By Tarik Cyril Amar, Website, 3/17/24

The current situation in the conflict between Ukraine – serving (while being demolished) as a proxy for the West – and Russia, can be sketched in three broad strokes.

First, Russia now clearly has the upper hand on the battlefield and could potentially accelerate its recent advances to achieve an overall military victory soon. The West is being compelled to recognize this fact: as Foreign Affairs put it, in an article titled “Time is Running Out in Ukraine,” Kiev and its Western supporters “are at a critical decision point and face a fundamental question: How can further Russian advances… be stopped, and then reversed?” Just disregard the bit of wishful thinking thrown in at the end to sweeten the bitter pill of reality. The key point is the acknowledgment that it is crunch time for the West and Ukraine – in a bad way.

Second, notwithstanding the above, Ukraine is not yet ready to ask for negotiations to end the war on terms acceptable to Russia, which would be less than easy for Kiev. (Russian President Vladimir Putin, meanwhile, reiterated in an important recent interview that Moscow remains principally open to talks, not on the basis of “wishful thinking” but, instead, proceeding from the realities “on the ground.”)

The Kiev regime’s inflexibility is little wonder. Since he jettisoned a virtually complete – and favorable – peace deal in the spring of 2022, President Vladimir Zelensky has gambled everything on an always improbable victory. For him personally, as well as his core team (at least), there is no way to survive – politically or physically – the catastrophic defeat they have brought on their country by leasing it out as a pawn to the Washington neocon strategy.

The Pope, despite the phony brouhaha he triggered in Kiev and the West, was right: a responsible Ukrainian leadership ought to negotiate. But that’s not the leadership Ukraine has. Not yet at least.

Third, the West’s strategy is getting harder to decipher because, in essence, the West cannot figure out how to adjust to the failure of its initial plans for this war. Russia has not been isolated; its military has become stronger, not weaker – and the same is true of its economy, including its arms industry.

And last but not least, the Russian political system’s popular legitimacy and effective control has neither collapsed nor even frayed. As, again, even Foreign Affairs admits, “Putin would likely win a fair election in 2024.” That’s more than could be said for, say, Joe Biden, Rishi Sunak, Olaf Scholz, or Emmanuel Macron (as for Zelensky, he has simply canceled the election).

In other words, the West is facing not only Ukraine’s probable defeat, but also its own strategic failure. The situation, while not a direct military rout (as in Afghanistan in 2021) amounts to a severe political setback.

In fact, this looming Western failure is a historic debacle in the making. Unlike with Afghanistan, the West will not be able to simply walk away from the mess it has made in Ukraine. This time, the geopolitical blowback will be fierce and the costs very high. Instead of isolating Russia, the West has isolated itself, and by losing, it will show itself weakened.

It is one thing to have to finally, belatedly accepted that the deceptive “unipolar” moment of the 1990s has been over for a long time. It is much worse to gratuitously enter the new multipolar order with a stunning, avoidable self-demotion. Yet that is what the EU/NATO-West has managed to fabricate from its needless over-extension in Ukraine. Hubris there has been galore, the fall now is only a matter of time – and not much time at that.

Regarding EU-Europe in particular, on one thing French President Emmanuel Macron is half right. Russia’s victory “would reduce Europe’s credibility to zero.” Except, of course, a mind of greater Cartesian precision would have detected that Moscow’s victory will merely be the last stage in a longer process.

The deeper causes of EU/NATO-Europe’s loss of global standing are threefold. First, its own wanton decision to seek confrontation instead of a clearly feasible compromise and cooperation with Russia (why exactly is a neutral Ukraine impossible to live with again?) Second, the American strategy of systematically diminishing EU/NATO-Europe with a short-sighted policy of late-imperial client cannibalization which takes the shape of aggressive deindustrialization and a “Europeanization” of the war in Ukraine. And third, the European clients’ grotesque acquiescence to the above.

That is the background to a recent wave of mystifying signals coming out of Western, especially EU/NATO elites: First, we have had a wave of scare propaganda to accompany the biggest NATO maneuvers since the end of the Cold War. Next Macron publicly declared and has kept reiterating that the open – not in covert-but-obvious mode, as now – deployment of Western ground troops in Ukraine is an option. He added a cheap demagogic note by calling on Europeans not to be “cowards,” by which he means that they should be ready to follow, in effect, his orders and fight Russia, clearly including inside and on behalf of Ukraine. Never mind that the latter is a not an official member of either NATO or the EU as well as a highly corrupt and anything but democratic state.

