Russia loses from its war in Ukraine, even if it wins. China wins from Russia’s war in Ukraine irrespective of whether Russia wins or loses. The US also wins from both a Russian victory and a defeat, but its win is less if Russia wins. And everyone else, especially Ukraine, has already lost regardless of the outcome.  

Even if Russian President Vladimir Putin gets his precious security deal, he has already condemned Russia to stagnation for as long as he remains in office. The Russian people have not only lost; they have lost most of what they have gained in the last twenty years.  

In the short term, Russia’s growth outlook has already cut from the 2.4% growth predicted in 2022 to somewhere between 8% and 15% contraction, according to the latest CBR survey of professional economists.  

As bne IntelliNews has reported many times, by building his fiscal fortress that was supposed to sanction-proof Russia, the real cost of sanctions has been to reduce Russia’s growth potential to a mere 2% – well below the global growth rate. That means the economy was already going to fall slowly further and further behind the rest of the planet. With all the new sanctions Russia’s growth faces even bigger impediments that have cut its expansion potential even further. The jury remains out on as to how bad it is, but some analysts suggest 1%, others nothing, and more say growth will be negative from here on in.  

But Putin doesn't care. As bne IntelliNews reported in an op-ed “has Putin gone mad,” for him, ensuring Russia’s security now appears more important than providing prosperity for his people.  

Of course the biggest looser of all is Ukraine. The cost of the war for what was already one of the poorest countries in Europe is impossible to measure yet, but the range already extends from the conservative $30bn worth of damage, more than the country’s entire hard currency reserves, to $565bn mentioned by Ukraine’s Prime Minister Denys Shmyhal on March 16, almost three times more than the entire value of the country’s economy. For comparison, the IMF’s recently stand-by agreement (SBA) was for $5bn over two years.  

China win-win

China has the most skin in the game, even though it is not involved in the war in any way.  

“The big winner from this showdown will be China,” Chris Weafer, a veteran of the Russian markets and CEO of Macro Advisory, told bne IntelliNews in a recent webcast.  

“China has been able to gain access to material supply and greatly strengthened its secure supply for its economy – energy or other materials – and they are now coming across land on very secure lines from the world’s biggest producer. Every time a western company is not willing to invest in a Russian project then China is there with its chequebook open – if it suits the Chinese national interest.”

Christof Ruehl, the former chief economist for the World Bank in Russia and then for BP, also pointed out in another recent webcast that if the West successfully cuts Russia off from the Western energy markets then it will have to sell oil, and especially gas to Asia, at deeply discounted prices. While sanctions on Russian oil exports will be difficult to enforce, as it can be simply put on a ship and sent via ports like Singapore back into the western markets, selling gas will be much harder; Russia currently sells about 70% of its gas to the EU and earns some $35bn a year from these exports.  

However, there are already plans for a Power of Siberia 2 gas pipeline that would connect the giant Yamal gas fields in Russia’s Arctic to China and another route via Mongolia, the Soyuz/Vostok pipeline, that also hooks Russia’s hydrocarbon fields into the Chinese market. But both will take time and a lot of money to build.  

“The problem is that Russia won’t have any other buyers, so the Chinese will be able to get the same gas, but at a deep discount,” Ruehl told bne IntelliNews.  

The first signs of these new “prisoner” deals have already started to appear. On March 15 India said it may take up a Russian offer to buy crude oil and other commodities at a considerable discount, as Russian commodities are seen as toxic amid its military invasion of Ukraine, Reuters reported citing two unnamed Indian officials. 

"Russia is offering oil and other commodities at a heavy discount. We will be happy to take that," one of the Indian government officials told Reuters.

According to Reuters, India would also want to keep Russia on board as its key-trading partner, despite western attempts to isolate Moscow through sanctions. India imports 80% of its oil needs, but usually buys only about 2-3% from Russia. However, with prices soaring New Delhi is looking to increase cheap supplies from Russia.

Western observers doubted that Russia would forego its profits and had assumed the obvious commercial catastrophe of sanctions would deter the Kremlin from attacking Ukraine. But that has been to misread Putin. The West is run on the basis of the Washington consensus where individual happiness and prosperity is at the core of the ideology. However, as bne IntelliNews has argued, Russia is driven by the Moscow Consensus, where the strength and security of the state is at the centre of the ideology and citizens are expected to sacrifice some of their prosperity for the sake of the Motherland.  

Ruehl speculates that Moscow has been looking at the successful Chinese model, which is run along exactly the same lines – arguably to an even more extreme extent – and has decided this model is a workable alternative to Western liberalism.  

China looking after number one

Thanks to the two competing outlooks, the resulting split between East and West starts to look like a return to the Cold War, but with China and Russia much more closely allied this time. However, that is to ignore one crucial change. The Cold War was a clash between two contradictory ideologies: capitalism vs communism. While the idea of promoting the state over the citizens is a holdover from the Soviet-era, the framework that this system is built on has been completely replaced: socialism has been abandoned and replaced with capitalism.  

