Since the autumn of 2020, the “Navalny Factor” has dominated the public and political discourse on Russia-EU relations. This factor fitted snugly into Brussels’ system of values that defines Europe’s principal approaches to its largest partner in the post-Soviet space. The nadir in the political dialogue was reached in October 2020, with the European Union adopting anti-Russian chemical cyber sanctions; November–December saw a period of somewhat smoothing out the particularly sharp angles. Yet, this was followed by Alexey Navalny’s return to Moscow from Berlin in January 2021, his subsequent arrest and several court sentences passed on him, as well as what Brussels deems a largely failed Moscow visit of Josep Borrell, High Representative of the Union for Foreign Affairs and Security Policy. All this doomed Russia–EU relations to an even deeper low. In early March 2021, the “insulted and injured” EU Ministers of Foreign Affairs spearheaded the adoption of new restrictive measures in the Council of the European Union as part of the Framework of Global Human Rights Sanctions Regime instituted on December 7, 2020. In addition, Charles Michel, President of the European Council, announced an upcoming revision of the EU’s strategic approach to Russia.
The pressing political crisis backgrounded economic relations that had traditionally formed one of the key foundations of Europe–Russia relations. Nord Stream 2 was an exception, as many in the European establishment are attempting to turn this commercial project into an instrument for putting political pressure on the Kremlin.
Seven years ago, in the spring of 2014, Brussels one-sidedly froze the principal mechanisms of its economic and political collaboration with Russia, including bilateral summits, a number of sectoral/industrial dialogues, and inter-governmental consultations between EU member states and Russia. Additionally, stiff sectoral sanctions were imposed on several leading Russian financial and industrial entities. The well-known Mogherini guiding principles adopted in March 2016 became, in Andrey Kortunov’s opinion, something of the lowest common denominator for the diverse standings of EU members, as these principles enshrined a compromise between hard- and soft-liners in managing relations with Russia. The main economic issues were hidden behind the concepts of “selective engagement” and “bolstering internal stability”. In the summer of the same year, Sergey Lavrov proposed auditing the relations with a view to finding which connections would allow to restore constructive cooperation. Five years later, this proposal still elicits no response from his European colleagues. Ultimately, Russia’s Ministry for Foreign Affairs began to describe the European Union as an “unreliable partner” that bases its approaches to Russia on its short-term interests. Apparently, this applies to the economic area as well, including the Eurasian Economic Union track.
Over recent years, economic cooperation has mostly shifted to Russia working with individual EU states, primarily those forming the backbone of its economic potential: Germany, the Netherlands, Italy and France. These four countries  account for over half the mutual foreign trade that, together with investments, constitute the foreign economic framework of Russia–EU relations. Despite exports and imports significantly dropping from USD 262 bn in 2019 to USD 192 bn in 2020, the EU remains Russia’s leading partner, ahead of China. Its 27 states (without the UK) now account for 37% of Russia’s trade turnover (42.5% in 2019, over 50% in 2013), while China accounts for 20% (18% in 2019, about 11% in 2013). The commodity composition has not changed much since 2014: in exchange for primary and secondary energy sources, Russia receives machinery and equipment. The restrictive measures did have a negative impact on mutual trade but it was rather limited. Actors from other states, particularly from Southeast Asia, are successfully moving into the sanctions-affected segments. Russia’s sluggish economic and political reforms remain a traditionally negative factor. Russia never accumulated a critical mass of competitive small- and medium-sized businesses. In addition to red tape and corruption, European business complains of protectionism and of the Russian authorities demanding product localization and import substitution. 2020 saw added complaints that anti-COVID lockdown restrictions hindered cross-border travel for highly skilled professionals.
Transport and logistics offer good prospects for joint activities. In 2020, despite the pandemic and despite disruptions in global supply chains in the spring, European and Russian companies managed to expand their co-operation‒primarily in providing rail and truck container shipping. Russia’s objective advantages as an overland transit space between China and Europe lay the foundations for a long-term cooperation within China’s Belt and Road Initiative. Cooperation in using transport routes via the Arctic Ocean shows promise as well.