In response, a divergence has surfaced inside EU/NATO Europe: The German government has been most outspoken in contradicting Macron. Not only Chancellor Scholz rushed to distance himself. A clearly outraged Boris Pistorius – Berlin’s hapless minister of defense, recently tripped up by his own generals’ stupendously careless indiscretion over the Taurus missiles – has grumbled that there is no need for “talk about boots on the ground or having more courage or less courage.” Perhaps more surprisingly, Poland, the Czech Republic as well as NATO figurehead Jens Stoltenberg (i.e., the US) have been quick to state that they are, in effect, not ready to support Macron’s initiative. The French public, by the way, is not showing any enthusiasm for a Napoleonic escalation either. A Le Figaro poll shows 68 percent against openly sending ground troops to Ukraine.

On the other side, Macron has found some support. He is not entirely isolated, which helps explain why he has dug in his heels: Zelensky does not count in this respect. His bias is obvious, and his usual delusions notwithstanding he is not calling the shots on the matter. The Baltic states, however, while military micro-dwarfs, are, unfortunately, in a position to exert some influence inside the EU and NATO. And true to form, they have sided with the French president, with Estonia and Lithuania taking the lead.

It remains impossible to be certain what we are looking at. To get the most far-fetched hypothesis out of the way first: is this a coordinated bluff with a twist? A complicated Western attempt at playing good-cop bad-cop against Russia, with Macron launching the threats and others signaling that Moscow could find them less extreme, at a diplomatic price, of course? Hardly. For one thing, that scheme would be so hare-brained, even the current West is unlikely to try. No, the crack opening up in Western unity is real.

Regarding Macron himself, too-clever-by-half, counter-productive cunning is his style. We cannot know what exactly he is trying to do; and he may not know himself. In essence, there are two possibilities. Either the French president now is a hard-core escalationist determined to widen the war into an open clash between Russia and NATO, or he is a high-risk gambler who is engaged in a bluff to achieve three purposes. Frighten Moscow into abstaining from pushing its military advantage in Ukraine (a hopeless idea); score nationalist “grandeur” points domestically in France (which is failing already); and increase his weight inside EU/NATO-Europe by “merely” posturing as, once again, a new “Churchill” – whom Macron himself has made sure to allude to, in all his modesty. (And some of his fans, including Zelensky, a grizzled veteran of Churchill live action role play, have already made that de rigueur if stale comparison.) 

While we cannot entirely unriddle the moody sphinx of the Elysée or, for that matter, the murky dealings of EU/NATO-European elites, we can say two things. First, whatever Macron thinks he is doing, it is extremely dangerous. Russia would treat EU/NATO-state troops in Ukraine as targets – and it won’t matter one wit if they turn up labeled “NATO” or under national flags “only.” Russia has also reiterated that it considers its vital interests affected in Ukraine and that if its leadership perceives a vital threat to Russia, nuclear weapons are an option. The warning could not be clearer.

Second, here is the core Western problem that is now – due to Russia undeniably winning the war – becoming acute: Western elites are split between “pragmatists” and “extremists.” The pragmatists are as Russophobic and strategically misguided as the extremists, but they do shy away from World War Three. Yet these pragmatists, who seek to resist hard-core escalationists and reign it at least high-risk gamblers, are brought up short against a crippling contradiction in their own position and messaging: As of now, they still share the same delusional narrative with the extremists. Both groupings keep reiterating that Russia plans to attack all of EU/NATO-Europe once it defeats Ukraine and that, therefore, stopping Russia in Ukraine is, literally, vital (or in Macron’s somewhat Sartrean terms “existential”) to the West.   

That narrative is absurd. Reality works exactly the other way around: The most certain way to get into a war with Russia is to send troops to Ukraine openly. And what is existential for EU/NATO-Europe is to finally liberate itself from American “leadership.” During the Cold War, a case could be made that (then Western) Europe needed the US. After the Cold War, though, that was no longer the case. In response, Washington has implemented a consistent, multi-administration, bipartisan, if often crude, strategy of avoiding what should have been inevitable: the emancipation of Europe from American dominance.

Both the eastward expansion of NATO, programmed – and predicted – to cause a massive conflict with Russia and the current proxy war in Ukraine, obstinately provoked by Washington over decades, are part of that strategy to – to paraphrase a famous saying about NATO – “keep Europe down.” And the European elites have played along as if there’s no tomorrow, which, for them, there really may not be.

