Will Russia dump or Trump its allies?

By Dmitriy Belyanin

For Central Asia, will Donald Trump mean prosperity or calamity?

The bombastic developer, who beat Hillary Clinton for president despite losing the popular vote, and who takes office this week, is noted for anti-globalist and pro-Kremlin rhetoric. Russian analysts welcomed his victory. We’ll show why the possible resolution of conflicts in Syria and Ukraine is but a mixed blessing, for both Russia and Central Asia, and why Trump’s policies may hurt an ally of Russia in the Middle East.

Resolving the Syrian and Ukrainian conflicts

Donald Trump promised to improve relations with Russia in resolving the Syrian and Ukrainian conflicts. “I think I would have a very, very good relationship with Putin.  And I think I would have a very, very good relationship with Russia.” Trump also promised to stop opposing Assad. But Trump’s promise contradicts that of the vice-president-elect, Mike Pence, who opposed Russian support for Assad’s assault on Aleppo. “If Russia continues to be involved in this barbaric attack on civilians in Aleppo, the US needs to be prepared to strike military targets of the Assad regime to prevent them from [taking part in] this humanitarian crisis taking place in Aleppo,” Pence said. On the other hand, Trump argued that the U.S. should stay out of Syria, America has “bigger problems than Assad.” Trump also hinted that the US may lift sanctions against Russia. Pence and many other Republicans may push Trump to renege on his promises.

Conflicts in Syria and Ukraine will affect Central Asia differently. Let’s assume the best-case scenario from the perspective of pro-Russian Trump supporters in the Commonwealth of Independent States: The US and Russia cooperate to remove terrorist groups from Syria, and Americans end their sanctions against Russia. We do not say that the negative side effects outweigh the benefits of peace, but shall illustrate these costs, to be objective.

Peace and stability in Syria, with the destruction or removal of the ISIL from the region, even with the repressive Assad still in power, would relieve CIS countries from having to provide jobs and aid to refugees and migrants, and from the threat of terrorism, at least in the short run. The flow of migrants and refugees to Europe would be reduced as well.  European countries would spend less on welfare benefits for them, and may invest more in other sectors, which can lead to economic growth.

ISIL elimination would decrease the world supply of oil, a key revenue source for the terrorist organization, and thus increase world oil prices, benefiting oil and gas-dependent economies. As of December 2015, ISIL monthly sales of oil, produced in Iraq and Syria, amounted to $40 million per month. However, in December, the U.S.-led coalition organized air strikes on oil-producing facilities, while Russia set up air attacks on oil tankers, cutting oil output from ISIL areas by 30%, reported Al Jazeera.

If the ISIL was eliminated from Syria, oil-exporting countries that float their exchange rates would see their currencies strengthen, because demand would rise for their own oil. By “strengthening,” I mean that the currencies could buy more than before of foreign goods, a trend known as “currency appreciation.” Their central banks might try to keep this from happening, because it would raise the domestic demand for imports – and lower the global demand for their exports, since foreigners need tenge to buy Kazakhstani oil (for example), and an appreciated tenge costs more to buy. But if the central banks thus keep their currencies weak, prices in their countries would remain high. Kazakhstanis, for example, would have to compete with foreigners for Tengiz oil – foreigners who want the oil because weak tenge are easy for them to buy.

On the other hand, if the National Bank of Kazakhstan lets the tenge appreciate, then the tenge wages of workers will rise in terms of dollars (after all, each tenge is worth more than before in terms of bucks). When foreigners build factories in Kazakhstan, they ultimately must pay dollars to hire workers. So, tenge appreciation discourages foreign investment.

    

The Ukrainian conflict is another kettle of fish. As long as it persists, western sanctions will continue. Though Brexit weakened the European Union, the new government of the United Kingdom is even more anti-Russian than the old one was: Foreign Affairs Minister Boris Johnson called for protest demonstrations, reported The Guardian. Even if the US ends its sanctions, other western countries might not.

