Could Greece Pivot To Russia And China?

Raoul Ruparel Contributor

Forbes

Greek Prime Minister Alexis Tsipras heads to Moscow tomorrow amongst significant noise around a potential Greek pivot towards Russia and China. But how realistic a proposition is this? The short answer is, not very. Most of the noise is precisely that, just noise. But it is worth exploring in more detail just why this is the case and what it means for the current negotiations around Greece’s position in the Eurozone and EU-Russia relations.

Russia cannot afford to support Greece

The usual narrative goes that, Greece is considering turning to Russia for financial support if it cannot reach a deal with the EU/IMF/ECB. However, in reality, this is not really an option on the table. The simple reason is that, with economic sanctions and a low oil price, Russia has its own economic problems and cannot afford to aid a country the size of Greece to the level that it requires.

While Greece is only 2% of the Eurozone economy, it is equivalent of 12% of the Russian economy. It is likely that it will need €30bn to €50bn over the next few years, with much of this funding front loaded. Given that the EU/IMF/ECB own €246bn in Greek debt, a large amount of any funding given to Greece would flow to these Western Institutions. It would be a strange turn of events for Russia to actively funnel huge amounts of funding to the EU while the EU has sanctions against it. This amount could easily escalate if the EU cut off support or if the banking sector required further assistance (not impossible).

Furthermore, as explained by PIIE in detail here, while Russia superficially seems to have significant reserves the figures include money already allocated for two sovereign wealth funds. As such, the actual usable reserves may be much lower than the headline amount. On top of this, while the state may be able to swing using these funds for domestic needs, currency protection or to counter sanctions it is hard to imagine them being put to use abroad and particularly in an EU state.

It is also worth looking at the level of investments Russia has made in other cases. While Russia did provide Cyprus (a country which it has very close ties both politically and financially) with a €2.5bn loan in 2011, it refused to provide greater support when the country really needed it in 2013. In the run up to the crisis in Ukraine – a clearly important strategic partner for Russia – it did provide some money and support the government but the amount pales in comparison to the hundreds of billions which have been poured into Greece.

In the end, Russia is likely to see its huge current account surplus hammered by the low oil price. At the same time the huge capital outflows are likely to continue or even pick up pace. The economy is likely to struggle for the coming months or years, plagued by uncertainty around all of this and as the chart below shows, the outlook has worsened considerably recently.

What does Greece actually have to offer Russia?

As an EU member, Greece actually has fairly limited room for manoeuvre in its negotiations with Russia. All trade policy and negotiations are handled at the EU level, so the hope for any serious deepening of trade links is unlikely to be fulfilled beyond some talk of cooperation.

Discussions are also further limited by the sanctions regime. Greece cannot help remove the sanctions since this requires unanimous support. However, it could hold up any further push for sanctions, which also requires unanimity, or even refuse to agree to extend the sanctions which are periodically reviewed. One further option which has reportedly been toyed with by Cyprus, is giving Russia some kind of military base or strike some kind of deal on military cooperation.

Another potential area for cooperation is the energy sector both in terms of gas deals and exploration rights of potential reserves in Greek waters. Neither of these options offers any real short term financial gains and could yet be scuppered by EU plans for energy union or even deeper sanctions.

While Greece does in theory reserves these options, it would mean a big leap to actually take them (particularly the military option). Given the intense negotiations going on between Greece and its Eurozone partners – which are no progressing well, partly due to a lack of trust – it would probably not be advisable to strike a deal with a government which many in the EU severely distrust.

China continues to take a specific approach to the crisis

Moving onto China, the story is different by the end result is likely to be similar. There will be talk of closer relations and a more amicable relationship but any significant change is unlikely. While China has significantly more funds available to help struggling countries it has resisted doing so, at least at the sovereign level. Despite many ministers heading to China to appeal for government led investment there has been little movement. That said, China has used the crisis to pick up undervalued strategic assets via private investment. A prime example is the port of Piraeus in which China is already heavily involved and is keen to purchase part of under the privatisation programme – though it is not clear if it will go ahead under the new government. As such, China is likely to be a potential source for private investment but it will not take unnecessary risks and is unlikely to offer anything close to a broad sovereign bailout. Such investment will also be reliant on the new government actually pursuing a privatisation strategy and welcoming foreign ownership.

All about negotiations with the EU

In the end, it is in both sides interest to try to create room for manoeuvre when it comes to their respective negotiations with the EU/Eurozone. For Greece, it is useful to have something to barter with and to try to suggest they have some alternative sources of funding and cooperation (despite everyone largely knowing that it does not). At least they can use willingness to pull back from Russia as a bargaing tool. For Russia it is continuously trying to sow seeds of uncertainty within the EU around sanctions (the EU has historically struggled to reach consensus on the issue). It is also helpful for it to have Greece as a messenger inside the EU.

Ultimately, the new Greek government is likely to have better relations with both Russia and China but there is little they can or will do to help Greece beyond its current predicament. While the Greek government may not agree with its EU partners on much it is also acutely aware of the damage pulling to close to Moscow and Beijing will do. As long as Greece remains in the Euro and probably the EU, any pivot is likely to be largely superficial.

http://www.forbes.com/sites/raoulruparel/2015/04/07/could-greece-pivot-to-russia-and-china/2/