Moscow-based experts contemplate potential for Russia to grab America’s piece of China market as Kremlin slaps duties on U.S. goods following Trump’s metals tariffs.

Official response

Russia informed the WTO about possible duties on U.S. goods worth USD $3.2 bn as early as the end of May this year. The amount equals Russia’s steel (USD $1.51 bn) and aluminum (USD $1.65 bn ) exports to the U.S. after the Trump administration introduced steel and aluminum duties of 25 percent and 10 percent respectively. As Russia informed the WTO, it considered “response measures”  worth USD $537.6 bn – the amount the U.S. could collect from duties on Russia’s steel and aluminum supplies.

Russian Economy Minister Maxim Oreshkin announced on Tuesday that Russia will impose  duties on U.S. imports, joining China and EU in what now appears to be well on the way to becoming a global trade war. Russia plans to impose duties only worth USD $93 mln in the near term but “retains the right to increase it to USD $537.5 mln”.

Russia’s scope to raise the stakes in a trade war which must surely pose the major risk to an already ageing global economic cycle are limited. U.S. imports to Russia are not significant, with high value spacecraft and aircraft equipment taking up the biggest share (USD $3.46 bn in 2017). Transport accounted for another USD $365 mln, while the government has already promised that all-important medicines worth USD $621 mln will not be affected by any  “protective measures”.

Oreshkin noted that Russia’s import duties will specifically target road construction equipment from the U.S. According to Export.gov, the total size of Russia’s domestic road construction market is USD $1.7 bn and U.S. suppliers provide USD $270 mln of this, with Caterpillar and bobcat the major U.S. players. This may help Oleg #Deripaska, who was a key target of  U.S. sanctions and who controls Russia’s biggest maker of road-building equipment. At the same time, Kommersant notes the government’s task  “is still not easy” as Russia “imports most Caterpillar excavators from its Chinese factory”.

Broader implications

A global trade war involving China, U.S. and EU could hit Russia from two directions. First, it will slow down Russia GDP growth amidst the global economic slowdown. Second, it will reduce prices for raw materials (metals and fuel) which Russia exports, notes Alexander Knobel,  from the Russian Presidential Academy of National Economy and Public Administration.

That said, Moscow-based observers appear to concur that a global trade war is unlikely to last long and any escalation would likely be followed by new negotiations, meaning all parties are more interested in negotiating new trade terms rather than in protectionism itself.  But the experience of past trade wars amply demonstrates that once they start they can be supremely difficult to control or stop.

If the trade war remains relatively contained, then  Russia should be able to expand exports in niches that will inevitably appear. In particular, agricultural export would benefit from any potential restrictions on U.S. agricultural product in China.  ‘On the other hand, if the U.S. restricts access of Chinese goods, these goods will remain in China and their competitiveness will grow domestically. This means it will be more difficult for Russia to supply its goods to China”, Knobel said.

The same view was voiced by Russia’s Deputy Foreign Minister Igor Morgulov who believes that  “the U.S.-China trade war opens new opportunities for Russia to grow its agricultural exports in the Chinese market”

Russia’s share in global trade is about 3 percent. “The global trade war is unlikely to significantly affect the nation”, said Vladimir Salamatov, head of the International Trade and Integration research centre. This China-U.S. standoff will let Russia grow its rolled steel supplies to the U.S. market, he believes. Further, Russia will be able to increase its exports to China of soy and other agricultural goods. On top of that, confrontation between the U.S. and EU would potentially support Russia’s natural gas exports to Europe as U.S. suppliers receded, with similar potential in China possibly boding well for Russian exports from Russia’s Yamal and Sakhalin, Salamatov added.

In general, optimism currently prevails in Moscow over the prospect of potential implications of a global trade war.  Alexey Maslov, professor at the Higher School of Economics, notes that while U.S. business is concerned about existing trade deals, China should start worrying about its political allies. He explained that prior to the current trade dispute breaking out, China enjoyed a comfortable situation for a long time. It developed its One Belt One Way model and formed a circle of economic and political allies, calling it Community of Common Destiny.

“Many nations can now see the U.S. has means to counteract China and they may be wondering if their decision to choose China as their main ally was right. One may question if China can guarantee unrestricted global market access to its economic partners anymore,” Maslov noted. U.S. measures are “purely political actions” targeting the “Made in China 2025” plan – a program that envisages massive expansion to the west, including U.S. markets.

But more ominously the risk that a general global economic slowdown, triggered by a trade war, could start financial market mayhem with heavily indebted Chinese SOE’s, or the Chinese consumers which have become an increasingly important source of demand growth for companies around the world, is increasing by the day.  Russia has an impeccable debt environment at household, corporate and sovereign level, as well as significant hard reserves, courtesy of financial sanctions, which have also done wonders in prompting domestic agriculture, and a long term scepticism by the Putin administration of the value of sovereign debt.  But against the prospect of a major global trade conflagration breaking out, a nation as heavily reliant on hydrocarbon based energy exports may find such defences limited, and find itself relying on the legendary stoicism of its own people.