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Morning from Moscow, where the coronavirus has made clear to the Russian government that every silver lining has a cloud. Crowds of Chinese tourists filling up Red Square or the checkouts of Moscow’s designer label outlets have been celebrated in recent years as a sign of the two countries’ booming new economic friendship. Now they are seen as a potential threat: sales of face masks in Russia swelled 13 times last week.
Russia’s decision to close its huge land border with China last week comes at a time when trade between the two nations is booming. Today’s main post examines the threat to the Russian economy as a result. Our policy watch looks at the differing positions between the UK and EU as they prepare for trade talks, while our chart of the day looks at the slump in South Korean trade.
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If you want to make God laugh, tell him about your plans
For the past five years, Russia’s 4,000-odd kilometre border with China has been one of its favourite trump cards to wave at western countries imposing sanctions against the Kremlin. Fine, take your big bank finance and your foreign direct investment elsewhere, Russian officials would crow, we have Beijing in our corner.
Big, expansive borders are great when you want to ramp up trade with a giant economy that needs to import huge amounts of the very thing you produce huge amounts of: energy. But they aren’t so great when there’s a viciously contagious virus epidemic raging on the other side — and nobody is sure just how deep the financial whack could be, or how long it will last.
Without Beijing, Russia’s relatively robust economy would be in a far worse state. Western sanctions — first imposed in 2014 after Moscow invaded and annexed Crimea from Ukraine — cut off the bulk of US and EU financing to many major Russian companies, reduced trade with Europe and cast a chill over the country’s investment climate.
But as the dollars dried up, the renminbis rolled in. Chinese investors rescued gas projects that would have otherwise gone belly up and bought up stakes in large infrastructure ventures. Encouraged by a strongman bromance between presidents Xi Jinping and Vladimir Putin, traders began taking advantage of new rail and road border crossings.
But as the coronavirus spread, Russia moved to close almost all of those very same checkpoints last week, in addition to cancelling Chinese electronic visas and banning major tour groups from the country. It has also closed traffic across the Russian-Mongolian border, an alternate route for Chinese goods to western Russia.
Tourists wearing face masks outside the Kremlin in Moscow last week © Bloomberg
Thankfully, trade relations have moved on from three decades ago, when the so-called “suitcase trade” saw thousands of one-man import-export businesses traipse bags of Chinese goods into Russia to sell on street corners.
Instead, trade between the two countries, which rose 25 per cent in 2018 to pass $100bn, has three major pillars. First, oil and gas, pumped south through huge pipelines or shipped on tankers, accounts for about 70 per cent of Russian exports to China. Second, almost all of the remainder is raw natural resources or machinery, which fuel China’s manufacturing industry. And, third, heading in the other direction to Moscow, are a plethora of finished goods, led by electronics and clothing — now in trucks or train cars, rather than carried by hand.
Of these, the first two are most at risk in the short term. While closed border crossings will undoubtedly affect the movement of small-scale shipments, the potential damage to Russian energy exports is far larger.
Crude prices are already down 15 per cent from early January’s peak, and Chinese fuel demand is only going to keep falling as quarantine measures remain in place or are extended, with citizens ordered to stay in their homes.
As Chinese factories cut back production or temporarily close, that will also impact demand for both fuel and the raw goods dug out of the Siberian soil and piled on train cars that snake across Russia’s Far East region.
Russia’s rouble, sensitive to both the global oil price and geopolitical tensions, fell more than 3 per cent last week. Its main stock index lost 2.5 per cent in the same period, led by oil and gas companies.
“Russia is hardly immune,” Vladimir Tikhomirov, chief economist at BCS Global Markets in Moscow, wrote in a note this week. “Although it is rather difficult to fully assess the macroeconomic impact of the new epidemic . . . pressure on the rouble and capital outflows from Russia will continue.”
Russian officials, keen to maintain close relations with their Chinese partners, have been at pains to stress that their measures are all “extraordinary and temporary”. But it is not hard to imagine that some in Beijing might feel a little put out by Russia’s rather dramatic response to the outbreak, especially given how supportive China has been since sanctions were introduced.
For now, some eastern cities have complained of empty fruit and vegetable shelves in shops as Chinese shipments are halted, and Russia says just two people — Chinese citizens in cities far east of Moscow — are confirmed as carrying the virus in the country.
But until China’s epidemic abates, Russia is likely to be one of the potentially significant victims, as grand trade growth forecasts for 2020 are quietly shelved or pared back. As they say in Moscow: “If you want to make God laugh, tell him about your plans.”
Charted waters
South Korean trade has been in decline recently as China’s economy has slowed and global tech demand has been weak. Now the coronavirus is presenting a new challenge: Hyundai said on Tuesday it would suspend production in South Korea after the outbreak disrupted parts supply.
Policy watch
UK prime minister Boris Johnson insists the UK can ‘prosper mightily’ even if a free trade agreement is not in place by December 31 © Getty
The outlook for trade talks between the UK and the EU is already not looking promising after UK prime minister Boris Johnson said on Monday that he was prepared to sever links with the EU without a trade deal if Brussels insisted on tying the UK closely to its standards. That was in spite of the government’s own estimates that it could inflict long-term damage on the economy, write Jim Brunsden and Sam Fleming in Brussels and Sebastian Payne and George Parker in London.
Johnson said that Britain favoured a “Canada-style” trade deal, removing tariffs and quotas on trade with the EU. But the prime minister said the UK could “prosper mightily” even if a free trade agreement was not in place when the transition period ends on December 31.
The pound did not react well to Johnson’s threat that the UK could walk away from talks with the EU without a trade deal, falling as much as 1.4 per cent against the dollar to just below $1.30 on Monday.
Meanwhile, the European Commission warned that the UK would not secure an extensive trade deal if it insisted on diverging from EU standards on issues such as state aid, the environment and workers’ rights.
Michel Barnier, the EU’s chief Brexit negotiator, said: “The UK answer will be fundamental to the level of ambition of our future relationship and the UK must know this,” he said. “It will be up to the UK to decide.”
Don’t miss
- The UK government must come clean on the cost of its EU trade strategy, writes the FT’s editorial board: neither a Canada- nor Australia-style approach is a favourable model for either side.
Read more - Writing in the FT, Harvard professor Joseph Nye warns that the US and China should not decouple their economies too far: interdependence is a double-edged sword, as it can also contribute to deterrence and strategic stability.
Read more - The coronavirus disruption underlines China’s central position as a manufacturing hub for the electronics and automotive industries. It could undermine that status too.
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Tokyo talk
The best trade stories from the Nikkei Asian Review
- India has snubbed the latest talks on the Regional Comprehensive Economic Partnership in Bali, with its failure to attend the informal talks a further sign that it may pull out of negotiations for a free trade agreement touted as largest in the world.
Read more - Wuhan’s strategic location made it an industrial powerhouse, but the city now infamous for being the centre of the coronavirus outbreak, may hobble the Chinese government’s effort to promote high-tech industries, known as “Made in China 2025”.
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