As the number of European economic entities in Russia’s economy shrinks  during the 2020 pandemic in particular, EU companies have continued to invest directly in Russia. The number of Russian investors in EU states is also gradually rising. Unfortunately, there is no reliable data broken down by their quantitative, cost, sectoral and regional structure. Recent high-profile deals include founding the Wintershall Dea energy concern in Germany, 33% of which is owned by a Russian partner. Total accumulated FDI of EU companies in Russia is about three times Russia’s investment in Europe.
Being a commercial project, Nord Stream 2 remains the most significant stumbling block in Euro-Atlantic and intra-EU relations alike. Even though most EU politicians and experts recognize the project’s importance for European energy security and sovereignty, hardliners support the American extra-territorial sanctions and continue to insist that the project be shut down .The key context is grounded in the need to continue transit shipping of the bulk of Russian gas via Ukraine as a guarantee of the latter’s treasury continuing to receive foreign currency payments from Gazprom and of its gas pipeline system’s modernization. The arguments used here focus on the need to maintain European solidarity and counter “the Kremlin’s gas aggression and uncontrolled expansion.”
The energy track shows a particular need for resuming full-fledged Russia–EU relations. As of today, the Gas Advisory Council (GAC) is represented by expert Work Stream 2, “Internal markets”, co-chaired by Andrey Konoplyanik for Russia and Wim Groenendijk for the EU (established in 2011 to reduce infrastructural and regulatory risks in bilateral gas relations). Two other GAC work streams (“Long-Term Gas Scenarios” and “Outlooks and Developing Gas Transportation Infrastructure”) have virtually stopped working. At the same time, trilateral Russia–EU–Ukraine talks on Russian gas deliveries and transit via the Ukrainian gas pipeline system were launched in May 2014. In 2019, the participants reached a new five-year transit agreement.
“Green” challenges and economic cooperation opportunities
In December 2019, the EU adopted the European Green Deal, a strategy determining the parameters for transitioning to a new energy paradigm by 2050. This paradigm will largely inform the way the EU will interact with Russia in the coming decades. In 2020, the European Commission adopted additional documents setting forth specific directions of the new course in industrial policies and digital transformation, in hydrogen energy, critically important raw materials, energy-efficient construction and building modernization, the closed-cycle economy, agriculture and forestry, and biodiversity. The particulars are still being actively discussed in the European political and expert communities. In 2021–2022, a new legal framework will be adopted and requisite mechanisms launched on the basis of these discussions.
All the areas announced in the New Green Deal open new avenues for European and Russian economic entities in implementing various cooperation projects. Hydrogen energy in all its aspects appears to be the most intelligible area in terms of possible co-operation. These aspects include manufacturing, storing, transporting and using environmentally-friendly hydrogen, which, in Russia’s view, includes not only green but also blue, turquoise and yellow Н2. Last summer, the Eastern Committee of the German Economy (ECGE) and the Russian-German Foreign Trade Chamber (RGFTC) protested against Russia not having been mentioned in the German and European hydrogen strategies. These actions triggered movement and, by the autumn of 2020, a discussion had been launched on a series of bilateral entrepreneurial projects. Germany’s Federal Ministry for Economic Affairs and Energy and Russia’s Ministries of Energy and of Industry and Trade launched informal contacts in the area. Despite operational difficulties in using Н2 and hydrogen technologies, the Russian-German initiative has good prospects for promoting joint projects on the EU market, including the European Clean Hydrogen Alliance  In addition to big reserves of methane and fresh water, besides major surplus capacities of low-carbon hydropower plants and nuclear power plants generating cheap energy, coupled with the significant potential of renewable energy sources and unique Russian know-how (such as research conducted by the Technological Hydrogen Valley consortium established in November 2020), European stakeholders are interested in using Gazprom’s existing pipeline and storage infrastructure as well as in deliveries of various equipment, including that for hydrogen electrolysis and pyrolysis. In mid-February 2021, Denis Manturov, Russia’s Minister for Industry and Trade, speaking at a conference on Russia-Germany strategic cooperation, announced the intention to put hydrogen technologies on the list of priorities for second-generation special investment contracts.
