A Cold Summer for China and Russia?
Image Credit: REUTERS/Alexander Zemlianichenko/Pool

A Cold Summer for China and Russia?

 
 

World War II officially ended on September 2, 1945 when the representatives of the Empire of Japan signed a formal surrender on board the USS Missouri. By that time four tumultuous months had already passed since the declaration of victory over the Nazis in Europe. Thus, Russia and China, the two victors who suffered the most casualties during the war, commemorate the anniversary of the triumph in late spring and early autumn, respectively. Xi Jinping’s attendance of Moscow’s victory parade last May was largely seen as the next step in the formation of a new world order, as Xi, flush with pride after the successful launch of the Asian Infrastructure Investment Bank, stood shoulder to shoulder with Putin – the two leaders using the occasion to announce the merger of China’s “New Silk Road Initiative” with Russia’s “Eurasian Economic Union.”

Four months have passed and the summer of 2015, while not as turbulent as that of 1945, has significantly altered the global geoeconomic balance. Vladimir Putin’s reciprocal visit to Tiananmen Square to attend Beijing’s celebration on September 3 provides a convenient checkpoint to assess the progress made in the Sino-Russian relationship since May.

The Cold Summer of 2015

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While the global temperatures have been the highest on record, the economic conditions in both Russia and China have grown progressively cooler. Gallons of ink have been spilled describing China’s economic plight, while Russia’s woes are generally relegated to the inside pages. However, if the current trajectory continues, then early next year Russia’s economy may enter a genuine depression (defined as more than 8 consecutive quarters of recession or a drop in GDP of more than 10 percent in a single quarter). Over the last two years the weak ruble, persistent inflation of over 15 percent, progressively harsher Western sanctions, and collapsing oil prices have brought Russia’s economy to its knees. The combined effects of these factors have hit the general population hard. Unemployment remains at 5.3 percent, but many government workers are working without pay. Disposable income is down 2.9 percent on the year. There is even discussion of delinking pension hikes from inflation, a move that would condemn thousands of elderly Russians to poverty if the economic crisis persists. Even Russia’s military budget, which has remained immune to post-Ukraine crisis cuts, has recently been squeezed.

Despite the economic pain Vladimir Putin has adamantly refused to back down in Ukraine (although he recently agreed to meet with U.S. President Barack Obama on the condition that the White House extend an invitation for a bilateral summit after the UN General Assembly). Nonetheless, as Putin’s ballyhooed “pivot” to Asia has produced scant results, the Kremlin may soon find itself with no alternatives but to seek rapprochement with the United States. Thus far China hasn’t come close to replacing the West’s place in Russia’s economy and the important steps to enhance trade and investment between the two powers that have been made over the last two years may be rapidly reversed if China’s downturn continues.

The Road and the Union

Xi Jinping first announced the “One Belt, One Road” (OBOR) initiative during a relatively innocuous speech at Astana University in September 2013. The project gradually picked up steam throughout 2014, eventually becoming the keystone of Xi Jinping’s foreign policy agenda. In April, China released a vast blueprint for the initiative and set up a $40 billion fund to finance various projects associated with OBOR.

At first the Kremlin was skeptical of Xi’s proposal, viewing it as the institutionalization of China’s already dominant economic position in Central Asia, but Beijing persistently lobbied Moscow to combine OBOR with the newly formed Eurasian Economic Union (EEU) – a regional trading bloc linking Belarus, Kyrgyzstan, Russia, Kazakhstan, and Armenia. After demurring for several months, the Russians finally acquiesced to China’s entreaties at the 2015 Boao Forum in Hainan when Deputy Prime Minister Igor Shuvalov proclaimed Moscow’s decision to combine the two organizations. Shuvalov, a man so close to Putin that he has been called the “shadow prime minister,” is in charge of the Sino-Russian intergovernmental commission for investment projects. He has also been given the responsibility for finding a way to combine the OBOR with the EEU – a devilish task considering that the two initiatives were created for entirely different purposes.

