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Russia’s Economy Will Be Frozen for a Long Time as It Relies More on China and ‘yuanization,’ Think Tank Says

Western sanctions isolating Russia will impede the country from progressing economically for a long time, wrote Alexandra Prokopenko, a nonresident scholar at the Carnegie Russia Eurasia Center.

Where once Moscow focused on technological development and a diversification away from energy sector exports, “now those elements have been replaced with capital controls, the labeling of countries as either friendly or hostile, the yuanization of payments, and the militarization of budget spending,” she said.

Ever since Russia’s war on Ukraine triggered sanctions, Moscow has also turned increasingly dependent on China, emphasizing discounted energy exports that weaken the Kremlin’s ability to profit.

Russia is also growing more reliance on China for high-tech imports and consumer goods, while payments are largely conducted in the yuan rather than in rubles, Prokopenko noted.

“The much-vaunted de-dollarization of the Russian economy is simply turning into its yuanization,” she said.

In the long run, Western sanctions will create lasting inefficiencies, and Russian will remain vulnerable to oil and gas disruptions, Prokopenko added, pointing out that its recent production cutbacks were aimed at keeping prices elevated.

Meanwhile, the countries Russia still trades with — partnerships formed less out of economic pragmatism but positive attitude towards Moscow — encourage it to deepen its commitment to commodity production. 

For instance, Russia has become China’s second largest oil supplier and fourth largest LNG supplier. But it’s an imbalanced relationship, with Moscow unable to purchase imports for projects such as offshore energy ventures.

“They have also limited its access to turbines and technology for building modern tankers, locomotives, cars, next-generation communication networks, and other high-tech products, as well as removed Russia from the global discussion over artificial intelligence and quantum computing,” Prokopenko wrote.

This is as larger firms, such as China’s Huawei, are less likely to operate in Russia out of fear of secondary sanctions.

Apart from the over-reliance on commodity trade and inability to expand technologically, Russia’s spending on militarization will also keep its economy back, she said.

“The constant focus on commodity prices and sharp increase in the militarization of state spending (to about a third of the budget) means Russia’s economic development will be frozen for a long time to come,” Prokopenko said. “Even once the active phase of the war is over, military spending is unlikely to decrease so long as any form of Putinism persists.”

Source : MarketInsider