Russia is extremely wary (adopts a de-facto negative stance) of the “carbon border adjustment mechanism” that entails imposing a tax on the “carbon footprint” of imported goods as part of the energy transition, which could result in multi-billion losses for Russian exporters of oil, gas, coal, steel and several other “carbon-intensive goods.” Moscow still has a chance to stand up for its interests, though the window for action is very small. It might be expedient to establish specialized expert groups on the issue, both in Russia and at the level of international multilateral dialogue, including by submitting the results of the discussion to the relevant UN agencies, including UNIDO and UNCTAD.
Let us note as an aside that the European Union is continuing to collaborate with Russia on a series of initiatives as part of long-term partnerships in climate and the environment: these are cross-border cooperation, the Northern Dimension programs, and partnerships for implementing the Paris Accords. Specific projects, including those in waste disposal and processing, wastewater treatment, increasing energy efficiency, entail equipment deliveries from the EU, which creates the prerequisites for cooperation in these areas. Bilateral initiatives implemented by Germany’s Federal Ministry for the Environment, Nature Conservation and Nuclear Safety and Russia’s Ministry for Natural Resources and the Environment also hold a special place in this process. These projects are, for instance, “Climate-neutral economic activities: introducing best available technologies (BAT) in the Russian Federation”, “Climate-neutral waste management” and “Peat bog restoration in Russia with a view to preventing fires and mitigating climate change”. In 2019, the parties agreed to resume the activities of the Russian-German Coordination Council on Environmental Protection. The German-Russian Agricultural and Political Dialogue has never ceased its activities; among other things, it works on forestry-related interactions.
Another positive note is that Russian academic bodies can continue their collaboration with their EU partners under the 9th EU research and innovation framework program Horizon Europe, which runs until 2027. Some of the results obtained (such as in medicine, IT, digital, hydrogen and other technologies) might ultimately be put to commercial use. This applies fully to bilateral cooperation as well, for instance, cooperation with Germany: in late 2018, implementation was launched of a ten-year roadmap for academic and educational partnership.
Despite the evidently crying need to resume sectoral dialogues between Russia and the EU, this is unlikely to happen in the near future. The principal reason for this is a deep value-based conflict and a lack of progress in implementing the Minsk Agreements, which makes it impossible to put on the agenda the issue of lifting or at least mitigating the many restrictive measures introduced by the EU. In the near future, economic interaction will still be based on market entrepreneurial cooperation that partly relies on government and regional support instruments as well as on bilateral inter-agency mechanisms (such as the Russian-French Council for Economic, Financial, Industrial, and Trade Matters (CCIFR) and the Russian-German High-Level Working Group on Strategic Cooperation in Economy and Finance (JWG)).
An important role is played by interest groups; the above-mentioned Germany ECGE and RGFTC are traditionally seen as the most advanced of these. In addition to their own existing lobbying mechanisms, which have acquitted themselves well, in December 2020 these groups spearheaded the establishment of a German-Russian Economic Council. The French-Russian Chamber of Commerce and Industry, the Economic Council of French and Russian Enterprises, and the Russia-France Business Cooperation Council represent the interests of French companies, while Italian businesses are represented by the Italian-Russian Chamber of Commerce, with the European Business Association  standing for European businesses.
Russian business operating in the EU is essentially disorganized and can only count on the Russian state for support. We are mostly talking about Trade Missions, which were transferred in 2018 from the purview of the Ministry for Economic Development to that of the Ministry of Industry and Trade. Currently, the difficult process of reforming them is under way, and it will show whether they will be able to fit into the system that supports market interests of Russian businesses‒small- and medium-sized in particular‒on international markets, including those of Europe. We believe the activities of the Trade Mission in Berlin deserve special attention. On 6 May, it will celebrate its centennial. It has been active in introducing new instruments for co-operation with Russian economic actors. Internationally-based bodies of the Russian Export Centre are only now finding their way around European countries and seeking their niche in this area.
