Putin in Beijing: What Drives China-Russia Relations?

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Putin in Beijing: What Drives China-Russia Relations?

Market complementarity, political pressures, and the old dictum to follow profit shape Sino-Russian economic ties.

Putin in Beijing: What Drives China-Russia Relations?
Credit: Russian Presidential Press and Information Service

Russian President Vladimir Putin’s attendance at this year’s Belt and Road Forum has, as usual, lent itself to renewed talk about the concerning depth of Sino-Russian ties. A cottage industry of self-styled experts on the rise of Asia and Eurasia push the line that Moscow is seeking to cement an alliance with China, despite the considerable lack of evidence of policy support behind it. It’s best to see their growing interdependence as structurally inevitable.

Russia’s primary exports are hydrocarbons and natural resources, and China overtook the United States as the world’s leading importer of crude oil in 2017. China’s import needs to meet rising food demand are rising too. It just so happens that Russia is well-positioned to help address both appetites at a time when Moscow needs all the growth opportunities it can get.

Russian authorities continue to tout the line that Belt and Road cooperation is progressing, though they rarely explain what that entails. Every statement needs to be taken with a large grain of salt, or perhaps whatever Putin and North Korean leader Kim Jong Un were drinking in Vladivostok before the forum. Economic ties are deepening, but not in service to the geopolitical meme that is the Belt and Road.

Gravy Trains

Russian Railways (RZhD) had been in deadlocked talks with Chinese contractors and investors over a future high-speed rail route linking Moscow to Beijing, envisioned as eventually extending to Berlin. Only heavily subsidized financing and generous estimates of haulage and passenger flows would make the route feasible. Putin expressed doubts about the logic of building an initial leg from Moscow to Nizhniy Novgorod last fall, ultimately overturning decisions taken by Prime Minister Dmitry Medvedev and his cabinet and proposing to build the line to St. Petersburg instead. Any talk of large-scale cooperation expanding trans-Eurasian rail service appears dead at this point.

Russia and China did complete a rail bridge across the Amur river linking Russia’s Autonomous Jewish Oblast to China’s Heilongjiang province, providing an estimated 5.2 million tons of annual freight turnover capacity with further work elsewhere increasing that to about 20 million tons. Talks were also held about the completion of a road across the Amur river linking Blagoveshchensk and Heihe. At present, it looks like Ruslan Baisarov – a Chechen construction magnate with past links to Chechnya’s Ramzan Kadyrov – will go ahead with intergovernmental talks in May as his firm, Most, begins preparing business proposals.

Though these projects will add some connectivity, trade largely relies on the Trans-Siberian Railway (Transsib) and Baikal-Amur Mainline (BAM), Russia’s main freight arteries linking east and west. RZhD is currently in the midst of a massive program to expand the two routes’ capacity from 120 million tons annually to 180 million tons by 2024. The problem is where the freight’s headed and what it consists of. RZhD is still working out its tariff regime for container freight of different kinds, and exports like coal – rising due to mine closures in China – are among the lowest-earning for the state monopoly. There are also nearly always significant delays and cost overruns, on top of never-ending fights over tariff rates.

True cooperation would entail significant domestic reforms to supply chains Moscow has to subsidize in order to keep far-flung regions afloat, industrial groups sated, and consumers happy. Rationalizations of tariff regimes mean higher consumer prices. That’s politically unfeasible while real disposable incomes continue to decline, and suggests that inertia from successful areas of economic cooperation will continue.

Alibaba and the 40 Thieves

There has been significant progress in the expansion of e-commerce links between Russia and China, foremost driven by Alibaba. The Chinese IT giant launched the sale of Chinese products through its own online marketplaces and supply chains last June. Over 90 percent of all the packages that arrive in Russia via the online retail market now come from China thanks to Alibaba’s dominance in the e-commerce market. The company has also launched the sale of Russian brands on the Chinese market.

Alibaba also just launched sales of its own Tmall Genie, a direct competitor to Amazon’s virtual assistant Alexa, and is now poised to challenge Russia’s Yandex for the domestic market of similar goods. Declining real incomes in Russia are proving a boon for Chinese manufacturers that can offer goods at lower prices, and already account for most of the supply chains used by Russia’s e-shoppers.