We are at a potential breaking-point, a crisis of that long-term trajectory. If the pragmatists in EU/NATO-Europe really want to contain the extremists, who play with triggering an open war between Russia and NATO that would devastate at least Europe, then they must now come clean and, finally, abandon the common, ideological, and entirely unrealistic narrative about an existential threat from Moscow.

As long as the pragmatists dare not challenge the escalationists on how to principally understand the causes of the current catastrophe, the extremists will always have the advantage of consistency: Their policies are foolish, wastefully unnecessary, and extremely risky. And yet, they follow from what the West has made itself believe. It is high time to break that spell of self-hypnosis, and face facts.

YouTube link here.

An old man with dementia can be expected to mix up the names of sons, wives, mistresses. If Iraq and Ukraine are in the same mental sock drawer for President Biden, we have a seriously under-noticed problem. You can watch Orf’s video for laughs, but this one is more horror movie than most of his productions. – Matt Taibbi

By Sarah Lindemann-Komarova, Medium, 2/22/24

Two years into an SMO that no one expected or wanted, it has become a fact of life with two fronts, the battlefield and economic. The focus here is on economics and life after two years of Western sanctions. The headline is “moving on”.

According to the Levada Center, 75% of respondents look forward to 2024 with “hope”, 8% with uncertainty”, and 13% with “anxiety”. Inflation is real and felt but people are coping in part because of a labor shortage that has forced salary increases in the private sector. Public sector service jobs continue to lag behind, one of the reasons there are 12 vacancies at the Manzherok Village school and no full-time medical staff in the clinic. There are plans to build “social housing” for these professionals but a local entrepreneur does not think this will make a difference, “No one is going to work for that kind of money now”.

Sanctions are rarely mentioned. If they are, it is to reflect on how scary it was when they were announced followed by admiration at the soft landing Central Bank Head Elvira Nabiullina has pulled off. There is no arrogance in this assessment, just pride and a little bit of wonder. One businessman expressed a different kind of wonder, why the Europeans are signaling to investors and depositors around the world that Europe is not a safe place. He moved his money after receiving threatening messages from a Swiss Bank. It is now in Kazakhstan, Dubai, Cyprus and he is also investing in Russia.

During holiday shopping at a mall in Novosibirsk, a 22 year old translates: Pull & Bear = Dub, Maag = Zara, LS = Levi’s, etc. The massive IKEA remains empty but the French Leroy Merlin and Auchan continue on as always although Leroy Merlin appears to be assuming more and more IKEA product lines. The high prices were mitigated by surprisingly great pre-holiday sales up to 70% in most stores.

The Chinese are rapidly cornering the car market as the French, Germans, and Americans, who had factories in Russia, left with options to buy back. Chery was making deals and the dealership was full. The $30,000 + Tiggo ProMax 7 could be had for $11,000 with a Renault Duster trade-in. Haval was not making deals. During the test drive, salesman Emile from Azerbaijian explained the differences between the Haval Dargo (Big Dog in Chinese) made in Tula, 193 km from Moscow, and the Dargo X made in China. The opening of the Tula Great Wall Motor Company factory in June 2019 was a big moment celebrated in person by Xi Jinping and Putin.

Emile, also talked about getting his degree in Novosibirsk and spending two summers in Ocean City Baltimore on the Work and Travel Program. He liked America and considered staying, but decided it wasn’t for him. His family is here and “you can make money in the US but you have to work all the time. Here, you can take a few months off and do other things you want to do.”

Two weeks before the SMO began, the new, improved Tolmachevo International Airport opened. At that time there were regular flights to Prague, Seoul, and various German cities. The expectation was that this major expansion would support growth in the role of Novosibirsk as the human and cargo hub between east and west. Instead, the billowing columns in the massive new entrance hall are now only serving international travelers to and from Central Asia, Yerevan, Baku, China, and the transit gateways to the West, Dubai and Istanbul. They are also welcoming vacationers exploring newly popular domestic tourism destinations like Kamchatka, Vladikavkaz, Kaliningrad, Gorno Altaisk, and Vladivostok.

The weekly flight to one of those destinations, Kaliningrad, now requires a detour over Baltic Sea international waters. The Region is surrounded by Europe (Lithuania and Poland) and the air space was closed in response to the SMO. In June of 22, Lithuania announced a ban on sanctioned goods traveling to Kaliningrad. Russia objected and a month later, the EU issued some new guidelines that allowed the goods to move.