The current level of Russia’s bilateral interaction with EU states could advance preservation of their present potential and help achieve progress in some cooperation niches, including the European Green Deal. Russia’s negative image in the European media remains a powerful hindrance. This image is being formed, among other things, by the decisions of the European Council, including prolongation of existing sanctions and imposition of new ones. This picture makes small- and medium-sized businesses more wary of possible business ties with Russia and indefinitely postpones their willingness to establish contacts. Joint state formats, such as the Russian-French Cross Year of Regional Cooperation (2021), the Year of Germany in Russia (2020–2021) and the Russian-German Cross Year of Economy and Sustainable Development (2020–2022) are intended for countering these negative trends.
No breakthrough in Russia’s economic and political cooperation with EU states should be expected in 2021–2022. Co-operation dynamics will be informed by the EU’s successes in combating the coronavirus pandemic and by possible positive signals from the Russian regions to European and Russian business concerning planned steps for improving the framework state of the economy. As of the early spring of 2021, European entrepreneurs were mostly pessimistic. For instance, while the German business community positively assessed the prospects for their economic cooperation with China, the US and the Eurozone (a poll conducted by the German Chamber of Commerce and Industry (DIHT)) (with figures of +15, +11 and +6 points for bottom line expectations), the prospects for cooperation with Russia were mostly viewed negatively (-19 points). Unlike their parent companies, the top management of their Russian subsidiaries were more optimistic in late 2020 about the prospects for working in Russia (a poll conducted by the ECGE and the RGFTC). They particularly noted the importance of and the need for the EU to co-operate more closely with Russia on such matters on the bilateral agenda as industrial modernization and increased efficiency, waste processing and management, energy and climate, alignment of rules and standards. It is noteworthy that the respondents did not view such areas as space, mobility, and production of natural resources in 2021 as particularly significant.
In conclusion, I would like to refer to the opinion of Oliver Hermes, Head of the Eastern Committee of the German Economy, expressed at the 24th Potsdam Meetings in mid-November 2020 to the effect that only a powerful joint economic space stretching from Lisbon to Vladivostok would allow German and, consequently, European industry to pool the technological know-how and market potential of Western and Eastern Europe and Central Asia and become the leader in digital and green technologies in the future. He believes that specialized institutions need to be established right now to launch EU-EAEU talks on a single market. Yet, the signal sent to Brussels during Germany’s presidency of the Council of the European Union has so far fallen on deaf ears of the European Commission. Apparently, the time for a constructive response has not yet come.
From our partner RIAC
1. Germany is the backbone partner in Russia-EU relations who largely defines their qualitative and quantitative contents.
2 For instance, there were 4,274 legal entities with German capital in 2019, with 3,971 in 2020.
3 It appears that the EU failed in its attempts to introduce an effective mechanism for counteracting third countries’ extra-territorial sanctions by late 2020. See also Ivan Timofeev’s opinion.
4 Russian companies’ experience of interacting with the European Clean Hydrogen Alliance is interesting in terms of the participation by Russian actors in other similar alliances with the status of an “Important Project of Common European interest” (IPCEI)
5 The EU–Russia Industrialists Roundtable Association was established in 1997 and was active until 2014. It held its last events in 2015. Apparently, its participants are not interested in restoring this once-effective mechanism for discussing existing problems and possible solutions to them.
Russia’s ‘Growth-Stability’ Dichotomy
Russian economic growth has underperformed the global average almost every year since the 2008-09 financial crisis. But it’s far from a homogenous pattern: in fact, since 2017, there has been a pronounced trend toward increasing divergence across the main sectors of the Russian economy. This has been significantly accentuated by the Covid crisis. The sectors exhibiting the highest growth appear to be those that benefit from Russia’s relative macroeconomic stability and are less sensitive to the country’s lack of growth momentum. This rising differentiation in growth across sectors has important implications for investment strategies, as we expect growth in sectors such as IT, agriculture and financials to continue to outperform the rest of the economy.