Since trade between the US and Russia is small, compared with trade between Russia and the European Union, Trump can lift sanctions against Russia unilaterally. If only the United States lifted their sanctions against Russia, this would increase both the incomes of Russian consumers and opportunities of Russian agricultural producers. Demand for food would rise with higher incomes, but supply would rise as well. Uzbek and Kyrgyz exporters into Russia would gain from higher demand.

Many European leaders will want to follow Trump’s lead in lifting sanctions, but probably will do so only on the condition that Russia lifts its own, retaliatory embargo, facing pressures from their farmers.

If both sides resolve the Ukrainian conflict, the sanctions and the Russian embargo will end. This will dissolve uncertainty about the prospects facing Russian farmers, so they will be able to borrow money at lower interest rates. By cutting costs, this will increase domestic production of food. In Russia, total food supply – consisting of domestic production and imports – should increase. The price will fall if resolution of the Ukraine conflict induces the Kremlin to cut tariffs. 

It is not clear how the end of the Ukraine spat will affect agricultural exporters of Kyrgyzstan, Uzbekistan, and Kazakhstan. On one hand, by lifting its embargo, Russia will expose those Central Asian nations to more competition in its imports market. That will limit their sales. On the other hand, the rise in Russian income will boost demand for most imports, including those from Central Asia.

The Deal with Iran

Trump argued that the Iran sanctions relief, in exchange for terminating its nuclear program, was a mistake. Since it “gave back to Iran $150 billion and gave us absolutely nothing -- it will go down in history as one of the worst deals ever negotiated.” In reality, according to a White House estimate, the United States freed up only about $50 billion in previously frozen assets; the remaining $100 billion is just Trump’s speculation about Iran’s gain. 

There may be three scenarios with the Iran deal, said CNN Money. The United States may unilaterally withdraw, but Iran’s President Hassan Rouhani said a single government cannot alter the nuclear deal. According to John Whittaker, a partner of the law firm Clyde & Co. in London, “A Trump administration would be at liberty, theoretically at least, to revoke the participation of the United States. At a practical level, however, this would have severe consequences for other signatories... in particular the European Union.” Uncertainty may keep people guessing.  Though Iran recently reached a $2 billion agreement with France’s Total and China’s CNPC on developing a large gas field, many United States companies are still wary of doing business in Iran. Trump’s election increases the uncertainty and may decrease investment by western companies into Iran. Finally, the Republican-dominated Congress may introduce new measures against Iran, even new sanctions. A new, more conservative government may then come to power in Tehran, to resume Iran’s nuclear program.

Steps towards pulling out are already being made. On November 15, the House of Representatives extended the existing sanctions, which would expire on December 31, 2016, till the end of 2026. However, the other five signatories -- Russia, China, France, the UK and Germany -- may remain committed to the deal, reports the Jewish Telegraphic Agency (JTA).

Since the deal on Iran was reached on January 16, 2016, oil production in Iran has soared from 2.9 million barrels per day in January to 3.8 million barrels per day in late May. Iran, having the world’s second largest natural gas reserves after Russia, boosted its gas output by 23 billion cubic meters upon completing development projects in the South Pars field, the largest gas field in the world. Due to the sanctions relief, real GDP growth for 2016 is forecast at 4.47%, up from 0.38% in 2015. However, to reach the target of 4 million barrels per day, approximately equal to Iran’s pre-sanctions output, Iran needs to attract about $185 billion by 2020 to improve output and refining equipment.

Meanwhile, domestic discontent is growing. Unemployment increased from 10.6% in March 2015 to 11% in March 2016. According to the World Bank, Iran still needs to improve its business environment, decrease the role of the state in the economy, and reform its financial system. Some entrepreneurs complain that state-run enterprises, rather than small businesses, attracted most foreign investment. Corruption and poor transportation infrastructure still discourage investment. In April, protesters gathered around the Ministry of Economic Affairs, accusing Rouhani of undermining the Supreme Leader Ayatollah Ali Khamenei’s call for the “Resistance Economy,” which would focus on domestic production. These factors decrease the possibility of re-election of the current Reformist government in 2017, reports an official of the U.S. Institute of Peace. If hardliners get elected, relations between Iran and the West will worsen.

