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On March 22nd, 2023, Bangladesh and Bhutan signed a transit agreement. Under the agreement, Bhutan can use Bangladesh’s land, air, and waterways to move goods to and from a third country in exchange for transit fees. As Bhutan is landlocked, it generally relies on its neighboring states for transit. In this context, the transit agreement will bring benefits to Bhutan in several aspects. On the other hand, providing a transit facility to Bhutan will also financially and politically benefit Bangladesh. Bhutan is the second country after India to avail of transit facilities from Bangladesh. Against this backdrop, it is worth assessing the potential implications of this transit agreement for both Bangladesh and Bhutan.
The Agreement
The agreement was signed on March 22nd at Bhutan’s Capital, Thimpu. Bangladesh’s Commerce Minister Tipu Munshi represented Bangladesh while Minister for Industry, Commerce and Employment Lyonpo Karma Dorji represented Bhutan. Under the agreement, Bhutan will avail Bangladesh’s land, air, and water routes for moving goods to and from a third country. In return, it will pay Bangladesh required fees and taxes.
According to the newspaper report, Bhutan will mainly use Mongla Sea Port and land and waterways from there. The agreement is also important for bilateral relations as Bangladesh and Bhutan signed a Preferential Trade Agreement in 2021.
Potential Implications for Bhutan
As Bhutan is a landlocked South Asian state, it requires cooperation from bordering and neighboring states to meet its export and import. In this aspect, the transit agreement will increase its cooperation with Bangladesh. Bhutan mainly relied on India to move its goods for a long time. Signing a transit agreement with Bangladesh will diversify its trade route. Moreover, Bhutan will greatly benefit by reducing its transit dependence on India. Due to the Sino-Indian rivalry over Bhutan, reducing transit dependence on India will also benefit Bhutan politically by easing geopolitical tension. The transit agreement will also increase trade relations between Bangladesh and Bhutan as Bhutanese traders will maintain close contact with their Bangladeshi counterparts for logistical support.
Potential Implications for Bangladesh
The agreement will increase commercial activities at Mongla Port. As a result, the agreement will help Bangladesh to utilize Mongla Port properly. Apart from Mongla Port, the agreement will also likely to increase commercial activities at the river ports. Moreover, moving Bhutanese goods will also increase the Bangladesh government’s revenue through collecting taxes and transit fees.
Besides revenue, fees, and taxes, it will also contribute to the local economy. Moving Bhutanese goods will increase business for the transport sector of the country. New ventures of facilitating transit will also open new jobs at the local level. The ‘roadside’ economy also has the scope to find extra profit. It is worth mentioning that the agreement opens up the scope, but the benefits Bangladesh and Bhutan would receive depends on the volume of goods Bhutan moves through Bangladesh.
In terms of bilateral relations, the agreement will enhance relations between Bangladesh and Bhutan. This is the second agreement in two years for the countries. In 2021, Bhutan and Bangladesh signed Preferential Trade Agreement (PTA) among them. Both countries are also discussing currently the possibilities of increasing agricultural trade among them.
Apart from bilateral and financial gains, the agreement will also diversify Bangladesh’s transit obtainer list. Before Bhutan, Bangladesh only had one transit obtainer, India. A diverse transit list will allow other states such as Nepal to initiate negotiations.
The agreement will also serve as an influence on regional connectivity. For a while now, Bangladesh and other Asian states are promoting trans-Asian connectivity through a network of road connections, transit facilities, and transshipment facilities. Bangladesh’s opening its trade routes to other South Asian states would serve as an example and inspiration for future regional connectivity also.
The agreement will not only benefit the signatory countries but also the region, South Asia. In South Asian politics, there is an effort to promote connectivity and regional trade. In larger ‘Asian Politics’, there is also an effort to promote connectivity and regionalism. So, the transit agreement will inspire future efforts and serve as a reference for future negotiations. The agreement will also become a milestone for Bangladesh-Bhutan bilateral relations, especially after the PTA agreement of 2021. Therefore, it is a praiseworthy agreement.