Since the 2008-09 financial crisis, Russia’s economic growth has underperformed the world’s average almost every year, with notable gaps observed versus the rest of EM and the CEE region throughout the past decade. The sluggish growth performance was partly attributable to the structural deficiencies, external factors, but also in no small degree to the macroeconomic policies that favoured the maintenance of macroeconomic stability over attaining high growth rates. The priority accorded to securing macroeconomic stability was in particular embodied in the operation of the fiscal rule within the fiscal policy framework, as well as inflation-targeting in the monetary sphere.
Indeed, the growth-stability dichotomy in Russia’s economy is a feature that has persisted for an extended period due to the frequency and intensity of crises erupting over the course of the past decade. After a period of attaining high growth rates in 2006-07, the paradigm of Russia’s economic policy shifted towards prioritizing macroeconomic stability after the global financial crisis of 2008-09. The geopolitical perturbations of 2014 and the most recent Covid crisis have served to reinforce this policy focus. While Russia has certainly had its periods of strong growth in the past several decades, the intensity of the external headwinds over the past 12-13 years has tilted the balance between pro-growth and pro-stability policies in favour of the latter.
Another dimension to the “growth-stability” dichotomy in Russia is the significant emphasis placed in economic policy on securing high levels of reserves. The lack of conversion of these sizeable reserves accumulated by Russia into boosting economic growth has been due to a number of factors. One was the lack of institutional capacity to ensure an efficient spending of fiscal reserves on large-scale infrastructure projects. This in turn was compounded by the pre-cautionary motives associated with concerns regarding the effects of economic crises (2008-2009 crisis) and geopolitical shocks (2014 crisis episode). As a result, Russia stands out across EMs as an economy with among the lowest fiscal deficits and government debt levels, while at the same time exhibiting a combination of high reserves but low economic growth. This pattern contrasts with the one observed in some other emerging economies during crisis periods, at which time greater efforts were made by EMs to boost growth at the expense of higher deficits and debt levels.
During the Covid crisis this pattern was yet again replicated as Russia exhibited greater caution in unleashing anti-crisis measures compared to many developed and emerging economies.
But while Russia’s overall economic growth has been rather modest in recent years — particularly since 2014 — there has been a rising asymmetry in the growth across Russia’s sectors. Over 2012-16, the divergence in growth across sectors was stable or gradually declining (except in 2015-16, when the economy was hit by the drop in oil prices and sanctions). However, the divergence began to grow markedly in 2017, and was later on significantly magnified by the Covid crisis.
Indeed, the Covid crisis generated notable differentiation across sectors as some were disproportionately affected by the pandemic and quarantine measures (tourism, travel), while others were given a major boost (telecommunications, IT and computer services). Russia’s macroeconomic policy, including sectoral taxation patterns, may have contributed to the differentiation patterns observed throughout the economy. Apart from Russia-specific factors, global sectoral factors may have also contributed to the patterns observed in Russia — in particular the rising dichotomy between manufacturing and extraction industries on the one hand and the services sector on the other.
As a result, sectors such as financials and IT have been increasingly diverging from the lacklustre performance in the transportation, construction and public sectors. The oil and gas and agricultural sectors have occupied the middle ground, broadly reflecting industry-specific and global factors. Overall, services such as finance and IT exhibited improved growth performance in 2016-19 compared to the 2011-15 period, while extraction of raw materials and transportation were among the sectors with deteriorating growth dynamics.
One of the best performers in recent periods has been the financial sector, which benefited from the organic growth in the sector via increasing financial penetration, as well as the significant expansion in the array of services offered to the population. Most importantly, however, the high real interest rates sustained by the CBR to maintain macroeconomic stability resulted in the greater attractiveness of investment in financial instruments than capital investment. The high real rates incentivized investment in financial instruments at the expense of the real sector.
