Foe and Friend

Plenty of ink has been spilled over the consequences of the invasion of Ukraine. Food and energy have (rightly) garnered the vast majority of the attention, and that is unlikely to change any time soon. The reasoning is fairly straightforward. It takes time to pivot and reshuffle the global energy, metals, and food markets. The temporal element to the necessity realign global markets from “foe to friend”. 

The transition for “foe to friend” is critical and it is relevant for Russia too.

Mineral products (read “oil and gas”), metal, and agriculture are the primary exports from both Ukraine and Russia. And those make the ongoing conflict problematic for a global economy that was not designed for this type of structural break in the flow of trade. 

It is also worth noting that sanctions are enacted quickly, but do not tend to be lifted in a timely manner. The need to reassess and secure different trading partners for many of the most exposed countries reliant on now sanctioned Russian goods. 

There is significant overlap in the country exposure as well. But there is also a subtle standout between the two that is notable – India. In the pre-invasion era, India was not a significant trading partner of Russia (and on a relative basis was more important to Ukraine). Following the invasion, India has been a buyer of heavily discounted Russian Ural crude. India was not a large purchaser of Russian crude pre-invasion, instead buying much of its crude from Saudi Arabia. It is notable for a few reasons including the consequences in the longer-run of shifting to Russian oil over Saudi oil.

In a world that has broadly cutoff Russia from goods and services, China is one partner still conducting trade with Russia. As supply chains adjust and rework themselves to avoid trade with Russia, it will be intriguing to see how the dynamics between China and Russia evolves. Partly, it will be telling due to the isolation of the Russian economy, and the general inability to purchase goods or services from most of the major global economies. But also telling on the level of restraint Chinese companies decide is necessary to remain on the “good side” of their Western trading partners. 

The shifting of supply chains is only just beginning. The persistent lockdowns of various Chinese regions is a further catalyst. That will eventually come to an end and slowly dissipate. But the sanctions regime is unlikely to abate in a similar timeframe. Shifts in the procurement of energy and food supplies are one side of the equation, and so is the story of where and what Russia can source . Watching the trade dynamics for Russia is also important for understanding the extent of the reworking of the global economy. 

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