Managing Alternatives: How Are Russia and China’s Economies Growing “Positively” Despite Western Sanctions?

Economic sanctions have become a primary weapon in the conflicts between major powers, or against other countries, to respond to what they see as violations of international laws and norms. Sanctions aim to pressure targeted governments to curb their rising economic influence, encourage democratic transitions, halt the development of nuclear programs, or limit human rights abuses. The forms of economic sanctions vary, ranging from a full ban on bilateral trade relations or trade in specific goods, to restrictions on certain sectors like arms purchases or aviation, freezing financial assets, reducing foreign aid, and more.

Despite the increasing use of sanctions by countries and international organizations in various forms, many of the targeted economies have managed to achieve positive growth rates. This has sparked international debate about the effectiveness of sanctions in achieving their goals, particularly in changing the behavior of the targeted countries.

This analysis explores the effectiveness of economic sanctions and trade and technology disputes in creating a tangible economic impact, with a focus on the cases of Russia and China. Both countries have managed to navigate exceptional economic conditions and achieve good economic growth rates.

The Russian Experience:

Western countries have imposed escalating sanctions on Russia since the outbreak of the Russia-Ukraine war in February 2022, targeting vital sectors such as finance, banking, trade, energy, transportation, technology, and defense. These sanctions also restricted Russia’s access to its foreign currency reserves, particularly U.S. dollars, and froze the assets of many Russian businessmen and oligarchs. Furthermore, they limited the access of some Russian banks and companies to European and American capital markets, banned transactions with Russian central banks, and excluded some Russian banks from the global SWIFT system. Consequently, :Russia became the most sanctioned country in the world, as shown in the following table

Some key points about this data:

1. Russia became the most sanctioned country in the world following its invasion of Ukraine in February 2022, surpassing Iran which previously held that position[1][3].
2. The number of sanctions on Russia increased dramatically, from around 2,754 before the invasion to 18,772 by late 2023[1].

It was expected that the Ukraine war and the subsequent economic sanctions on Moscow would exert direct economic pressure. However, the Russian economy’s growth rate rebounded after a sharp decline in 2022, as shown in the following table.

It’s important to note that this recovery has been largely driven by increased government spending, particularly on the military and war-related industries. The sustainability of this growth model is questionable, and some economists express caution about its long-term viability.

This chart shows that Russia’s economic growth rate reached 3.1% in 2023, compared to a contraction of 1.2% in 2022, with growth slowing to 1.3% by 2024. This suggests that the growth recorded in 2023 was driven by a low annual comparison base. Additionally, in January 2024, the International Monetary Fund (IMF) raised its forecast for Russia’s economic growth rate for the current year to more than double, from 1.1% in October 2023 to 2.6%. The growth of the Russian economy can be explained by the following factors:

Diverse Trade Alternatives: Countries targeted by economic sanctions usually seek other trade alternatives, shifting their focus to new markets. When the supply of one commodity is cut off, the concerned countries try to obtain it elsewhere. Consequently, Russia sought alternative destinations for its exports away from the European Union. Russian exports to European countries decreased by 68% in 2023 to $84.9 billion, with imports declining by 12.3% to $78.5 billion. In contrast, Russian exports to Asian countries (especially China and India) increased by 5.6% in the same year to $306.6 billion, while imports rose by about 29.2% to $187.5 billion. This allowed Russia to maintain a trade surplus of $140 billion in 2023, with exports amounting to $425.1 billion and imports to $285.1 billion.

Shift in Russian Energy Trade: The world has witnessed a shift in oil and natural gas trade, which are among the most targeted sectors by sanctions, as Russia sought to rely on national currencies in trade with other countries and sell energy products at a discount of around 30% compared to global market prices. As a result, Russian oil exports to EU countries fell from 3.3 million barrels per day in 2021 to 0.6 million barrels per day in 2023, while exports to China and India increased from 1.6 million barrels per day and 0.1 million barrels per day in 2021 to 2.3 million barrels per day and 1.9 million barrels per day in 2023, respectively, as shown in the following table.

This data shows a declining trend in Russian oil exports over the three-year period. In 2021, Russia exported 8.0 million barrels per day. This decreased slightly to 7.8 million barrels per day in 2022. In 2023, there was a more significant drop to 6.7 million barrels per day.