Despite the precarious location and intensification of the conflict, there was no trace of that turbulence or other possible threats in October 2023. In Kaliningrad, people were moving in and moving on. The cab’s children’s car seat and toys were not evidence of a caring grandfather, but a career change. The 50+ driver’s previous lucrative business was transporting goods from Lithuania. He sold his trucks, bought a baby seat, and moved on.

After life as Prussia and Poland, Kaliningrad was the German City of Konigsberg until 1945 when it was given to the Soviet Union in the Potsdam Agreement. Over the next couple of years German residents were expelled and people from other parts of the USSR moved in. That flow has continued generating a steady population increase since 1950. It has long been the destination for Siberians who want to stay in Russia but live in Europe or escape the cold climate. A young cab driver from Novokuznetsk moved three years ago because of the cold and bad environment in his native coal mining region. Initially he wanted to move to Petersburg, but he couldn’t afford an apartment and didn’t want to get a mortgage. He ended up mortgage free and happy in Kaliningrad.

Kaliningrad was a world class destination for tourists before options were limited. 13th century on, pick an era and you will find the most eclectic mix of sites including where Napoleon slept, a Cold War era submarine, Kant’s grave, and Blues Brothers statues outside a café/museum with record players from 1840–1940. There is also the resort town Zelenogradsk. Founded in 1252, in 2010 it branded itself a “cat town” and now features cat murals, cat traffic lights, cat food machines, even the war memorial had a white cat lounging by the flame.

On the way to the Kaliningrad flea market, selling everything from fish shot glasses to German helmets with bullet holes, the cab driver boasted that his Grandmother was one of the first people to move here in 1946. He goes on to say that everything is great. Yes, housing is twice as expensive but there is plenty of work if you are ready to work. He had no negatives about the current development boom. He is proud and excited for his 4th generation daughter’s future with huge investments going into culture, including affiliates of the Tretakov Gallery and Bolshoi Theatre, and education with apartments for teachers.

Others are less enthusiastic complaining about change, getting used to change, and the taming of what once were wild places. The gripes about the prices and congestion that come along with being a booming tourist destination. One cabbie/fisherman cited 4 hour summer traffic jams to get on the Curonian Spit, a 98 km. forested sand dune separating the Baltic Sea from the Curonian Lagoon. Half of the Spit is a National Park in Russia and the other half is in Lithuania.

Even the more ancient relics are coated with references to the Great Patriotic War (WWII). The 14th Century Konigsberg Cathedral was jam packed on a Tuesday night, hundreds of people paid 500 rubles to hear an organ concert. The building was partially destroyed, along with most of the City, by Allied bombing in August 1944. Passing remnants of forts and churches outside the City, the guide explained that none of the old buildings were damaged by bombs. Their semi-demolished state was the result of local inhabitants taking the bricks to build homes after the war. Most haunting are the remains of the Allenberg Psychiatric Hospital. It was the best in Germany before an SS Division affiliated with the Dachau Concentration Camp moved in and used it for experiments.

The path to moving on in Russia is often viscerally informed by national history. Two women reminded me of this when we discussed sanctions. One, born around the time Brezhnev and Nixon signed the first Strategic Arms Limitation Treaty, is a corporate executive. The other was born during Perestroika and recently moved her yoga business from Novosibirsk to Altai. They both grew up sharing bedrooms with brothers, sleeping on foldout couches with a table to do homework.

“40 jars of cucumbers, that was our record”, the younger woman boasted about summers spent helping her Grandmother in a Kazakhstan village.

The other responded describing her great-grandmother, “She never ever threw anything out. If someone left a little piece of bread, she would take it, dry it into a crouton, store it in a bag hanging from the kitchen door, and when others had bread, she would eat from the bag.”

Moving on is also bounded by the status quo and no one expects the sanctions will end even when the shooting stops. People here are more comfortable with the idea that nothing is perfect, there is always a work around so “Plan B” is built into the hardware, you adapt and keep going. Even today, for many like the corporate executive, the legacy of the impact from past western invasions came first hand, “There were two wars, one after the other, and there were no men so she had to be tough”.

Part Three: The Social Contract and the Next Gen

By Andrew Korybko, Substack, 3/18/24

President Putin declared in his re-election speech early Monday morning that Kiev’s cross-border terrorist raids and use of long-range Western weaponry to strike deep into Russian territory could “force” his country to establish a “sanitary zone” that he also described as a “security zone”. He first spoke about this in January, which was analyzed here, and his latest remarks follow former President and incumbent Deputy Chair Security Council Chairman Medvedev’s talk about Russia’s “strategic borders”.