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“Apply this economic, peaceful, silent, deadly remedy and there will be no need for force. It is a terrible remedy. It does not cost a life outside of the nation boycotted, but it brings a pressure upon that nation.” — Woodrow Wilson
Economics has always played a role in wars. In the American Revolution, blockades were used to prevent nations from trading, in order to cause shortages and prevent treasuries from replenishing their gold reserves. In the Ukraine war, however, economics has played an especially significant role, allowing the United States and its allies to take on Russia without losing a single life, and inflict more damage than carpet-bombing could, albeit more slowly. Moving forward, it seems that economics will play a greater role in future wars. China is Washington’s other major adversary, so Beijing is most likely watching what unfurls in Russia. Xi Jinping is surely asking himself if China could withstand similar sanctions, if they were imposed in response to an attack on Taiwan.
Since the invasion of Ukraine, the U.S. and its allies have levied some 11,000 sanctions against Russia. The economic aspect of this war has been dubbed the third front by Matthew Schmidt, a former lecturer at the U.S. Command General Staff College. Although sanctions by themselves are not expected to defeat Russia, they had a negative impact on the country’s economy last year and are expected to have an even greater impact this year.
The first sanctions imposed by the U.S., shortly after the war began, prevented the sale of most commodities and technology to Russia. Western banks and companies were prohibited from transactions with many of Russia’s largest banks. Numerous Russian financial entities were removed from the SWIFT international payment system. Financial institutions were no longer permitted to extend credit to certain major Russian corporations. The Kremlin’s foreign currency reserves, held in Western banks, were frozen. And trading in Russian government bonds was banned.
In the early stages of the invasion, the World Bank and other authorities forecast that the Russian economy would contract by 8 to 10 percent. The Russian central bank, however, moved quickly to insulate the economy and stabilize the currency. The government nationalized assets of foreign companies that left country. Russian banks increased interest rates to 20 percent. Restrictions were placed on the conversion of rubles into dollars, while companies were forced to convert 80 percent of their dollar holdings to rubles. And although the currency took an initial dive, by summer it had recovered.
An unintended consequence on sanctions preventing exports to Russia was that they prevented capital from leaving the country. With export revenues rising from skyrocketing oil prices and little money being spent on imports, by November, Russia had developed a major trade surplus. Oil and gas revenues were up 28 percent, while the GDP continued to grow.
In December, this all changed, when Russia’s balance sheet was hit with a trifecta of bad news. Oil prices went into sharp decline, the EU imposed an oil-price cap, and Moscow completed its accounting for its war expenses. Suddenly, GDP growth was negative 2.1 percent in 2022.
In 2021, Russia provided 17.5 percent of the world’s oil, 47 percent of its palladium, “16.7 percent of nickel, 13 percent of aluminum, and almost a quarter of potash fertilizers.” Restrictions of these raw material exports would be devasting for the global economy, and so the harshest sanctions were placed on less crucial commodities: steel, coal, and processed wood exported to Europe. Combined, they made up just 11.7 percent of Russia’s exports. Consequently, the effect was not as damaging as it could have been. On the other hand, these restrictions put tremendous economic pressure on specific regions of Russia where the mines, processing, and manufacturing plants are located.
Moscow mitigated the impact on the domestic economy by increasing public expenditure by 32 percent. During 2022, the Kremlin increased planned budgetary spending by $113 billion, roughly half of which went to the military. The rest of the money went to increased social payments, including aid to families with children. This spending created a budget deficit of about $50 billion which was covered by withdrawals from the National Wealth Fund.