The above observations concerning sectoral growth patterns suggest that greater differentiation across Russia’s sectors may be warranted in devising top-down investment strategies. If the current prioritization of macroeconomic stability were to persist, sectors such as IT, agriculture would be well positioned from a top-down perspective. Finally, it is important to note that the outperformers from the services sector that benefit from Russia’s growth-stability dichotomy also exhibit relatively good scores in the ESG ratings, most notably compared to the natural resource sectors. As investors increasingly focus on ESG issues, the longer-term implications for sectoral growth performance may prove significant.
From our partner RIAC
Virtual-Reality Leaderships Await Digital-Guillotines
When national leadership starts acting more as if Virtual-Reality based illusionary leadership games, it calls immediate testing to ensure digital future of the virtualized economies of the nation. Just as billion mile highways need cars, trillion-node digital highways need smart digitized enterprises. Just as highways and transportation need qualified Ministries dedicated to control national mobility, similarly digital platforms economies need virtualization; layers of platforms, hyper-interactive, live in action, motion and execution, floating on global digital arenas and creating mini-micro-mega trade opportunities and serving the common good of the world. Futurism demands futuristic literacy.
If there are some 200 nations outside a miniscule number, most nations along with their ministries and government departments already crushed under the weight of their own bureaucracies. Translated into simple language; when a single piece of urgent and serious business-trade query enters any government office building, decked with thousands desks and many thousands of filing cabinets, expecting quick response within a few days, if lucky may get some broken answer in many months. Those who slowly circumnavigate the world, require no proof on this, those educated exclusively on social media allowed screaming in denial. There are many such office buildings, each with many floors, in each city, in each nation. Some billion people occupy such global bureaucracies, strangling their own nations and stealing their own future from their next generations. Visible in open daylight, the barren landscapes, untapped resources, wasted talents lingering as wasted over a century. Today, against tidal waves of almost free technologies and digitalization, we need quick do or die solutions.
The cruelty of incompetence fermenting on mahogany furniture in dark offices now needs digital-guillotines.
The Paper-Processing-Age created Bureaucracies, Rubber-stamps glorified and corner offices mesmerized the fermentation process of incompetency and guaranteed permanence of seniority as gold standard. Like a tsunami, “digitization” is now bureaucracy free, office-free and tantrum free, only measured precisely in right columns with right amounts and ‘true’ numbers to evaporate filing cabinets and desks. Productivity, performance and profitability are what have been missing the last few decades bringing nations to their knees. The future of governments now measured by meritocracy will rule and manage future economies; the rest will stay hidden in the fog of confusion.
Over a century ago, H.G. Wells wrote about aircrafts and Jules Verne, the submarines. Now, we live in a time where digitally floating enterprises and virtually accessible national economies must thrive. Now, is the turn of our times to optimize our ‘mental powers’ functioning way above automation, performing our intellectualism over mechanical robotization and achieve superior commercialization while considering diversity, tolerance and common good? Now is the time to claim our rights, design our economies and better sustainable lifestyles. A brighter future waits.
Nevertheless, within the coming years, elimination of bureaucracies, digitization of enterprises and virtualization of economies will quadruple performance on a national basis for most nations; unfortunately, getting this thinking may take another decade for many other nations. Observe their starving children.
As a crude and only available measurement, amongst the 190 nations of the world, there are only top 20 nations where *GDP Per-Capita-PPP is about USD$50,000 and more. Everyone else is lower, as an example, a sample of 50 nations, where their per capita is USD$5000 or $13.00 per day. Now observe their governments, their Ministries, Institutions, Trade Associations, Chambers and various government agencies are deeply stuck in the last century, robbing their own future. Disconnected with global age, now clearly visible all across their front line teams points to continued financial calamites. Any 10% to 90% elimination of bureaucratic ponderings, indecisive floor-by-floor rubber stamp approval dances will quadruple their national performances. Nation-by-nation, strangulations due to the lack of decisive skills now make bureaucracies the most backward frontier left in critical need of upskilling and reskilling realignments, to stand up to global standards of productivity. Therefore, across the board, national economies must qualify at specified speed and accuracy with due diligence to attract FDI, collaborations and alliances to survive in global-age. Local political parties scared of their own re-elections will never tackle such issues. Immediate testing of any frontline management team of any top departments will expose the gravity.