Sanctions Evasion: Targeted countries often find informal ways to evade or circumvent sanctions, such as through networks of shell companies and intermediaries abroad, creating alternative channels and institutions for international financial transactions, and using the names of other entities to open fake bank accounts to access international markets. In this regard, Moscow succeeded in using a “shadow fleet” of tankers and non-Western insurance companies to circumvent Western sanctions.

China’s Adaptation:

U.S.-China relations have witnessed significant tension in recent years, especially during former U.S. President Donald Trump’s administration, with tariffs and sanctions imposed on Chinese companies to revive domestic manufacturing, confront what Washington describes as human rights abuses, and tighten the grip on China’s technology sector, claiming that Beijing exploits telecommunications equipment for spying on the U.S. and its allies.

Despite this, China has managed to maintain positive, albeit slowing, growth rates. China is expected to be the largest contributor to global growth over the next five years, accounting for a larger share than the entire G7 combined, thanks to increased demand for services, investment in manufacturing, and infrastructure enhancement. The lack of significant impact from trade and technology disputes on China’s economy can be attributed to the following factors:

Launch of Stimulus Packages: Beijing relies on stimulus packages to boost and revitalize the domestic economy to achieve the government’s growth target of 5% by the end of 2024. The most recent of these packages was in March 2024, when the Chinese government announced its intention to issue an additional trillion yuan ($137 billion) in treasury bonds for infrastructure projects, potentially raising the budget deficit to the maximum limit set by Chinese authorities at 3%. This reflects China’s growing concern about the slowdown in its economic growth in the coming years.

Alternative Financial Networks: Beijing is trying to find alternative pathways to sustain its economic growth despite ongoing geopolitical tensions with Western countries. China has leveraged the Ukraine war to take steps to counter the dollar’s dominance in the global economic system. China discussed linking the Russian SPFS system to its Cross-Border Interbank Payment System (CIPS), launched in 2015, to compete with the Western CHIPS system, providing clearing and settlement services for cross-border payments and trade in the Chinese currency, the renminbi. Additionally, China integrated the Mir payment system with its UnionPay counterpart.

Expanding Influence: Over the past years, China has strengthened its position in the global economy and expanded its influence to Africa, Asia, and Latin America to counter increasing tariffs on its trade with the U.S. Through diverse trade partnerships, China has become the largest trading partner for many countries worldwide. It has also joined new economic blocs, invested more in emerging and developing economies, and succeeded in becoming a leader in rare earth production, renewable energy equipment, chip technology, ports, and maritime shipping networks, granting it geo-economic influence over international sea routes.

Unfavorable Context: While Beijing strives to maintain positive growth rates, the IMF, in its latest report from April 2024, predicted a slowdown in China’s economic growth to 4.6% this year and 4.1% by 2025, as shown in the following table.

This table is based on the data provided in search result , which shows GDP growth projections for China from 2020 to 2025. The values for 2020-2023 are actual reported figures, while 2024 and 2025 are projections.

The IMF attributed the downward revision of China’s economic growth forecasts to factors unrelated to U.S. sanctions or trade and technology disputes, indicating that the Chinese economy could return to high growth rates once these factors are resolved. The global economic slowdown, weak global demand for exports, and the ongoing contraction in the real estate sector are among the key factors negatively affecting China’s economy. The IMF projected a 50% decline in demand for new housing in China over the next decade, which could undermine economic growth rates.

Conclusion:
Russia and China have managed to achieve positive growth rates despite exceptional circumstances, including economic sanctions against Moscow due to its war in Ukraine and tariffs and efforts to curb Beijing’s technological superiority. This suggests that economic sanctions may not be effective due to their mismatch with the size of the targeted economy and the lack of participation from enough countries in imposing them. This leaves room for the targeted economies to find alternative markets for their foreign trade.

Citations:
[1] https://tradingeconomics.com/russia/full-year-gdp-growth
[2] https://tradingeconomics.com/russia/gdp-growth-annual
[3] https://www.bofit.fi/en/monitoring/weekly/2024/vw202407_1/
[4] https://www.voanews.com/a/russia-economy-grew-in-2023-despite-war-and-sanctions/7478952.html
[5] https://www.castellum.ai/insights/russia-is-now-the-worlds-most-sanctioned-country