gonna bring in Ryan Murphy program
assistant with the GE economics Center
and the economic statecraft initiative
hey Ryan hi Sophia thank you for having
me of course good to have you here okay
let's look at your
research excellent so what you're
looking at here and the numbers for this
uh addition is six versus 244 and what
that means is there were six
consultations last year in 2023 at the
World Trade Organization or WTO and
there were 244 trade concerns raised and
so you see this massive Divergence
particularly after 2019 between these
two numbers okay so this is pretty
timely since the uh 13th ministerial is
coming up um okay so let's dive into
this a little bit more so on this
leftand chart we have requests for
consultations can you walk us through
what that really means and why we should
care about it absolutely so when talking
about concerns and consultations it
sounds very dry but it really is how a
bit a little just a little bit very Min
in the WTO but what we're talking about
is how countries resolve their trade
disputes with one another uh and so when
we're looking at trade concerns this is
the result of committees that are formed
with a lot of WTO members uh for
specific issue areas and that's where
they bring up uh things regulations
rules laws of other members um that are
concerning to them or that seem like
unfair Trade Practices and the critical
thing to note here is that this is not a
formal arbitration process the formal
arbitration process and this goes back
all the way to the original Gat uh
through the the uguay round um is this
idea of consultations consultations is
the first step uh between two countries
to resolve a potential trade dispute and
so while you see countries that are
really concerned and bringing these
topics to the table uh you're not seeing
them move from the table you're seeing
them quite literally tabled uh before
they get uh to this kind of more formal
adjudication okay and so we're talking
about trade disrupting measures like
tariffs subsidies that sort of thing
right exactly yes okay so these two
graphs are pretty Stark and you
mentioned that 2019 was really a turning
point that's about five years ago now
what was happening around this time
absolutely yeah so what we see uh even
as early as 2017 is the United States
having a blockade on the appointment of
WTO appol body judges and the appet body
is um about seven members uh they
adjudicate uh some of these disput Utes
that come through this consultation
process and it's critical that they have
a quorum the Quorum is three members uh
and in December of 2019 that fell below
Quorum and so this body has not been
functioning effectively since 2019 uh
since the Trump Administration um and
this has continued through the Biden
Administration so uh even as recently as
the G20 media in New Deli um Katherine
Tai us trade representative had talked
about this body needing a fundamental
rethink uh and so there's a real issue
here at least from the perspective of
the United States that's maintaining
this blockade um of this body uh
overstepping its boundaries and
therefore they have not made future
appointments uh to this group okay so I
want to go Beyond the Lines a little bit
so how are these two data points
distributed among the WTO members are
there any particularly active members
Yes actually surprisingly the United
States and the European Union you are uh
the most active members for both
consultations and trade complaints and
one of the really interesting data
points is that for cases where the
United States is a complaintant usually
against China or the European Union they
win almost 90% of their cases and so
while there is this concern um at the
federal level um with the administration
that the appet body the resolution
process is flawed the United States
actually does when it is pursuing trade
complaints for unfair Trade Practices it
actually does win the majority of these
cases so it does seem like it would be
in the US interest to get that
fundamental rethink do you think that's
likely do you think that's going to
happen so we should keep our eyes on the
13th ministerial conference that'll be
at the end of the month uh through the
26th and 29th in Abu Dhabi um one of the
things that's been happening uh is and
this was announced at the last
ministerial uh a review of this
resolution body um reforms to it and
those have been operating on two tracks
there's some agreement on the first
track over the general princip
principles that should govern the body
but to the actual composition of the
appal body the actual uh rules and
regulations that would apply day-to-day
um there's still considerable
disagreement so while you may see some
progress here on this general principles
um I wouldn't expect to see a major
realignment at this 13th ministerial
okay well we'll keep our eye on it
thanks so much Ryan for looking into
this it's very timely well thank you so
much for watching this has been Guide to
the global economy I'm Sophia Bush and
assistant director with the geoeconomics
Center and if you like this video you
can go ahead and subscribe or you can
also follow us on Twitter thanks so
much
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