The West Block

Posted
March 19, 2023

Canadians may have had flashbacks to the 2008 financial crisis last week when it looked like the collapse of Silicon Valley Bank was spreading before Washington stepped in. The bank turmoil adds to the economic uncertainty caused by inflation, rising food and gas prices and high interest rates. Ahead of the federal budget announcement on March 28, “The West Block” host Mercedes Stephenson speaks with Kevin Page, former Parliamentary Budget Officer and head of the Institute of Fiscal Studies and Democracy, and Lisa Raitt, former Conservative cabinet minister and vice chair of global investment banking at CIBC, about the state of Canada’s economy.

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Chinese President Xi Jinping is meeting with his Russian counterpart Vladimir Putin on a three-day visit aimed at boosting Beijing-Moscow ties and cementing China’s status as a global powerbroker.

After helping to arrange a detente between Saudi Arabia and Iran earlier this month, Xi is using the trip to promote a 12-point peace plan to resolve the war in Ukraine — a proposal Putin reportedly said he views “with respect”.

With Xi’s peace plan receiving a lukewarm response in Kyiv and Washington, however, the Chinese leader is more likely to have success shoring up economic cooperation with Putin, which has deepened amid the growing isolation of Moscow.

“Xi’s trip to Russia is mainly about maintaining closer Sino-Russian relations in the post-pandemic era when both powers are experiencing hard times,” Edward Chan, a postdoctoral fellow at the Australian Centre on China in the World, told Al Jazeera.

“It is fair to expect China and Russia will have a tighter bonding economically and diplomatically,” Chan added.

Here are the key economic areas Xi and Putin are likely to focus on for greater cooperation.

Russian energy

China has emerged as a major buyer of sharply discounted Russian oil and gas as Western buyers have banned energy imports.

Russia was China’s top oil supplier in January and February at 1.94 million barrels per day, up from 1.57 million in 2022, according to Chinese customs data. Russia’s crude oil exports to China are also up, growing 8 percent in 2022 to 1.72 million barrels per day.

China’s imports of Russian pipeline gas and liquefied natural gas last year jumped 2.6 times and 2.4 times, respectively, to $3.98bn and $6.75bn.

Meanwhile, China’s imports of Russian coal surged 20 percent to 68.06 million tonnes.

The surging energy sales have provided Russia’s economy, which shrank a less-than-expected 2.1 percent last year, a much-needed lifeline in the face of sanctions. Besides China, other top buyers of Russian energy include India and Turkey, who have taken advantage of a punitive price cap on Russian oil to access cheaper energy. Analysts expect sales to continue to go up as the war in Ukraine shows no sign of ending.

Imports of Chinese goods

Shortly before Russia’s invasion of Ukraine, China and Russia announced a “no limits partnership”. Much of that has manifested in trade.

While Russia has been selling energy to China, Russia has been ramping up imports of Chinese goods, including machinery, electronics, base metals, vehicles, ships and aircraft.

China’s exports to Russia hit $76.12bn in 2022, up from $67.57bn the previous year, according to Chinese customs data.

An exodus of Western brands from Russia has been a boon for Chinese industries such as automaking, with China’s Geely Automobile Holdings, Chery Automobile and Great Wall Motor taking 17 percent of the Russian market last year.

Overall, bilateral trade between the two sides grew by nearly one-third last year to about $190bn and is likely to continue to grow. Their economic relations, however, are imbalanced.

While China is Russia’s most important economic partner, trade between the two is dwarfed by China’s trade with the Association of Southeast Asian Nations, the European Union and the United States, according to customs data. Trade between these top three trading partners in 2022 was valued at $947bn, $821bn, and $734bn, respectively, according to government data.

Ahead of his trip to Moscow, Xi published a lengthy signed letter in the Russian Gazette calling for greater economic cooperation, investment, and two-way trade.

De-dollarisation of Russia

Russia’s economy was temporarily crippled in the early days of the Ukraine invasion by Western moves to freeze the assets of Russia’s central bank and Russian commercial banks, cut off Russian financial institutions from the international payments system SWIFT, and the departure of Western banks and credit card companies.