That has created an important restraint on China’s relationship with Russia. While Beijing sympathises with Putin’s geopolitical objections to the US-led unipolar world and agrees a multi-polar setup is preferable, it is not prepared to wreck its increasingly important commercial ties with the West to overtly support Russia’s aggression. China is still a communist country in name, but it is now also very interested in cash too. As bne IntelliNews reported, Beijing has to strike a delicate balancing act between these two conflicting poles.  

One place this is illustrated is despite the growing number of joint military exercises Beijing has conducted with Moscow in recent years, the two countries have yet to call each other “allies” in the formal sense. Similarly, when the UN Security Council (UNSC) voted to condemn Russia’s invasion of Ukraine, China only abstained from the vote. It was up to Russia to veto it. (Notably India also abstained from voting for much the same reasons.)  

Would China welcome Russia’s defeat in the Ukraine war?

Beijing supports Russia’s demand that the world should run on multipolar lines, but it also has a vested commercial interest in seeing Russia defeated in the war against Ukraine, Csaba Barnabas Horvath wrote in an opinion piece in Geopolitical Monitor.  

“Knowing the history of Sino-Russian relations, a Russian victory doesn’t seem to be in China’s interest. What is in China’s interest is a prolonged war of attrition, draining Russia’s resources as much as possible, weakening it as much as possible, meanwhile isolating it from the West as much as possible, and with a Russian defeat at the end,” Horvath argued.  

Russia has never wanted to be China’s junior partner, but a global power in its own right. And ironically the Kremlin sees the best way to achieve that goal as in partnership with Europe, not China. The Russians don't trust the Chinese.  

bne IntelliNews asked then First Deputy Prime Minister Arkady Dvorkovich in an interview if Russia’s long-term future was in partnership with China. He replied: “No. Our future is with Europe. We are a European country. We want to partner with Europe. China is too different and too far away.”  

Putin has said many times that his ultimate foreign policy goal is to build a single market “from Lisbon to Vladivostok”, plans that the attack on Ukraine have wrecked. During his first term in office Putin asked for membership of the EU but was rebuffed by Jose Manuel Barroso. The fallback plan then became to set up the Eurasia Economic Union (EEU), which could later be hooked into the EU to create a giant pan-Eurasian single market of over 500mn people accounting for some 25% of global GDP, according to KPMG.  

That would not have been in Beijing’s interests. Better to see Russia hobbled and isolated, and forced to become a discount raw materials supplier to China, runs the argument.  

“Throughout most of the history of Sino-Russian relations, Russia was an adversary, rather than an ally, of China. Russia’s aim is not to become the junior partner in a Sino-Russian alliance, but to be a great power in its own right. Russia has a great power identity of its own, which means it pursues its great power agenda on its own, and as history has shown us, whenever that agenda crossed the interests of China, Moscow seldom hesitated to confront Beijing and, the stronger it was, the more it was willing to confront directly,” Horvath said.  

Relations between Moscow and Beijing have improved enormously since the fall of the Soviet Union, but Russia has been largely helpless for most of that time.  

The establishment of the Shanghai Cooperation Organisation (SCO) in June 2001 was a step forward toward deeper integration, but Russia blocked Beijing’s request to turn it into a free trade zone, highlighting the underlying trade rivalries that remain. China’s heavy investment in Central Asia, especially in the Kazakh energy business, has also made them rivals in Central Asia’s strategic markets.

A victory and incorporation of Ukraine in some form will significantly strength Russia in Europe and make it more difficult for Beijing to deal with. A defeat will make Putin as dependent on China’s President Xi Jinping, just as Belarus' President Alexander Lukashenko is now dependent on Putin.  

USA win-sorta win

The US will also be a big winner from Russia’s war in Ukraine. US President Joe Biden came into office intending to deal quickly with the “Russia problem” and proposed a new engagement with Russian President Vladimir Putin at a meeting in Geneva on June 16, 2021 to smooth over the tensions that have built up over the last two decades so that he could turn his attention to the growing rivalry with China. Many things were suggested for the agenda, including cybercrime and new arms control deals.  

It didn't work out like that. Putin’s growing belligerence has hijacked the US State Department’s entire attention since December. The Russia problem got a lot worse, not better. But even before peace is found in Ukraine, Putin has so thoroughly wrecked both Russia’s standing in the world and the short- and long-term economic prospects, that what hopes Russia had for being a US rival have been destroyed. Before long Biden will be able to move on and turn his full attention back to China having crushed any rivalry Russia could have shown.  

The one danger is if China embraces Russia as it spins out of the global community and they form an alliance. Then the challenge for Biden will have become greater. On paper the synergy between the two countries is impressive and their combined military would be a serious rival to that of the US. However, few analysts believe things will play out that way and Russia is doomed to become a Chinese raw materials appendage.

Europe lose-lose

The EU has already lost even if Russia is defeated. Putting aside the instability on the EU border and the 2.5mn refugees that have already crossed that border, Russia’s war in Ukraine is already sending energy, food and commodity prices through the roof to politically problematic levels.  

