The course of the ruble: how the EAEU develops trade despite sanctions

By Dmitry Alekseev

The mutual trade turnover of the Eurasian Economic Union (EAEU) in national and friendly currencies in 2023 will amount to 90%, the Russian Foreign Ministry predicts. The department is confident that dollars, euros and yen are unreliable currencies, and the implementation of EAEU projects should not depend on the mechanisms for servicing international economic relations controlled by the United States and other unfriendly countries. To what extent mutual trade between the EAEU countries compensates for the consequences of sanctions and how it affects the Russian ruble, Izvestia investigated.

Retired volumes
Practice has shown that the mutual trade of the EAEU countries is able to compensate for losses from the restrictions of unfriendly states on trade with Russia and Belarus. A significant flow of goods is formed from Kazakhstan, Armenia and Kyrgyzstan to Russia . We are talking about both parallel imports to Russia and changes in supply chains caused by difficulties in transferring money, Izvestia was told at the Russian University of Economics. G. V. Plekhanov. According to the Institute’s estimates, the volume of imports of Russian goods by Kazakhstan, Armenia and Kyrgyzstan at the end of 2022 remained at the same level: about $22 billion. At the same time, positive dynamics was noted with Armenia and Kyrgyzstan.

In turn, the flow of goods from these three countries to Russia deserves more attention, economists emphasize.

For example, Western sanctions affected trade to the greatest extent in the group of machinery and equipment. The volume of deliveries from unfriendly countries, which were among the main importers of the Russian Federation, decreased by three times, says Associate Professor of the Department of International Business of the Russian University of Economics. G. V. Plekhanova Anastasia Prikladova.

“Germany alone limited exports to Russia by almost $10 billion. At the same time, the EAEU countries increased the volume of supplies of machinery and equipment to the Russian Federation by at least $2.5 billion, ” the expert explains.

However, trade within the EAEU replaced the retired volumes of products by only 5%, that is, it is still difficult to call trade compensating, experts say. There are two main reasons for this: the limited technological potential of the EAEU economies and the risks of secondary sanctions against them from unfriendly countries.

Impact of the EAEU on the Russian ruble
As for the monetary and financial aspect of relations within the association, it is determined by the state of foreign trade relations, experts explain. According to various data, in the structure of Russia's foreign trade, the EAEU accounts for about 8%, while payments are made mainly in rubles. The expected increase in the share of national currencies in mutual settlements from 76% to 90% will affect only 1% of Russian trade. According to Anastasia Prikladova, this most likely will not have a significant impact on the Russian ruble either towards strengthening or weakening.

The day before, Russian Foreign Minister Sergei Lavrov said at MGIMO that the mutual trade turnover of the EAEU in national and friendly currencies will reach 90% in 2023. In 2022, this figure was 76% , the head of the Russian diplomatic department noted. According to Lavrov, the implementation of EAEU projects should not depend on the mechanisms for servicing international economic relations controlled by the United States and its allies.

According to the estimates of the Eurasian Development Bank (EDB), last year Armenia, Belarus, Kazakhstan and Kyrgyzstan increased their exports to the EAEU by $9.8 billion (1.4 times), of which to Russia — by $9.5 billion . the significance of the market for Armenia and Kyrgyzstan - Yerevan increased exports from 29.3 to 46.8%, Bishkek - from 28.8 to 65.8%.

Obviously, trade within the EAEU, which includes Russia, Belarus, Kazakhstan, Armenia and Kyrgyzstan, plays an important role, because the potential of the EAEU is the market of countries with a population of 184 million people . Trade within the EAEU significantly contributes to the expansion of the internal market of the Commonwealth and the development of trade flows, as well as the more diversified development of the Russian economy and the reduction of dependence on other trading partners.

The absolute advantage of integration is that all members of the EAEU receive priorities, emphasizes Olga Panina, Associate Professor at the Financial University (FU) under the Government of the Russian Federation. Among the advantages are further reduction of trade barriers, systematization and harmonization of norms and rules, and most importantly, closer cooperation in infrastructure and logistics, explains the economist.

“The increase in trade volumes within the union also leads to more favorable conditions for the development of the domestic market of each of the countries,” Olga Panina believes.

According to the analyst overcoming bureaucratic barriers, creating conditions for the development of competition, comprehensive support for entrepreneurship (not only within the union, but also in each country that is a member of it) will help to maximize the potential of the EAEU by overcoming bureaucratic barriers, creating conditions for the development of competition - all this will further ensure an influx of investments.

Commodity-geographical imbalance
However, acting Head of the Department of World Economy and International Economic Relations of the State University of Management (SUM) Evgeny Smirnov looks at the Eurasian process a little differently. According to the expert, the EAEU can hardly compensate for Russia's loss of the European market. If the EU countries in 2021 accounted for more than 35% of Russian turnover, then the EAEU countries, even taking into account the significant growth during the NWO days, account for only 10% of Russian foreign trade, explains Evgeny Smirnov.

Trade between Russia and the EAEU countries is unbalanced both in terms of goods and geographically . Firstly, more than half of the trade turnover of the Union is export-import deliveries between Russia and Belarus. Secondly, most of the intra-union deliveries are exports of Russian energy carriers, ” he notes.

Thirdly, for the EAEU countries, Russia is a key foreign trade partner, but for Russia, most of the Union countries are not key partners, their share in the Russian foreign trade turnover is insignificant. Finally, over the past decade, the industrial production of the EAEU countries has grown faster than their mutual trade, and this demonstrates the weak orientation of the economies of the Union countries towards mutual trade in finished products .

Parallel imports and supply chains
At the same time, experts admit that under sanctions, the potential for mutual trade is growing and will continue to grow. At least because, in the context of the current changes in global supply chains, Russia has significantly increased the import of many goods: they are re-exported through parallel imports, mainly through Armenia and Kazakhstan. However, this trade model is hardly perfect, since these re-exporting countries always run the risk of being subject to Western sanctions.

— The growth of trade within the EAEU should not be regarded as a significant trend in terms of the strengthening of the ruble, since, as already mentioned, the share of the EAEU countries in the Russian foreign trade turnover is still low. The growth of settlements in national currencies up to 90% is undoubtedly a good sign, but in 2021, over 70% of settlements accounted for national currencies,” Evgeny Smirnov explained.

In turn, Olga Panina believes that trade within the EAEU may have a certain impact on the strengthening of the ruble , but this influence is not so much a determining factor as a complementary one. The ruble exchange rate is largely influenced by oil prices, macroeconomic stability, the Central Bank rate and confidence in the economy.

“Trade can indirectly help strengthen the ruble, as it improves the balance of payments, creates demand for the ruble, leads to the strengthening of the regional economy and, therefore, strengthens confidence in the ruble,” the expert emphasized.

Economists agree that the development and promotion of the EAEU (as well as the BRICS) is more of a political step, demonstrating the US and the EU the ability to limit Western expansion and build alternative mechanisms for multilateral cooperation. It would be very useful for other friendly countries (for example, Iran and China) to closely integrate with the EAEU. Such a step, according to experts, could be a preferential trade agreement, after which one could talk about a fundamentally different economic weight and influence of this integration association, as well as its adaptability to current challenges.
This article originally appeared in Russian at iz.ru and was translated and edited by Rhod Mackenzie