For Central Asia, worse relations between Iran and the United States would be a mixed blessing. Decreasing investments into Iran’s economy would decrease the global oil supply, and increase oil prices, ceteris paribus, benefiting the economies of Russia, Kazakhstan, and other resource-extracting CIS countries, but it would hurt the economies of oil importers in Europe. The increase will strengthen the tenge and the ruble, relative to the euro or the dollar, and currencies of other commodity-exporting countries in the region with floating exchange rate policies. Labor migrants in Russia and Kazakhstan will benefit from this appreciation. Countries with fixed exchange rate regimes, such as Turkmenistan, will experience higher inflation.

However, trade between Iran and each of the other two countries, through the railroad linking Kazakhstan, Turkmenistan and Iran, will decline, since Iran, under renewed sanctions (and thus decreased foreign investment), will demand less Kazakh and Turkmen grain. Iranian investments into projects in Central Asia, aimed at economic diversification, may decrease as well. Higher commodity prices would induce Iranian companies to invest in oil instead of other industries.  Iranian companies would have to pay higher interest rates, since Iranian banks would be denied access to cheap loans.

Kazakhstan is likely to lose more than Russia from the renewal of sanctions against Iran. As of April 2016, according to KAZNEX data, about 400 Iranian companies invested in Kazakhstan alone, 164 of which were active. There were 150 Kazakhstani companies operating in Iran, and 105 Kazakhstani exporters to Iran, out of which 73 supplied over $1 million of exports annually. New sanctions on Iran would affect Russia’s economy less: As of 2014, trade between Russia and Iran amounted to $1.67 billion, only slightly above that of trade between Kazakhstan and Iran, of $1 billion, although Russia’s economy is about 9 times larger than that of Kazakhstan, reports Forbes.kz.

Like other oil exporters, Russia would benefit from higher oil prices than would exist otherwise but may not retain a strong geopolitical ally in Iran if Russia’s relations with the West improve while Iran’s worsen. (Like Russia, Iran is a supporter of Assad’s regime in Syria. Iran lost almost 700 soldiers and militia fighters by May 2016, reported The Telegraph. Iran had also voted against the UN Resolution on Crimea on November 15, and may support Russia in future conflicts and controversies.) Facing severe economic problems, Iran would not care to side with Russia in controversies, unless there were clear economic benefits from doing so. Siding with Russia on the Crimea issue brings Iran no economic benefits, only geopolitical benefits. It is not wise for Russia to “befriend” the West against Iran.

One may argue that Russia may attempt to soothe Iran’s problems and the decline in trade between Iran and Central Asia by allowing Iran to join the Eurasian Economic Union (EAEU). However, in the interest of dominating in the EAEU, and appealing to Soviet nostalgia among its citizens and those of the EAEU member states, Russia is unlikely to make the first move in admitting countries that are not former Soviet republics. Furthermore, since even without Iran, exporters of oil and hydrocarbon products dominate the EAEU, the trade increase with other members from Iran’s accession will be limited. Also, if Russia made such a move, its relations with the U.S. could suffer again, and the hawks in Congress and the New Administration may urge Trump to oppose Russia in new or existing conflicts. Trump’s victory is by no means unambiguously beneficial for Russia or for Central Asia.

Conclusion

Pro-Russian politicians and analysts worldwide are euphoric over the prospect of US-Russia cooperation in resolving the Syrian and Ukrainian conflicts due to Trump’s victory.  But they fail to consider the side effects of such cooperation on third parties.

Dmitriy Belyanin has a Master’s degree of Business Administration in Finance and a Bachelor of Arts degree in Economics from KIMEP University. Since 2007, he has been writing on issues in economics and finance ranging from stock markets to environmental economics. He is the associate editor of this blog.

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