World Economy
Western Sanctions: New Horizons for Russia's Cooperation with Arab Countries

Moscow has something to offer its Arab partners, differentiating its approaches, taking into account the level of their socio-economic and technological development, ambitions and solvency.

In the context of the ongoing Russian military operation in Ukraine, a sharp tightening of Western sanctions aimed, as US President John Biden said, at excluding Russia from advanced technology, weakening its economy, dictates the task of finding adequate answers in the field of foreign economic activity (FEA). One answer which offers promise is the dynamic development of dialogue with the Arab world.

Even before the events in Ukraine, Russia had accumulated the experience of economic contacts with a number of countries in the Middle East that were facing emergency conditions, including: international sanctions (Iran, Sudan), a state of armed conflict (Yemen, Libya, Syria), crisis (Lebanon), and a difficult internal political situation (Iraq). In particular, we are talking about testing  financial crisis mechanisms - as an example, we should refer to the same Tempbank, transactions with Syria and Iran, as well as existing banking structures, the names of which, for obvious reasons, are not subject to public disclosure.

Moscow has something to offer its Arab partners, differentiating its approaches, taking into account the level of their socio-economic and technological development, ambitions and solvency. A prominent place is traditionally given to military hardware. According to the Stockholm Peace Research Institute (SIPRI) despite a 22% reduction in its exports in 2016-2020 compared to 2011-2015 - due to a 55% decrease in supplies to India, sales to Algeria (the third most important importer after India and China, buying 15% of defense products exports from Russia) increased by 49%, and to Egypt - by a record 430%. In total, during the period under review, Russian trade in military products with the Middle East increased by 64%, increasing the share of this region to 21%. This is lower than what Asia accounts for (55%+), but more than Africa (18%+).

The confrontation between the West and Russia in the foreseeable future runs the risk of becoming more aggressive than earlier attempts by competitors, using the pretext of sanctions, to oust Russian gunsmiths from the Arab markets. Washington’s pressure on Arab governments, including those with the status of “special allies outside NATO” (Egypt, Jordan, Bahrain, Kuwait, Morocco, Tunisia, Qatar), will certainly be used again, in parallel with the accelerated certification of their weapons to NATO standards. The anti-Russian strategy will affect the market for 4+ and 4++ generation combat aircraft (they are cheaper than 5th generation aircraft); Russia has long been a recognised leader in the production and maintenance of such warplanes. In 2016-2020 such shipments accounted for up to 49% of the export value of Russian military products. The West is unlikely to give up speculation on the limited financial capabilities of foreign partners, imposing "preferential schemes" on them in exchange for the rejection of "too expensive" Russian equipment (as in the case of Indonesia, in December 2021, which abandoned the Su-35 fighters).

However, the difficult situation in which Russia finds itself due to unprecedented external restrictive measures does not at all mean that there are no horizons for increasing exports to Arab countries, both of high-tech military products and conventional weapons. These include air defense and electronic intelligence, light and small arms, as well as armoured vehicles, where Russia's competitors don’t only include the West, but also China. Moscow’s known competitive advantages are the following: the availability of a service and repair base, including for the modernisation of Soviet equipment, increased after the generally successful use of Russian military equipment in the conflicts in Georgia (2008), Syria (since 2015) and Ukraine (2014, 2022).

The unique technologies used in the creation of advanced air defense systems (Derivatsiya-Air Defense, Pantsir-SM-SV, Typhoon-Air Defense) will continue to be of interest to the Arab monarchies, given their rivalry with Iran and Houthi UAV attacks on targets in Saudi Arabia and the UAE. All this will ultimately help to narrow the negative consequences of the almost inevitable decline in Russian aircraft exports. The history of deliveries of  S-400 systems to Turkey, which lost participation in the joint programme with the United States to maintain the 5th generation of F-35 fighters, confirms the aforementioned thesis.

The Russian producers are able to offer Arab importers cooperation formats that compare favourably with the standard schemes offered by Western competitors. Starting with a flexible pricing policy, deliveries of military products with pre-sales preparation and after-sales service, up to the production of weapons adapted to local conditions (the Iskander-E missile system project became successful, despite the fact that their export does not damage the defense capability of the Russian Federation). The most effective solutions for dialogue with members of the Gulf Cooperation Council (GCC) are joint offset projects and R&D, including the creation and production of helicopters and UAVs. The main thing is to ensure state support and control in the Russian Federation, excluding unfair competition between foreign economic activity entities within Russia and in the CIS.

It is advisable to utilise the interest of Algeria and Egypt in importing military products in exchange, Russia could purchase their agricultural products and consumer goods using clearing and payments in national currencies. Russia has had experience in clearing settlements since the days of the USSR, when trade with Finland was carried out in rubles, with India in Indian rupees, and with Pakistan in Pakistani rupees; settlements in Chinese yuan are now being introduced. It cannot be ruled out that these algorithms will expand the Russian presence in the markets of the Arab Maghreb (in addition to Algeria, in Morocco and Tunisia), as well as in Sudan.

Another direction is space exploration. Saudi Arabia is seen as the main partner here, its authorities established a Space Commission in 2018, announcing the allocation of $ 2.1 billion for these purposes in as part of the ambitious national programme "Vision 2030". Projects for the formation of human capital in the space industry (The Ajyal Space Program) and the creation of "orbital slots" in outer space (The Orbital Sites Reservation Project) have been launched. Riyadh is trying to keep up with the UAE, which launched in 2020 an automatic interplanetary station for the exploration of Mars, Al-Amal,  the first in the Arab world. A year earlier, the Saudis had joined the inter-Arab coordination group set up under the 813 Satellite programme to remotely study the Earth, environment and climate.

