The Reality of a Trade War With Europe and the US : Russia Would Lose

[Benton D Struckcheon]

-The EU would win an all-out trade war with Russia hands down. The EU is Russia’s biggest trading partner, while Russia is the third largest trading partner of the EU. Exports to Russia make up 7.3 per cent of the EU’s total, while imports are 12 per cent. On the other hand, the EU buys 50 per cent of Russian exports and sells 42 per cent of what Russia buys from the outside. Also, foreign direct investment from the EU accounted for over 75 per cent of Russia’s total in 2012. FDI from Russia is a small 3 per cent of the EU’s total.
-Russia has even less leverage over the US. Trade with Russia accounts for 1 per cent of the US total. By contrast, exports to the US account for 5.8 per cent of Russia’s total, while imports from the US are 4.9 per cent.
...
- In addition to an $87bn oil stabilization fund, Russia has $493 billion in foreign exchange reserves, just over 45 per cent of which were held in dollars as of the middle of last year. Influencing the massive $12.3trn US Treasury market – the obvious target – with such ammunition would be the equivalent of trying to bring down King Kong with a slingshot.
- The only Russian ally that could attempt a meaningful Treasury boycott would be China. But China has refused to take sides during the conflict, and its incentives for intervening in the Treasury market are low. As much as two-thirds of China’s $3.8trn international reserves are held in Treasuries and other government securities, while Treasuries held by China represent 22 per cent of the total outstanding. China could not rapidly dispose of large amounts of US Treasuries without causing severe damage to its own balance sheet.

Source: http://ftalphaville.ft.com/2014/03/25/1811132/crimeanomics-favours-the-west/

In reference to that last point, please see here, where China refused to go along with a previous Russian attempt in 2008 (entirely unprovoked, I might add) to bring down the US debt market:

http://www.democraticunderground.com/10024682337

Russia is a military power. But economically, while its economy in total is large, its importance to the US is insignificant (unless you're Exxon, of course), with which it does limited business, and while more important to the EU, the EU is also far more important to Russia than Russia is to the EU.
Putin is somewhat rational (the 2008 adventure shows he's not really inhabiting the same planet as the rest of us, which is concerning, but he seems more calculating than crazed overall), so I don't think he'll try anything in the eastern Ukraine. It's not worth it to him, I would think, to see his currency crater and his economy go into a tailspin if the EU gets serious with sanctions. The ruble's recovered from the shock of this invasion, but that is certainly due to the lack of follow-through so far. Getting into it with eastern Ukraine would throw that stability right out.

[1000words]

1. In that case, they'll follow the U.S. lead, and sell arms.

Starting with Iran.

[Benton D Struckcheon]

2. Eh, they're already doing that.

In ten years, Russian arms exports and the volume of orders have tripled. According to the report from the Stockholm International Peace Research Institute (SIPRI), Russia was among the countries that became the world's largest arms suppliers from 2009 to 2013. Russia accounts for 27% of global arms exports. The USA takes the lead with 29%.

http://english.pravda.ru/russia/economics/25-03-2014/127157-russia_arms_sales-0/

...which, given the size of their economy, means they are proportionately devoting a much larger portion of their economy to the arms export trade than we are.

[1000words]

3. My point is, Russia could put Iran on scholarship, like we do Israel.

That'll make a lot of folks very uncomfortable.

[Bodhi BloodWave]

4. While such a war would hurt Russia quite badly, i have one question

Assuming the US creates enough animosity to cause Putin to strike back hard by lets say....changing the currency they trade their oil in, so rather then use dollar they use rubles.

What kind of effect do you think that would have on the US?

addendum: whops, posted to wrong person but no biggie, should be read anyhow :p

[1000words]

5. Little unless he can really bolster a Kremlin-friendly trading bloc

In my opinion, the biggest effect Putin can/will have is to the PNAC's (or whatever they're calling themselves, now) vision for the future.