The larger context within which this scenario is being contemplated is the prospect of a conventional NATO intervention in Ukraine via a “coalition of the willing” that would likely be led by France, the UK, and Poland if it happens with the predictable participation of the Baltic States as well. At the same time, CNN, the Wall Street Journal, and the Washington Post all finally admitted that Russia won the “race of logistics” with NATO after the New York Times was the first to acknowledge this last September.

In other words, the “worst-case scenario” from Kiev’s perspective might soon materialize whereby Russia’s lead in the “race of logistics” results in a breakthrough across the Line of Contact (LOC), which could prompt the “worst-case scenario” from others’ perspective of a conventional NATO intervention. The risks of sparking World War III by miscalculation would spike unless there’s a tacit understanding between NATO and Russia over how far west and east each would respectively go in that scenario.

Therein lies the importance of President Putin once again bringing up the possibility of establishing a “sanitary/security” zone in Ukraine since a compromise could be for the Ukrainian Armed Forces (UAF) to carry out as orderly of a retreat as possible over the Dnieper if Russia breaks through the LOC. Russia would then go as far as the administrative borders of its newly reunified regions short of crossing the Dnieper while NATO would stay west of the Dnieper as peace talks resume to formalize this deal. 

In that way, the risks of World War III being sparked by miscalculation could remain minimal, while the US and Russia could then hash out the details of Ukraine’s asymmetrical partition. NATO would establish a “sphere of influence” over the western half of the country, the West would tacitly accept Russia’s control over the four former Ukrainian regions that reunified with it in September 2022, while the rest of eastern Ukraine would remain under Kiev’s political control but become a demilitarized buffer zone.

The merits of this proposed compromise are that it meets some of each side’s interests but leaves space for the other party to agree to this by not accomplishing either of their maximalist goals. Russia secures its newly reunified regions and establishes a sanitary/security zone in the rest of eastern Ukraine, while Kiev clings to the alleged “legitimacy” of its pre-2014 borders and NATO formalizes its presence in the country. NATO and Russia would then balance each other along the new LOC and the Belarusian border.

Russia would have the advantage in the event that the Korean-like armistice that former NATO Supreme Commander James Stavridis suggested last November is broken since the demilitarized region in eastern Ukraine directly abuts Belarus, pre-2014 Russia, and its newly reunified territories in the south. Therein lies the reason for formalizing NATO’s presence in the western half of the country in order to reassure the bloc that Russia wouldn’t exploit this position to strike first lest they then retaliate in Belarus.

President Putin also acknowledged the presence of NATO forces in Ukraine during his re-election speech, hence the proposal for formalizing this in a way that reduces the risks of World War III by miscalculation such as if they conventionally intervened in a “Race to the Dnieper” if the LOC collapses. This could happen in parallel with the UAF retreating as orderly as possible over the Dnieper to demilitarize the rest of the eastern Ukraine in that event while Russia stays within its new regions’ borders.

This plan is admittedly dependent on: 1) an impending Russian breakthrough across the LOC; 2) that in turn prompts NATO to participate in a “Race to the Dnieper”; 3) which could raise the risks of World War III being sparked by miscalculation in a sequence of events that no responsible policymaker wants. It could of course be that no such breakthrough occurs, NATO doesn’t conventionally intervene if one does, or it intervenes with the intent of “escalating to de-escalate” by openly flirting with World War III.

If the military-strategic dynamics remain on track and the West is still led by “rational” leaders with an interest in preventing a nuclear apocalypse, then President Putin’s “sanitary/security zone” could lay the basis for a potential compromise aimed at responsibly managing Ukraine’s asymmetrical partition. A trusted mediator like the Pope and/or India should be relied upon by Russia to probe the West’s interest in this, which the US might be receptive to as it prepares to “Pivot (back) to Asia” to contain China.

The Bell, 2/23/24

Russia’s militarized economy is storing up problems for the future

Russia’s economy has demonstrated both resilience in the face of Western sanctions, and flexibility in restructuring trading relationships and domestic demand. Since the Kremlin sent tanks across the border into Ukraine in 2022, China has replaced the European Union as Russia’s primary trading partner and tech supplier, while, domestically, the increase in military spending has given a major stimulus to the broader economy. 

Superficially, military spending and buoyant revenues from hydrocarbons mean the Russian economy can appear to be flourishing. But this is not a healthy sort of flourishing, and economic growth is masking a decline in productivity, rising currency instability, fiscal difficulties, labor shortages and a reversion to less sophisticated technologies. 