At the same time, the shock to the market and renewed disruption to supply chains will only stoke more inflation that was already at very high levels thanks to the coronacrisis.  

Albania for one is already being destabilised and has seen protests against the impossible rate of the soaring cost of living last week. Fresh protests broke out on March 15 in Tirana, as the situation only gets worse. Everyone in the region is seeing inflation rates jump that cause similar problems or at the very least will drag on growth for the foreseeable future.  

The eurozone economy will grow less than expected this year thanks to Putin’s war, the European Commission said in February, as energy prices and supply chain problems jack up inflation and delay a more sustained recovery from the pandemic.

The EU executive said GDP in the single currency bloc would grow by 4% this year, instead of the 4.3% it was predicting only three months earlier. Inflation will also increase to a much stronger than expected 3.5% in 2022.

"Multiple headwinds have chilled Europe's economy this winter: the swift spread of Omicron, a further rise in inflation driven by soaring energy prices and persistent supply-chain disruptions," said EU economy commissioner Paolo Gentiloni this week.  

And all this is before Putin hits out with Russia’s counter-sanctions that are due to be announced next week. The severity of those sanctions is unknown. On the one hand, the EU’s surprisingly harsh sanctions are being taken by the Kremlin as an act of economic war, so the riposte could be extreme; On the other Russia is itself teetering on the edge of an economic and financial crisis and the Kremlin may be unable to cut itself off from desperately needed revenues.  

The rest of the world is ambivalent  

The rest of the world is not better off and in most places it is worse off than the EU. Global inflation and soaring food prices hurt rich economies but they cause carnage for poorer nations where the population was already struggling to get by.  

Putin must be hoping to avoid the China-dependency by turning to the G20 and the rest of the emerging world for allies and markets. And there he can already find sympathy. To his advantage is the fact that the Emerging Markets are collectively richer and more populous than the Developed Markets. To his disadvantage is individually they are all much weaker than the countries in the Western world.  

“There is an unmistakable sentiment emerging across Asia, Africa and the Arab world that Europe is throwing itself into a disaster over Ukraine and that the international order itself is crumbling,” Radha Stirling wrote in an op-ed in The Times of Israel. “While Western nations are rushing headlong into the crisis, countries in the Middle East, the Asia-Pacific rim and Africa are busy calculating the ramifications for their own peoples and trying to anticipate what a de-globalised future holds.”

“While Western unity over the Ukraine issue appears to be a show of strength, the wider world sees profound self-sabotage that may well lead to continental chaos in the coming years, and which signifies American withdrawal from the post-WWII global order. Many see Russian sanctions, and their inevitable destructive impact on Europe, as part of the long-discussed American pivot to Asia,” Stirling concluded.  

Fifty-two nations either abstained or simply didn’t vote in the UN resolution condemning the Russian invasion of Ukraine, and their silence could be interpreted, not as condoning of the invasion, nor as hostility to the West, but as ambivalence about the emerging new international order implied by the vote.

Stirling points out that in the Arab world the outrage of a big country invading a smaller one in the western world smacks of hypocrisy after the US travelled 6,000 miles to invade one of their neighbours on made-up evidence, whereas Russia has invaded a country that has received significant arms and money from Russia’s rival, the US, and was seeking to join an alliance that Russia perceives as hostile to it.  

There are more practical considerations for the Arab world’s ambivalence to the Ukraine war too. Removing a third of the world’s grain supply with hurt the Middle East more than anyone, which depends on Russia and Ukraine for a third of its grain imports. A food price shock bigger than the one that sparked the Arab spring in 2011 is now almost certain to hit in the middle of this year.  

“Russia and Ukraine together are largely responsible for feeding the Middle East, so no one in the region is eager to beat the drums of war, because any prolongation of the conflict will undoubtedly lead to catastrophic food insecurity, instability and civil unrest,” says Stirling, adding that the blow will be doubly damaging, coming on the heels, as it does, of the coronavirus (COVID) shock.

“No one is ready to embrace this tsunami of economic consequences for the sake of Ukraine’s aspirations to join Nato,” says Stirling.  

The West’s zeal to punish and isolate Russia will residually punish countries in the Global South where Russia has been working hard to build up economic, energy and security relations with many countries.  

In recently years the Arabs have begun to actively invest into Russia and even bailed the government out in 2016 when it found a huge RUB2 trillion hole in the budget it could not fill with the faux privatisation of a 19.5% stake in the state-owned Rosneft in December that year.

OPEC countries in particular are being asked to ramp up oil production, but they don't see the US following similar policies. The UEA and Kingdom of Saudi Arabia, two of the US closest allies in the Middle East, have refused to take calls from the US president throughout the crisis, but appear to have been in regular communication with Moscow, reports The Times of Israel.  

“There is talk of resurrecting the Non-Aligned Movement of the Cold War period floating in the ether across the developing world, with countries from the Gulf to the Far East predicting that they will have to fend for themselves and carve out new economic and political alliances in the absence of Western hegemony,” Stirling says. “The war in Ukraine looks like a watershed moment to many in the Global South, and they feel more than ever that they have to choose their friends carefully.”