[Benton D Struckcheon]

8. This question is always coming up.

It used to be said that if Iran changed out from dollars to euros it would cause the dollar's reserve currency status to end. Iran's not big enough to cause any worries on that front; I always used to chuckle when I saw that stuff.
The amount of trades and transactions the dollar is involved in yearly is up in the trillions. It's the same as the effect on the Treasury market: to really do something, they'd have to team up with some other truly large global players, such as China. Else it would barely be felt.
From sources looking around online, it appears Russia and China already have an agreement to trade oil in their own currencies as of last year. The source I'm seeing is not one I'd normally consider reliable, so unless I can find something else, I won't put it up.
But the dollar's reserve currency status is due to the fact the US is the largest economy. When the UK became the world's largest economy, the pound was the reserve currency - along with gold because gold was still part of the official exchange system at that time. When the UK ceased to be the largest economy, it was inevitable the pound would lose its status as the world's reserve currency, which it did to the dollar, with gold also still being used at first. Note that most central banks still hold gold in their reserves, even though it's not officially part of the currency system anymore, by the way.
On that day in the not-too-distant future when China finally overtakes the US as the world's largest economy, the dollar's days as a reserve currency will be numbered.
Note that this will not be some sudden event; instead, central banks will buy fewer US Treasuries and more Chinese securities, whatever they wind up being, to hold in reserve. Various commodities would begin to price in both yuan and dollars, and if the Chinese economy really becomes dominant, only in yuan. It would be a decades-long process, just as it was when the pound gave way to the dollar. There's no official UN decision or something about this; it just happens as a normal part of the functioning of the global economy.

[Benton D Struckcheon]

9. Addendum:

An excellent explanation of the dollar's reserve status and why it will stick around for a long time, regardless of what happens with oil trading:

http://www.forbes.com/sites/billconerly/2013/10/25/future-of-the-dollar-as-world-reserve-currency/

It's amazing how tough it is to find an economically literate article on the subject.

[LittleBlue]

6. Putin looks to Asia as West threatens to isolate Russia

Forcing home the symbolism of his trip, Igor Sechin gathered media in Tokyo the next day to warn Western governments that more sanctions over Moscow's seizure of the Black Sea peninsula from Ukraine would be counter-productive.

The underlying message from the head of Russia's biggest oil company, Rosneft, was clear: If Europe and the United States isolate Russia, Moscow will look East for new business, energy deals, military contracts and political alliances.

The Holy Grail for Moscow is a natural gas supply deal with China that is apparently now close after years of negotiations. If it can be signed when Putin visits China in May, he will be able to hold it up to show that global power has shifted eastwards and he does not need the West.

"The worse Russia's relations are with the West, the closer Russia will want to be to China. If China supports you, no one can say you're isolated," said Vasily Kashin, a China expert at the Analysis of Strategies and Technologies (CAST) think thank.

http://www.reuters.com/article/2014/03/21/us-ukraine-crisis-russia-insight-idUSBREA2K07S20140321


Russian Oil Seen Heading East Not West in Crimea Spat

The Crimean crisis is poised to reshape the politics of oil by accelerating Russia’s drive to send more barrels to China, leaving Europe with pricier imports and boosting U.S. dependence on fuel from the Middle East.

China already has agreed to buy more than $350 billion of Russian crude in coming years from the government of President Vladimir Putin. The ties are likely to deepen as the U.S. and Europe levy sanctions against Russia as punishment for the invasion of Ukraine.

Such shifts will be hard to overcome. Europe, which gets about 30 percent of its natural gas from Russia, has few viable immediate alternatives. The U.S., even after the shale boom, must import 40 percent of its crude oil, 10.6 million barrels a day that leaves the country vulnerable to global markets.

The alternatives to Russia also carry significant financial, environmental and geological challenges. Canada’s oil sands pollute more than most traditional alternatives, while Poland’s promising shale fields have yet to be unlocked. The biggest oil finds of the past decade are trapped under the miles-deep waters offshore Brazil and West Africa.

http://www.bloomberg.com/news/2014-03-25/russian-oil-seen-heading-east-not-west-in-crimea-spat.html

This is now an implied threat from Russia. The more we try to sanction them, the more their trade will fall into Chinese hands.

I predicted this earlier this month. The Chinese always try to turn western conflicts to their advantage.

The pipeline deal looks to be signed early this year when Putin visits Beijing.

[Benton D Struckcheon]

7. Kind of an obvious thing to do.

They were planning that anyway. 2018 is when that would start, if all goes according to plan.
It still wouldn't replace Europe as a customer if push really came to shove. I doubt it ever would come to an extreme situation, but everyone is positioning now in ways they weren't really thinking about just a month ago.
The ending of that first sentence in the Bloomberg story is not quite true. We barely import much from Russia now, so them moving from Europe to China wouldn't increase our dependence on the Middle East. Europe's would increase, but not us.
The only direct effect if things really got bad is that Exxon would be forced to cancel its deal for drilling in the Arctic with Rosneft. I have a hard time feeling bad about that.
As I pointed out before, the real problem for Russia will be in the value of the ruble, which would fall sharply; if 75% of your FDI goes away, that will cause your currency to seriously wobble. That would be true regardless of who buys their energy.