The year ended not as badly for Russia as had been predicted by Western experts, but much worse than the Kremlin had hoped. New car production decreased 59 percent, while airplane production is down at least 25 percent. Only about 30 percent of machine tools are manufactured in Russia, and the machine building industry is believed to have contracted by 10 percent last year. The pharmaceutical industry is roughly 80 percent dependent on imported raw materials. Consequently, medicines are in short supply. Spare parts are running out, and as repairs are needed more and more vehicles and machines will have to be taken out of commission. Western restrictions on the sale of dual-use technology have impacted the manufacture of military equipment. For now, Russia may still be using up its Soviet-era surplus, but once that runs out, it will be difficult to manufacture more modern weapons and equipment. GPS modules and microchips are among the items which can no longer be sold to Russia and which they will find it hard to manufacture themselves. Unmanned aerial vehicles (UAVs), which have played a large role in the Ukraine war, will be difficult to build without Western technological inputs. Drones, such as the KUB-BLA “kamikaze” UAV, the E95M, and the Orlan-10 UAV, all rely on imported technology.
Oil production is up 7 percent since the beginning of the year, but this may be due to increased demand from the Russian military. However, with reduced exports to Europe, production is expected to decrease by 7 to 8 percent by the end of 2023. The European oil price cap is in place, meaning that no oil can be sold to Europe for more than $60 per barrel. European and allied insurers and merchant vessels will not carry Russian oil which is priced higher than $60. Since the cap was put in place in December 2022, Russian oil revenues have fallen by 17 percent. Russia is now relegated to trading with countries not participating in the price cap, India and China being the largest buyers. To attract buyers, Russian oil has to be priced below the market price for oil. At the same time, global gas and oil prices have decreased by 43 percent since their 2022 peak. Now, not only does Russia have to sell below this lower global price, but in order to bypass sanctions, gas and oil have to travel the long way round to India. This adds one month and about $10 per barrel to the cost.
According to most analysts, the economy is expected to decline 2.3 percent. However, this contraction could be worse if Russia does not find additional markets for its exports. Professor Jeffrey Sonnenfeld from Yale School of Management told Deutsche Welle that much of the data used by the IMF, World Bank, and other international organizations to make their predictions is provided by the Kremlin. His independent research on the state of Russia’s economy suggests that the picture is much worse than that believed by many observers. One point he made is that there is no market for rubles, not even a black market. Consequently, there can be no price for rubles. The official rate is 75.4 rubles to the dollar, but since none of the exchanges are accepting rubles, where does this price exist?
The Moscow Stock Exchange (MOEX) is down 38 percent since last year. Sonnenfeld speculates that the only reason it has not declined more is because foreigners are not allowed to sell their holdings. In reaction to the restrictions put on sales by foreigners, the U.K. revoked MOEX’s status as a recognized exchange.
The retail sector is down by at least 6.6 percent overall while the non-food sector is down 15 percent. But it is important to remember that these numbers are nominal sales revenues, so they are based on higher prices resulting from inflation. Accordingly, the total quantity of goods purchased and consumed by the average Russian has declined by even more than the sales figures suggest — and these numbers are expected to get worse.
Between the oil price cap and the additional cost of shipping oil all the way to India, Russia is barely breaking even. Consequently, Sonnenfeld believes that there is very little money coming in, and a lot of money is being spent on the war and on job creation, as the public sector has absorbed people who were made redundant as a result of the slowing economy. Public sector employment has increased by 300,000 since the war started, not counting the 300,000 called up to military service.
In the second year of the war, Russian defense spending is expected to reach 5 percent of GDP, while the deficit is expected to be 1.5 percentage points above Moscow’s projections of 2.3 percent. The 2023 budget deficit could be covered by withdrawals from the National Wealth Fund, but the Kremlin has already spent about a quarter of the fund, with only $87.2 billion remaining in liquid assets. With the international sale of Russian government bonds prohibited, raising taxes and cutting social programs may be the only options left. Last year, the government increased social spending, to placate the populace and make them more amenable to the war. Reversing those policies may cause a public backlash.