With Russia iced out of the dollar-dominated international financial system, the Chinese yuan and cryptocurrency have stepped into the void. The share of yuan-based transactions grew from 0.4 percent to 14 percent of the total in a nine-month period, according to the Carnegie Endowment for International Peace. In September, two Russian banks began to lend in yuan and also use the currency for money transfers in lieu of SWIFT.

Russia’s growing reliance on the yuan saw the country in October become the fourth-largest offshore trading centre for the Chinese currency.

Amid dwindling dollar reserves due to sanctions, Russia’s central bank in January sold $47m worth of yuan to make up for gaps in its budget from lower oil and gas revenues.

Swapping the dollar and euro for the yuan may be an effective short-term solution, but it will make Russia more financially dependent on China, Alexandra Prokopenko, a visiting fellow at the German Council on Foreign Relations, said in a recent article for the Carnegie Endowment for International Peace.

“The de-dollarization of the economy, which the Russian authorities are so proud of, essentially translates into ‘yuanization.’ Russia is drifting toward a yuan currency zone, swapping its dollar dependence for reliance on the yuan,” Prokopenko said. “This is hardly a reliable substitution: now Russian reserves and payments will be influenced by the policies of the Chinese Communist Party and the People’s Bank of China. Should relations between the two countries deteriorate, Russia may face reserve losses and payment disruptions.”

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The federal government will “invest aggressively” in clean technology, Finance Minister Chrystia Freeland said Monday during a prebudget event in which she outlined the main themes of the economic plan she will deliver next week.

At a time when the U.S. government is spending billions through programs and tax breaks to spur the use of electric vehicles and clean energy, Ms. Freeland said it would “reckless” if Canada failed to also take action.

“Canada right now is really at a crucial crossroads. This is a moment when the great economies of the world have decided to embrace the clean economy,” Ms. Freeland told reporters after delivering a budget-themed speech to the International Brotherhood of Electrical Workers in Oshawa, Ont.

Ms. Freeland, who is also Deputy Prime Minister, said Canada must choose between two options.

“We also can invest aggressively in the clean economy of the 21st century in a smart, focused Canadian way – or we can be left behind,” she said. “Not making those investments is also a choice. And a choice, I believe, would be really irresponsible, really reckless.”

Monday’s speech is the latest in a series of public remarks in which the Finance Minister has provided broad outlines of the March 28 budget. She has previously said that accounting for the recently announced increase in health transfers to the provinces will be a key element. Her comments Monday add to earlier signals that the budget will include measures in response to green technology incentives contained in the Inflation Reduction Act approved last year in Washington.

In addition to those two areas of spending, Ms. Freeland said next week’s federal budget will include a “narrowly focused” boost to social safety net supports for low-income Canadians in response to the higher costs of living.

NDP Leader Jagmeet Singh, who is part of a supply and confidence agreement with the minority Liberal government, has said this should come in the form of an extension of the current six month doubling of the GST credit, a direct payment that is aimed at lower income Canadians.

Ms. Freeland did not provide specifics as to the form this support will take. She also repeated past assurances that the new spending can occur as part of a fiscally responsible budget.

Economists and business groups have cautioned that Canada can’t compete dollar-for-dollar with the billions in subsidies now on offer south of the border. A Congressional Budget Office report estimated that the measures in the Inflation Reduction Act add up to about US$400-billion over 10 years. A Credit Suisse report said the total could be twice as high.

Business Council of Canada CEO Goldy Hyder has said that Canada’s response should be about one-10th of the size of the U.S. package, given that Canada’s population is about one-10th that of the U.S. He also said that Canada’s response could include repurposing previously announced programs for business rather than funding it entirely through new spending.

In her speech, the finance minister also addressed the turmoil in financial markets following the failure of Silicon Valley Bank and this weekend’s merger of UBS and Credit Suisse.

“We have strong institutions, and we have a financial system that has proven its strength time and again,” she said. “Our financial institutions have the capital they need to weather periods of turbulence. A hallmark of our Canadian banks is prudent risk management—and this is also a core principle for those of us who regulate the financial system.”

The minister said the federal government is being vigilant and monitoring the situation closely.

Mr. Singh, the NDP leader, told The Globe last week that his party will be expecting to see cost-of-living support in the budget, including a previously promised expansion of a dental care program for lower-income Canadians.

The Conservative Party is urging the government to deliver a budget that reins in spending and avoids tax increases.

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