The Russian Ministry of Foreign Affairs was charged with writing the rules for the merger, but the mercurial nature of the OBOR has made this job akin to erecting a fortress on quicksand. A variety of different states are jostling for a share of the $40 billion pie and Beijing seems happy to promise the moon to all of them. In a recent Foreign Affairs article David Shambaugh estimated that China has pledged to invest approximately $1.41 trillion in Asia alone by 2025. However, if China has to use its immense foreign currency reserves to steady its own shaky economy then how much will be left over for Beijing’s vast external designs? For example, the biggest benefactor of China’s largess has been Kazakhstan, a country that recently signed a series of deals worth $23 billion, but more importantly, has already received billions in Chinese investment.

Russia, on the other hand, was wary of accepting Chinese investments during the booming 2000s and now finds itself a bit late to the party. Thus far the only project actually linking the EEU and OBOR has been the proposed construction of the high-speed railroad from Moscow to Beijing. In June, China’s Railway Group and Russia’s JSC railways signed a contract to begin construction of the first branch of this track – the 480-mile high-speed railroad between Moscow and Kazan that is supposed to be completed by the 2018 World Cup. However, as indicated by the recent ouster of JSC Railways chief Vladimir Yakunin, Russia’s state-owned railway companies are not exactly models of transparency and the completion of the Moscow-Kazan branch is far from certain.

Many Words, Little Action

China’s FDI in Russia is currently a relatively measly $8 billion (even after rising more than 250 percent in 2014). Moreover, many of the funds China promised Russia at the signing of the $400 billion gas deal in May 2014 have failed to materialize. Gazprom has reportedly lost hope of ever seeing the $25 billion pre-payment for the $55 billion “Power of Siberia” gas pipeline. There has also been no progress on the “western” Altai pipeline linking Russia to Xinjiang that was promised by Li Keqiang during his visit to Moscow in November 2014. Meanwhile, the weak ruble, western sanctions, and Russia’s Byzantine legal system have made Chinese financiers wary of investing money in mid-size business in Russia. Overall, Sino-Russian trade has dropped by approximately 30 percent in 2015 and, as The Economist recently reported, cross-border trade between Russia’s Far Eastern provinces and China’s Northeast has been hit particularly hard. It is unlikely that this year’s overall bilateral trade will exceed the 2014 mark of $95 billion and, in fact, may not even reach the $89 million that was achieved in both 2012 and in 2013. Naturally, the goal of attaining $200 billion by 2020, announced by Putin and Xi at the May 2014 conference, remains firmly in the realm of fantasy. Thus, although Putin is apparently set to sign 20 bilateral deals during his upcoming trip to Beijing, the recent past indicates that not many of these agreements are actually worth the paper that they are written on.

It’s not that there haven’t been any important economic breakthroughs this summer. First of all, the recently announced sale of Novatek’s share of the giant Yamal LNG project to a Chinese firm for approximately $900 million is a significant deal given that Novatek’s principal owner, Gennady Timchenko, was one of the first Russians to be hit by U.S. sanctions, making it difficult for him to continue working on Yamal. Second, June’s pronouncement that Russia’s Zabaikalsk region would grant 115,000 hectares of land to Chinese company Huae Xinban under a 49-year lease may have set off a maelstrom of concern in Russia, but was also an important step towards allowing greater Chinese investment in Russia’s agricultural sector. As revealed in a recently published field study by Ivan Zvenko, agriculture is one of the areas in which Sino-Russian collaboration remains underdeveloped and contains great promise.

Conclusion

The last four months have shown that “hot politics, cold economics” remains the best paradigm for understanding Sino-Russian relations. When Putin visits Beijing this week he is certain to receive a warm reception indicative of the “hot” nature of the political relationship, but look beyond the flirtation and it becomes obvious that the economic component of the partnership has cooled significantly over the summer. Russia is actively seeking to diversify its partnerships in Asia, cementing ties with Vietnam, and increasing cooperation with India. Ultimately, the Kremlin must be beginning to realize that any pivot to Asia is impossible without first improving Moscow’s tattered relationship with the West.

Greg Shtraks is a PhD Candidate at the University of Washington where he is writing his dissertation on the evolution of Sino-Russian relations. He is currently a resident fellow at East China Normal University in Shanghai.

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