The biggest tragedy is that all of these nations have unlimited talents, great minds and great skills potential, but crushed by bureaucracies, in darkness mode, where sun never rises, where digitization is feared for fears of exposing competency levels. The Covidians of the new post-vaccinated world with new thinking now have a real chance to ride out the storms, bring mega changes, and create highly efficient economic models. No country without national mobilization of hidden talents of entrepreneurialism on digital platforms of upskilling to foster exportability and outbound exposure will survive. This is what Silicon Valley did; study slowly to deeply appreciate the process.
Upskilling as a mandatory testing requirement drowning in crypto-economies and fictionalized as success ignoring tent cities, nation’s biggest losses hidden in the untapped entrepreneurialism of the national citizenry. Study more on Google, how business education actually destroyed businesses across Western economies.
Rules of economic revolutions:
Do not fix, just break it, and start on a new page.
Do not fire, upskill them, bring a brighter future closer.
Do not fumble, upskill yourself, become a lifelong learner.
Do not fail, there is no plan B, economic damage now commonplace.
Do not runaway, take a stand; there is no other way out.
Do not deny the bright future to your next generations.
There are some 100 national elections scheduled within the next 500 days… national leadership must demonstrate their literacy to read futurism. Identify their local teams with the right expertise to address national challenges, urgently respond with right answers, and develop clear narrative to address realities. Expothonis tabling a new agenda, in a global debate series with global experts on such bold issues to advance the discussions on such mega-change processes.
The strategy: The Covidians, survivors of bankruptcies, body bags have little or no tolerance for bureaucracies and with free rains of technology have no patience for paper-based-sluggish and dysfunctional economies. Citizens will vote for real and pragmatic truth. National leadership must face the music and learn to tango: Eliminate bureaucracies, virtualized economies and carve straight paths for climate control protocols.
Is this a perfect storm in the making or a new sunrise of the early spring?
The rest is easy
Suez Canal Shutdown revealed the importance of the Middle Corridor
On March 23 of 2021, a container ship called the “Ever Given” ran aground in Suez Canal, one of the most important waterways in the world, and blocked other vessels from using it. This human-made waterway is one of the world’s most heavily used shipping lanes, carrying over 12% of world trade. This canal is also responsible for the transportation of 7% of the world’s oil and 30% of daily container shipments. Therefore, the blockage of the canal has considerably affected global trade. According to Lloyd’s List, a London-based shipping news journal, the estimated daily value of cargos passing through the canal is $9.7 billion, with $5.1 billion traveling westward and $4.6 billion traveling to eastward directions. The incident forced some ships to use the alternative route around Africa’s southern tip, which is dangerous and increases the transportation costs and time.
Shipment delays because of the incident in the Suez Canal also negatively affected the already-disrupted global supply chain. Since the start of the pandemic, shipping delays and shortages have considerably strained the global supply chain. As the commodities become increasingly difficult to obtain and produce for the companies, customers face limited options and higher prices. Several big companies such as Nike, Honda, and Samsung have already expressed that supply-chain issueshavesignificantly impeded production volumes. Thus, the blockage of the canal made the supply chain crisis even worse.
Almost a week after the “Ever Given” halted the canal, on March 29, it became possible to free the vessel and the Suez Canal opened for business again; tugboats managed to refloat the stuck vessel away from the canal’s sandy bank. During the blockage, at least 367 vessels were left waiting for the canal to be unblocked. However, it remains unclear when the traffic in the canal will return to normal, as it will take a couple of days to clear the backlog of ships. Some experts have estimated that it could take more than 10 days.