Budget: there’s still money to pay for the war

President Vladimir Putin has committed record sums to Russia’s war in Ukraine: in 2022 and 2023, spending topped 30 trillion rubles. Five years ago it was half that size.

In this way, the Russian authorities have changed how demand is distributed in the economy. Now, the greatest demand comes from an expanded defense sector. As in Soviet times, the war has been a financial boon for the military-industrial complex and related industries, the armed forces and their families, and all parts of the public sector that are connected with defense and security.

High levels of public spending, which also includes preferential loans, prompted the Central Bank to hike interest rates to 16%. It also drives inflation.

It’s more than likely that these trends will continue through 2024, and we will see the level of military and national security spending exceed 8% of GDP for the first time in history. Alongside oil revenues, Russia’s economic fortunes are now tied to the military and the defense industry. We looked in detail at the consequences of this here.

Labor market: nobody to hire

The militarization of the economy has been the primary driver of rising demand on the labor market. And this rise was accompanied by a decline in supply as hundreds of thousands of able-bodied Russians went to the front, or fled the country. As a result, Russia is experiencing a labor shortage. This benefits workers, who can command higher salaries. As a result, real wages and disposable incomes in Russia are on the rise.

However, this growth is relative as it follows a significant fall in 2022. In fact, real wages and disposable incomes have only just rebounded to 2020 levels. 

In addition, high demand for workers and the difficulties of accessing Western technology means Russia saw a record 3.6% fall in labor productivity in 2023 (second only in this century to the 4.1% fall recorded in 2009 amid the global economic crisis). Over the last two years, the average Russian has been earning more and producing less. 

The ruble: unprecedented volatility

A widely fluctuating exchange rate has become the new normal. At different points over the last two years, you could buy a U.S. dollar for 50 rubles, and also for 100 rubles. After the abolition of Russia’s “budget rules,” the exchange rate has been determined solely by trade flows. As a result, in summer 2023, when export revenues hit a ceiling and demand for imports continued to rise, the ruble collapsed to 100 rubles against the U.S. dollar.

In an attempt to exert control, the authorities forced exporters to sell foreign currency earnings. Strictly speaking, neither the government, nor the Central Bank, has an exchange rate target, so it is wrong to talk about abandoning a floating ruble. Equally, though, it is incorrect to assume that the current rate is entirely market based.

International trade: replacing Europe with China and the Global South

Over the last two years, Russian foreign trade has undergone changes that are comparable in their scale with those seen in the 1990s. We’ve seen a transformation of both logistics, and the geography of imports and exports. This is clearly illustrated by two graphs published by economic research outlet Econs.

Technological and financial sanctions imposed by the West at the start of the war obliged Russia to replace imports from the EU and other developed countries. The main source of imports has shifted from Europe to China, which now provides 45% of Russia’s imports (up from 27% before the war). Developed economies dropped from providing 47% of Russian imports to just 17%. However, import substitution has not been total. Parts and components now make up a smaller proportion of overall imports and this implies a decline in localized production – instead of assembling cars, for example, Russia is back to purchasing ready-made ones.

Russia’s raw material exports have responded well to the loss of Western markets, and have been quickly diverted to other countries.

Replacing the U.S. dollar with the Chinese yuan

Conflict with the west has forced Russia into China’s embrace (we recently discussed this in detail here). In just two years, trade in the yuan on the Moscow Exchange went from almost nothing to nearly a third of the market. In December, 35.8% of Russia’s exports were purchased in yuan, along with 37% of imports. At the same time, exports in foreign currencies reached their highest level since January 2022 ($2.8 billion of the total $5.4 billion was settled in yuan). In 2023, $68.7 billion was held in yuan in Russian bank accounts, compared with $64.7 billion in dollars. Lending to companies in yuan was up 3.6 times to $46.1 billion in 2023, largely due to the conversion of debt from dollars and euros.

Although a substantial part of Russia’s banking sector is under Western sanctions, a chunk of export-import payments still happen in U.S. dollars and euros. However, after U.S. President Joe Biden’s decree on secondary sanctions, Russian businesses have increasingly encountered problems with transactions in “friendly” countries such as Turkey, the UAE and China. This means that the yuan will be used even more.

Why the world should care

Amid the war in Ukraine, the Kremlin has managed to continue to acquire essential chips and semiconductors via third countries, and it has successfully switched its oil exports to Asian buyers. However, the current stability is not likely to endure: in 1-2 years, the structure will begin to wobble due to accumulated imbalances, and possible social problems. [It will be interesting to see if this prediction proves true in the next year or two. – Natylie]