The Debate

Can Europe Fill the Gap in China-Russia Relations?

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The Debate

Can Europe Fill the Gap in China-Russia Relations?

Can Central and Eastern Europe be the bridge that unites China, Russia, and the EU?

Can Europe Fill the Gap in China-Russia Relations?
Credit: Russian Presidential Press and Information Office

Despite Russia’s publicly orchestrated pivot to Asia, which was accompanied by various rhetorical commitments and diplomatic gestures, the China-Russian relationship has taken a downturn following the sharp devaluation of the ruble and China’s stock-market crash. This may provide a window of opportunity for both Europe and Russia to resolve existing tensions and reach common ground. Beyond that, it can also provide Europe and Russia with a new incentive to rethink the current practice of bidding for multiple spheres of influence and instead approach China together, putting the inclusive character of its New Silk Road strategy to the test.

Russia’s Pivot to China Hits a Snag

Russia’s pivot to the East was in the air long before the Ukrainian crisis arose and was always associated with the development of the Russian Far East. The first Federal Action Program on the development of the Far East was established nearly 20 years ago, in 1996. When preparing to hold the Asia-Pacific Economic Cooperation (APEC) summit in Vladivostok in 2012, Russia gave its Far Eastern territories and the Asia-Pacific region a sharper focus than ever before. That same year also saw the creation of the Ministry for the Development of the Russian Far East. In 2013, the position of the presidential plenipotentiary envoy to the Far Eastern Federal District was assumed by the acting vice prime minister, thus demonstrating the high priority given to the development of the region. Had the Far Eastern “gate” been effectively open for integration into the Asia-Pacific region, Russia’s economy would have been more diversified at the time when the Western sanctions were imposed. In that case, Moscow would not have been forced to search at short notice for an Asian substitute for the EU energy market.

In 2014, Gazprom and the China National Petroleum Corporation (CNPC) closed a $400 billion deal for the construction of the Power of Siberia pipeline. At that time, Russia was still among China’s top ten trade partners. The two parties felt certain that by 2015 they would achieve the declared goal of a mutual trade turnover of $100 billion and break the conventional Sino-Russian relations formula, “warm in politics, cold in trade.”

Since then, the collapse of hydrocarbon prices and China’s decreasing demand for natural gas, together with greater availability of liquefied natural gas (LNG) inside China, are seriously threatening the implementation of what had been labeled a “historic” agreement. Furthermore, talks on the development of the Power of Siberia-2 pipeline have reached a stalemate, and the dissolution of this deal appears imminent. In addition to the impasse in energy cooperation, the volume of Chinese direct investments in Russia has decreased by 20 percent in the first half of 2015 – largely due to increased ruble volatility, as announced by the director of the department for Eastern Europe and Central Asia at the Chinese Ministry of Commerce, Zhi Lin. Contrary to Russia’s expectations, the Chinese banks have also been very scrupulous and careful in dealing with their Russian counterparts under the sanctions regime. Furthermore, following the precipitous crash of China’s stock market and signs of economic slowdown, the financial lifeline of Moscow – Chinese loans to Russian companies and investments – could be running dry, confronting Putin’s administration with an additional significant challenge.

Surely, the outlook for Russia-China economic collaboration is not totally grim. In 2015, Putin and Xi issued a joint declaration on the alignment of the Silk Road Economic Belt and the Eurasian Economic Union. Russia and China agreed to design a high-speed railway between Moscow and Kazan, which might one day evolve into an Iron Silk Road from China to Europe via Russia. In energy, an agreement has been finally reached on the acquisition of a 9.9 percent equity stake in Yamal LNG by China’s Silk Road Fund. Moreover, the volume of RUB/CNY trade skyrocketed 400 percent during the previous 12-month period, as Moscow started to accept payments for its hydrocarbon exports to China in yuan. Amid the news that China has overtaken the U.S. as the world’s leading importer of crude oil, Russia recently surpassed Angola as the second-largest oil supplier to China and, in May and September, even outstripped Saudi Arabia in the amount of oil it supplied to China.

By prolonging its sanctions against Russia over its Ukraine policy, the Western states have exacerbated Russia’s diplomatic and economic isolation, pushing the Kremlin toward an even greater dependence on China. Furthermore, Russia may incur even more political and economic losses once the deal on the Trans-Pacific Partnership has been reached; unlike China, Russia does not have an extensive FTA network to (partly) offset the comparative disadvantages it may face in the region because of the exclusion from the format. The portfolio of Russia’s economic ties is still poorly diversified, and its initial euphoria of “turning east” (which could just as well be named a “turn to China”) appears to be evaporating. However, with the Russia-China axis being severely shaken by recent economic fluctuations (and with the sanctions regime showing no positive result in Ukraine), the EU and Russia now find themselves in a position to adapt to China’s rising ambitions, redefine common interests, and revisit their power sharing strategy. Especially as more and more European decision-makers are eager to reach a compromise with Russia on Syria and have respectively softened their tone on the Ukraine conflict, a new dialogue platform involving Moscow and Brussels could implicitly contribute to deescalating the tension in Eastern Ukraine.

Linking China, Europe, and Russia: A 16+3 Formula?

Having identified a window of opportunity in the euro zone crisis, China in 2012 appealed to the countries of Central and Eastern Europe (CEE) with a new formula for regional cooperation labeled “16+1.” This group of 16 states from the former Communist bloc was seen by China as a potential bridgehead in the large European Union market. Given the official shift of China’s foreign policy strategy from “keeping a low profile” to “striving for achievement” under its new president, the 16+1 format could pave the way for the EU’s participation in Xi Jinping’s “One Belt, One Road” project.

Although the EU membership of the 11 CEE countries has certainly complicated the cooperation framework in terms of restrictive EU legislation, the leadership in Beijing has not given up on the idea of these states becoming “lobbyists” for Chinese interests within specific EU institutions. Moreover, some have accused China of deliberately circumventing unfavorable EU regulations – especially when it comes to enhancing investments targeted at the EU market. Amid the ongoing European debt crisis, Chinese engagement and increased level of investment is a chance for these countries to catch up economically and develop the efficient infrastructure networks required to improve connectivity and unlock new trade corridors. In this regard, all of the CEE states have a strong pragmatic interest in pursuing a multi-vector foreign policy approach. Their beneficial geographical position invites a diversification of political and economic ties with various stakeholders like China, Russia, the United States, and the European Union.

Therefore, instead of complaining about China’s alleged attempt to “buy its way into Europe” by repeatedly bypassing Brussels and dealing directly with national capitals, the EU should rather take Russia on board and use the 16+1 format as a testing ground for engaging with China in the context of the Silk Road Economic Belt project. The 16+1 format would thus become a 16+3, with China, Russia, and the EU all involved.

Meanwhile, Russia should refrain from exploiting the European countries’ dependence on its gas and rather negotiate the establishment of a more sustainable energy supply network. Such a network would diversify both energy consumer and energy producer sources, as well as optimize transit routes through corridor countries and guarantee the security of energy supply.

In this regard, launching new coordination mechanisms for discussing critical infrastructure and energy trade agreements prior to the upcoming 16+1 meeting in Beijing will be an important step, especially when it comes to aligning the interests of the EU, Russia, and China in the region and boosting economic growth across Central and Eastern Europe.

Liudmila Filippova is Program Manager at the Russian International Affairs Council (RIAC), Moscow. Inna Veleva is Project Manager of Global Dialogue at the BMW Foundation, Berlin.