Geoeconomics

The Russian attack on Ukraine in February 2022 marked not only a turning point (Zeitenwende) for German security policy but also for German foreign economic policy. From a European standpoint, the war served as a painful reminder of how economic dependencies can be used as political leverage, bringing the geopolitical dimension of trade relations and economic interdependencies into public focus. In particular, economic ties with the People’s Republic of China are increasingly being scrutinized. The ifo Institute conducted a representative survey with German firms in February 2024 to assess changes in their reliance on Chinese inputs since the outbreak of the war and firms’ plans regarding their supply relationships with China.

In 2023, Russia experienced a 3.5% economic growth, but forecasts for 2024 indicate a slowdown to 1.5% due to tightened monetary policies and the expected global economic slowdown. Despite large military spending and Western energy sanctions eroding budget revenues, fiscal deficits have been generally kept under control. Intensified scrutiny of third-country firms violating energy sanctions widened discounts on Russian oil prices in late 2023. Generally, Russian import patterns remained relatively stable. In particular, EU exports of economically critical and common high priority goods to Russia in November 2023 represent just 2% of its prewar levels, underscoring the effectiveness of sanctions in halting direct exports. Besides China and Hong Kong, Türkiye and CIS countries became vital suppliers, meeting Russia's demand for economically critical goods and high-priority items.

While eight out of ten German manufacturing firms reported material shortages at the height of the pandemic in December 2021, this share had fallen to 18 percent in October 2023. Nonetheless, the recent attacks by the Yemeni Houthi rebels on container ships in the Red Sea highlight the fact that supply chain risks remain significant.

In January 2024, five politically and economically heterogeneous countries ‒ Saudi Arabia, Iran, Ethiopia, Egypt, and the United Arab Emirates ‒ joined the BRICS. The BRICS+ countries now represent around 45 percent of the world’s population and around a third of global GDP. The BRICS were originally founded as an economic alternative to the Western bloc led by the USA and the EU. The idea was to offer the countries of the Global South a counterweight to Western institutions. The current change in the geopolitical and geoeconomic framework has driven the expansion of the BRICS. And it will also play an important role in shaping the international order of tomorrow.

 Despite EU restrictions, only around one-third of pre-war exports to Russia are fully sanctioned; most trade remains unaffected or subject to numerous exemptions. While exports have decreased by 32%, imports have increased by 17% due to innovative ways to bypass trade sanctions. China is Russia’s most important alternative country of origin for products under sanction: 61 percent of all products subject to sanctions come from China. The Russian economy shows signs of recovery, driven by robust domestic demand from wartime fiscal stimulus, contributing about 10% to GDP in 2022-23. Real GDP and industrial production have grown by 2.5% and 3%, respectively, indicating recovery from the economic crisis.