Samuel Charap, a senior political scientist at the RAND Corporation and a former senior advisor at the U.S. State Department, said he believes that Russia has been able to withstand sanctions so far, because they have been imposed gradually, over a period of a year, providing Moscow with time to adjust. According to Brad Bowman, senior director of the Center on Military and Political Power at the Foundation for Defense of Democracies, sanctions have to be comprehensive and consistent; otherwise, if one entity is sanctioned, business will just shift to another. A black market is helping Russia bypass sanctions, with semiconductors coming in from Turkey, China, and Hong Kong. Mysterious ghost ships, with hidden registrations and origins, having been transporting Russian oil. And China is suspected of planning to provide Moscow with weapons.
In his opening statement at the U.S. Senate Committee on Banking, Housing, and Urban Affairs hearing on national security, Ranking Member Tim Scott (R-S.C.) said that existing, secondary sanctions need to be enforced against China, India, Iran, Turkey, and other countries which are known to be supporting the Russian economy.
Rachel Ziemba, an adjunct senior fellow for economics and security at the Center for a New American Security, said that sanctions were never intended to be a “silver bullet” destroying Russia and ending the war. They were meant to weaken Russia, in combination with military action on the ground. The sanctions on Russia will not cause an outright collapse but will severely limit GDP growth and set the country back many years in terms of technological development. A final victory, however, will depend on the U.S. and its allies continuing to support Ukraine.
This war can be seen as a battle of economic attrition between Russia and Ukraine. Whichever country collapses first will lose. Ukraine’s economy contracted by 30.4 percent in the first year of the war. Around 8 million people who have fled the country, while 5.4 million are internally displaced. The electricity grids are threatened. Manufacturing is in contraction, plagued by uncertain logistics and transportation. There is no way that Kyiv could resurrect the economy, much less feed the entire population, without help from outside. And this brings us to the other aspect of the economic war. At the same time that the Western allies are breaking the Russian economy, they are propping up Ukraine. U.S. Treasury Secretary Janet Yellen stated that U.S. financial support was necessary to keep the Ukrainian government afloat. So far, the U.S. has provided at least $25 billion in assistance, while President Joe Biden has asked congress to approve more. Yuliya Pavytska, an economic analyst at the Kyiv School of Economics, confirmed that the Ukrainian economy was dependent on aid from the West, but she defiantly stated that it would not collapse.
The economic war in Ukraine serves as a warning to China’s Xi Jinping. Although this second year of sanctions will most likely be more damaging to Russia, the reason Russia has not collapsed yet is because it has unique advantages which China lacks. First off, Russia’s debt-to-GDP ratio was extremely low, less than 20 percent, whereas China’s debt is around 300 percent of GDP. Next, much of China’s exports are manufactured by foreign companies in China. If foreign companies exited China, as they did in Russia, this would severely slash China’s manufacturing base, exports, and GDP. For example, if Nike pulled out of China tomorrow, the factory would still be there and a Chinese company could take it over, but what product would they manufacture and would the world agree to buy that product, as opposed to Nike products manufactured in India,Vietnam, or Indonesia?
Sanctions on Russian imports were slow to be applied to Russia’s most important source of revenue, oil and gas. Europe could do without Russian manufactured goods, but was dependent on Russian energy. China’s exports, however, mostly consist of consumer products which could be produced elsewhere. Even essential products from China, like pharmaceuticals, or essential services, such as processing of raw materials, can be done elsewhere. When the supplies from China are cut off, the price will increase, making manufacturing anywhere, even in the U.S. or Europe, more attractive.
The first round of sanctions prevented Russia from importing foreign products and raw materials. And while these restrictions are making it more difficult for Russia to service and repair its existing infrastructure and equipment, Russia, unlike China, is a resource-rich country. Raw materials account for over 25 percent of China’s total imports, while intermediate goods account for 19.25 percent. Without these, China’s manufacturing sector would grind to a halt.
The blueprint for economic war was developed over a period of centuries. The Ukraine war is serving as a lab test. The allies will adjust and tweak the technique, making it one of the most powerful weapons to be deployed in future wars.