Despite the fact that the canal was freed, it has raised questions on the risks of the world’s overreliance on this route. The economic damage of the blockade of the Suez Canal proved the fragility of global transportation architecture. This in turn brought up the issue of the development of alternative land or maritime transport routes. Hence, after the incident, Russia and Iran have called for the need to find alternative shipping routes, especially recalling potentials of the Northern Sea Route (NSR) and International North-South Transport Corridor (INST).By explaining the reasons for considering the NSR, on its official social media account Russian state company Rosatomflot declared that rapid melting of the Arctic and the existence of powerful Russian icebreakers improve the accessibility of the North Sea, which could become an alternative to the Suez Canal. Iranian officials, on other hand, called for the activation of the INSTC as a reliable and “low risk” alternative.
The other alternative route that has the potential to become one of the mainland routes for the transportation of goods between Asia and Europe is the Trans-Caspian East-West-Middle Corridor Initiative, shortly called “The Middle Corridor”. This corridor is considered as one of the most important routes in reviving the ancient Silk Road. The Middle Corridor begins in Turkey, passes through the territories of Azerbaijan and Georgia, crosses the Caspian Sea, reaches Central Asia, and extends to China through the Turkmenistan-Uzbekistan-Kyrgyzstan or Kazakhstan routes.
The formation and development of the Middle Corridor began after the November of2013, when as a part of the II International Transport and Logistics Business Forum “New Silk Road” in Astana, the leaders of JSC “National Company” of Kazakhstan, CJSC “Azerbaijan Railways” and JSC “Georgian Railway” signed the agreement on the establishment of Coordination Committee for the development of the Trans-Caspian International Transport Route. In December 2016, the participants of the Coordinating Committee decided to establish the International Association”Trans-Caspian International Transport Route”, which started its activities in the following year. The main goal of this project is to increase the volume of freight transportation between East Asia, Central Asia, the Caspian and Black Sea basins and European countries by creating alternative or complement to the traditional land routes that go through the territory of Russia.
Middle Corridor has several advantages in comparison to traditional transportation routes. Compared with the Trans-Siberian Railway, which is also called the “Northern Corridor”, it is 2 thousand km shorter and has more favorable climate conditions. Compared with the traditional sea route, it shortens the travel time of goods between Europe and China by about three times, making it only 15 days. In 2015, the first pilot shipment took place and a container train, which started its trip from Western China reached Baku through Kazakhstan and the Caspian Sea in 6 days. Besides, the Middle Corridor creates great opportunities for cargo transportation within Asia and to Africa. Using this corridor, cargos from east and south-east Asia could be easily transported to the Middle East, North Africa and the Mediterranean regions using port infrastructures of participating states.
The Middle Corridor initiative is also supported by Afghanistan and Tajikistan as this route creates new transportation opportunities for them. By integrating the “Lapis Lazuli” corridor, an international transit route that links Afghanistan to Turkey, to the Middle Corridor, these countries could easily transport their goods in all directions in Asia. Integration of these corridors is also advantageous for the participating countries of the Middle Corridor. The agreement on the establishment of the Lapis Lazuli corridor was signed by Georgia, Afghanistan, Turkmenistan, Azerbaijan and Turkey in November 2017, which added a new artery to the Middle Corridor in the southern direction.
Along with the mentioned advantages, the Middle Corridor also holds precedence in comparison to other proposed alternatives, which have obvious shortcomings. In the case of NSR, most of the year it is covered in snow and for transportation of goods through this road ships of special nature and capabilities are required. So, the competition of NSR with the Suez Canal could only be of seasonal nature. The INSTR on the other hand, despite its advantages, cannot become the direct competitor to the Suez Canal as it serves for the connection of the Indian Ocean and the Persian Gulf with Northern Europe, not for the connection of east and south-east Asia like the Suez Canal. It could compete with the Suez Canal only if it is integrated into the Middle Corridor. Hence, the advantages of the Middle Corridor and shortcomings of other alternatives reveal the importance of the Middle Corridor and make it the best alternative for the transportation route that goes through the Suez Canal.
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