Alibaba’s success has also proven a boon for Alisher Usmanov, a well-connected Uzbek billionaire close to the Kremlin with considerable stakes in the metallurgical, communications, and media sectors. Usmanov has recently pivoted toward finding ways to make money off data and e-commerce initiatives, namely through his stakes in the Mail.ru Group and Megafon. Both have partnered with Alibaba in a joint venture working in the online retail space. But Usmanov’s successes were not key to any of Putin’s public statements or Kremlin reports from the forum, since these sectors remain a lesser concern strategically.

Arctic Frisson

Chief among Putin’s notable statements at the forum was his suggestion that Russia’s Northern Sea Route (NSR) in the Arctic could be linked with the Belt and Road. Unfortunately for Putin, it’s unclear how exactly this would make any sense for China or most shippers. For starters, the NSR has to compete with the Suez Canal, which, per an as-yet toothless Memorandum of Understanding reportedly worth $5 billion in investments, is effectively being messaged as part of the BRI. Putin called on policymakers – in this case primarily Rosatom as it legally administers the NSR – to ensure that the tariff burden on icebreaker use is reasonable. That way it can compete with Suez, which has launched fee rebates on top of a capacity expansion in recent years.

One problem is that large container ships are simply too wide for the current generation of Russian icebreakers, which have a beam of about 30 meters on average. That’s narrower than Panamamax container ships designed for the Panama Canal with a base capacity of 3,000 twenty-foot equivalent units (TEU) of containers. For perspective, the shipping industry is entering a period where mega-sized vessels carrying over 21,000 TEU are entering regular service.

Due to unpredictable weather, a lack of alternate markets along the route, and the logistics of icebreaker use, it’s likely the NSR is best suited to carry dry bulk goods or things like oil and gas. Russia has legally limited access to maximize the earnings for companies like Rosatom and Rosneft off of shipbuilding and piloting fees. They’ve also introduced new rules requiring foreign military ships using the NSR to give 45 days advance warning and to use a Russian maritime pilot. Expect these types of initiatives to tighten further, likely discouraging countries like Japan and South Korea from taking part. China also has to worry about Russia’s use of regulations to maximize costs and control.

In good business news, the China National Petroleum Corporation (CNPC) has acquired a 10 percent stake in Novatek’s Arctic 2 LNG project through a subsidiary, and China National Offshore Oil Corporation (CNOOC) acquired another 10 percent. Although it’s a win for Sino-Russian Arctic cooperation, it ultimately reflects China’s energy import needs. Putin noted that Beijing broached the possibility of increasing piped gas supplies by 5-10 bcm through the Power of Siberia pipeline. All told, it seems clear that the Kremlin is still aiming to balance the interests of Novatek and Gazprom, with talk of a pipeline via the Altai mountains to China’s Xinjiang dead for now.

On the whole, there was nothing announced at the forum that suggests a breakthrough in Sino-Russian Arctic cooperation. Regarding energy ties, natural gas leads the way. Russia has maintained its privileged position as China’s leading oil supplier, aided by Saudi Arabia’s overcommitment to production cuts to support prices. But there’s no evidence Beijing has gotten over Rosneft’s dalliance with CEFC China for its potential privatization deal, and talk of joint work in the Arctic is leading to little other than continued interest in energy imports.

The Show Must Go On

Putin’s statements did little to suggest any new policy developments or significant overlap between BRI and the Eurasian Economic Union, or Russia in particular. Yes, overall trade turnover set a record at $108 billion last year, but that has reflected trends on commodities markets, as well as the sectoral improvements laid out above.

Market complementarity, political pressures, and the old dictum to follow profit shape Sino-Russian economic ties. Ties would be far better if Russia and China more fully liberalized their economies to pursue structural reforms. Putin made sure to take a pot shot at the United States for its trade war with China, but the song remains the same: Russia isn’t ready to avail itself of the full possible depth of economic partnership between the two countries. For that, Washington should be grateful.

Nicholas Trickett is Editor-in-Chief of FPRI’s BMB Russia and a researcher for AKE International Ltd. He holds an M.A. in Russian and Eurasian Studies from the European University in St. Petersburg and is currently completing an MSc in International Political Economy at the London School of Economics and Political Science.