In this view Russia, having unique experience in the field of manned space exploration, the production of launch vehicles and satellite launches, as well as spaceports, is able to provide significant assistance to the Arab states in the development of national and subregional (in the Persian Gulf, Maghreb) space programmes, including joint R&D and satellite manufacturing as well as space tourism. A practical step could be the intensification of Russian participation in the upcoming Global Space Forum on September 21-22, 2022 in Riyadh and on March 5-9, 2023 in Dubai, the 17th international conference on space operations SpaceOps 2023

As in the case of the export of military products, in the space services market Russia faces competition from other players represented by the United States, China, India, Japan and the European Space Agency. The greatest chances are advanced unique domestic developments, which, like qualified personnel, need legal protection, and therefore it is advisable to recommend an inventory by Rospatent and the Russian Ministry of Foreign Affairs of the international regulatory framework in the field of intellectual property protection.

The third sector is nuclear energy, to which an innovative element of intellectualisation (Smart Grid) was added within which the electrical network is treated as a single infrastructure element with a highly automated control system (based on the projected intelligent electric power system of Russia - IESR). The flagship project in the Arab world was the construction of the El-Dabaa nuclear power plant in Egypt. Competition in the nuclear market, comparable to the arms market (the competitors of Rosatom here are the American corporation Westinghouse Electric and the French group of companies Areva), necessitates the adoption of flexible cooperation algorithms, taking into account the actual loss of Russia's opportunities for long-term lending to nuclear projects in dollars and euros. The external financing of transactions is also becoming problematic: on March 28, the UAE sovereign investment fund Mubadala Investment Company  announced the suspension of work in Russia. The way out, at least in part, could be an increase in exports of agricultural products to the Russian Federation on a clearing basis.

The fourth promising field is information technology (IT). Despite the temporary outflow of specialists from the Russian Federation caused by the coronavirus pandemic and partly by the fear of sanctions, as the benefits approved by the Government of the Russian Federation for the national IT sector are implemented, opportunities for selling IT products abroad will expand. Practice shows that Arab partners continue to be interested in Russian developments related to cryptography and computer security, including countering hacker attacks. As in other industries, new cooperation schemes will be required, involving contracts or joint projects with third countries, for example, the IT market leader India. In the case of sensitive technologies, one cannot do without the reliable protection of confidential information and intellectual property rights in the format of bilateral agreements. The current copyright agreements with Austria, Armenia, Hungary, Madagascar, Poland, Slovakia, Czech Republic and Sweden can serve as a model.

Fifth, with the participation of the Ministry of Industry and Trade, the Ministry of Agriculture and the Ministry of Economic Development of Russia and Russian academic centers, it seems appropriate to study the issue of modalities for increasing the role of the Russian Federation in ensuring food security for a number of countries in the Middle East and North Africa. We are talking about countries experiencing conflicts and humanitarian crises (Yemen, Lebanon, Libya, the Palestinian territories, Syria, Somalia), or densely populated (Egypt, Algeria, Iraq). The provision of the population with grain products has significantly decreased due to the unfavorable global situation (falling grain yields) and the withdrawal of Ukrainian suppliers from the market. According to Statista, in 2020 Russia ranked first in the world in wheat exports (37.3 million tons), and Ukraine ranked fifth (18.1 million tons). The key to growth in the supply of food products from the Russian Federation is seen in the aforementioned clearing in combination with a flexible pricing policy, access to non-tender contracts, for countries with low solvency - in humanitarian supplies with external financing. In exchange for paying the latter, Russia is ready to provide guarantees for the protection of third-country projects on the territory of Syria (the “security matrix”, which implies the creation of favorable conditions on the ground by the Russian military police contingents stationed in this country for economic activities).

Sixth, the range of Russian exports can be expanded to include ferrous, non-ferrous and rare earth metals, unprocessed and processed wood - that is, those goods that, before the introduction of stringent sanctions, were often sold not under direct contracts, but through international exchanges. It is assumed that the regular participation of economic operators from the constituent entities of the Russian Federation in specialised exhibitions in a “business to business” format with information and logistical support from the regional branches of the Russian Chamber of Commerce and Industry, the Russian-Arab Business Council and bilateral business councils will help to identify specific areas of cooperation. Thus, the organisation of Russian business missions to Iraq, Saudi Arabia, Oman and Egypt this year is being worked out.

Finally, Russia remains attractive in terms of medical and VIP tourism (elite hunting for representatives of the Arab rich), and the organisation of paid studies for students from the Middle East and North Africa. In the 2017/2018 academic year there were 22,180 of them (including 4,438 from Iraq, 3,763 from Egypt, 2,869 from Morocco, 2,752 from Syria). In 2021, up to 69% of students studied on paid programmes.

Summing up, we single out the following main geographical areas of Russian foreign economic activity with the Arab world under the sanctions. The first is the GCC members in terms of importing high-tech military products, food, fertilizers, metals and liquid funds, implementing joint offset projects and R&D in the field of space, energy, and IT. The second is the countries of the Maghreb and Egypt with the export of grain and military products with counter-purchases of citrus fruits, vegetables, leather and leather products, clothes, shoes, the development of mass tourism for Russian citizens on all-inclusive packages. The third is humanitarian supplies with international funding to countries in a state of armed conflict.

Views expressed are of individual Members and Contributors, rather than the Club's, unless explicitly stated otherwise.