Research & Insights #20

Oil & Gas. According to the New York Times, the European Union is preparing a phased ban on imports of Russian oil products. The measures should not be introduced until after the second round of French elections, to be held on April 24, to avoid the impact on pump prices harming President Emmanuel Macron’s re-election chances.This approach is intended to give Europe, and Germany in particular, time to find alternative suppliers. In 2020, Russia provided a quarter of the European Union’s oil supplies and a third for Germany. The EU has imposed several rounds of sanctions on Russia, but so far Russian oil and gas have been excluded because of the high level of dependence of some EU member states on energy supplies. Germany’s Vice Chancellor, Robert Habeck, recently spoke out against an immediate gas embargo on the grounds that it would threaten social peace in the country. Despite the war, Gazprom continues to supply Russian gas for transit to Europe through the territory of Ukraine.

Defence. Russia has successfully carried out a first test launch of a Sarmat intercontinental ballistic missile (ICBM) from the Arkhangelsk region, the Russian Defence Ministry announced Wednesday. Vladimir Putin congratulated the military, stressing that this unique weapon will force all those who try to threaten Russia to think twice. According to the Russian president, the new system has the highest tactical and technical characteristics and is capable of evading any modern missile defence system. It is the largest nuclear missile ever designed. The Pentagon commented on the event through its spokesman, John Kirby, who said it was a “routine” test that posed “no threat” to the United States or its allies. The Sarmat has been under development for years, so its test launch is not a surprise to the West. However, it comes at a time of extreme geopolitical tension due to the war in Ukraine.

Central Bank. Russia announced a likely further cut in interest rates and increased budget spending to help the economy adjust to Western sanctions. As a reminder, the Bank of Russia marginally lowered its key interest rate on April 8 to 17%. The country recorded 16.7% inflation in March and the World Bank expects the Russian economy to contract by more than 11% for the year 2022. The current rise in inflation is due to low supply, not high demand, according to Elvira Nabiullina. She repeated in the lower house of parliament that the goal is to bring inflation down to 4% by 2024, while the economy adjusts to Western sanctions. The latter mainly affect the financial market but should now “start to affect more and more the economy.” The main issues are the massive changes required in logistics and technology supply chains. Over time, logistics networks will be reconfigured and shortages of some consumer goods should disappear. Problems along technology supply chains will be more difficult to resolve.

Russia-China Relationship. Trade between Russia and China has surged since Moscow was cut off from Western imports. In 2022, January-March trade turnover between the two countries reached US$38.17 billion, up 28.7% from the same period last year, according to state news agency RIA Novosti. Russian imports from China rose 25.9% to US$16.44 billion, while its exports to China jumped 31% to US$21.73 billion in the first quarter of the year. In March alone, Russia exported US$7.84 billion worth of goods to the Chinese market. The bulk of Chinese imports from Russia are energy, mineral and agricultural products. China has been Russia’s largest trading partner for more than 10 years. Beijing has called on the West to lift the unprecedented sanctions imposed on Russia. Just days before the war in Ukraine, Vladimir Putin and Xi Jinping announced a “no-limits” partnership with plans to increase bilateral trade to US$250 billion by 2024.