The Dynamics of the Russia-China Relationship
by Justin Burack
In an article dated on March 8th, China’s state-owned People’s Daily hailed Vladimir Putin’s controversial election victory four days earlier as a popular endorsement of his entire career and proof that he was still Russia’s “most popular politician.” This implicit commentary on Russia’s political landscape was both a statement of approval for Putin’s policies towards China and his leadership techniques. The Chinese Communist Party and Putin’s United Russia party both derive their legitimacy from narratives of stability and development, and as such have de-fanged the liberal opposition in both their respective realms. This congruency in strategy allows for a high amount of political and economic cooperation, as it can be facilitated with no political strings attached. Nonetheless, Russian attitudes towards China are becoming apprehensive as the latter seeks a more assertive role on the world stage.
The final draft of the Russia’s Strategy 2020 report (commissioned by Prime Minister Putin in 2010, and led by Rector of the Higher School of Economics Yaroslav Kuzminov and Rector of the National Economy Academy Vladimir Mau) outlines some rather frank concerns about the tribulations Russia faces in the next ten years. Chief among them was that the Yuan would eventually become the world’s settlement and reserve currency, undermine the “stability” of the international currency system, and threaten the ruble in international transactions. The report also mentioned China’s economic encroachment into Central Asia. However, by far the most alarmist statement to come out of the study was that “The highly competitive Chinese processing industry… will continue to squeeze out Russian counterparts from the Russian market and prevent the trade and investment expansion of Russian companies abroad.”
While China has successfully created a dynamic industrial economy of scale, Russia is heavily dependent upon oil and natural gas exports, mostly to Europe, leaving the economy vulnerable to volatile global commodity pricing. Illustratively, Russia fared the worst during the 2009 economic crisis among the BRICS. This was due partly to a sharp decline in demand for raw commodities worldwide, difficulties for Russian investors in penetrating European markets, and a 10.4% plunge in economic output, 9% of which was apparently due to a “massive inventory adjustment” according to former Moscow IMF head Martin Gilman. Europe had tapped into its domestic gas reserves in the first half of fiscal year 2010 as oil prices skyrocketed so quickly that the markets could not immediately adjust. This led then- president Dmitri Medvedev to call Russia’s comparative bondage to the oil and gas sector “humiliating.”
In a recent foreign policy paper published in Moscow News before his reelection to the presidency, Putin placed much of his nation’s hopes upon technological and economic cooperation with China, particularly through the development of the sparsely-populated Russian Far East after centuries of relative neglect. This region contains the world’s largest reserves of natural gas and the seventh largest reserves of crude, in addition to large mineral deposits. Russia, Putin wrote, would do well to “catch the Chinese winds in the sails of our economy” and would benefit greatly from a “prosperous and stable China” and “a solid mechanism of bilateral ties.” Quite simply, access to these resources would allow the Russian government to devote newfound export revenues towards financing the re-industrialization of the national economy, and thereby break its commodity dependence. However, this requires a massive capital infusion that Russia cannot produce on its own initiative or from contact with its other trade partners.
In April 2011, Xinhua reported that Chinese businessmen were already investing greater raw capital assets into the Russian Far East than the Russian government itself—by a factor of three—during the year 2010. China has also set up 34 special economic zones in Amur, Primorye, the Jewish Autonomous Region, and Khabarovsk. The economic links between China and Russia were physically cemented by the construction of a 3,700km oil pipeline running from Taishet (Irkutsk Oblast) to Daqing (Heilongjiang Province); this pipeline, the first linking Russia and China, made China Russia’s largest foreign trading partner with a volume of $70 billion. According to Putin, cross-border exchanges between China and Russia are projected to reach $200 billion in value by 2020.
Meanwhile, the Russian Direct Investment Fund, the nation’s sovereign wealth entity, has increased its holdings of Foreign Direct Investment (FDI) by 33% due to a rise in oil prices ($18.3 billion in 2011). This is the largest such increase in FDI in the world economy to date. During Putin’s visit to Beijing in October, the two countries announced plans to pledge $1 billion each from their sovereign wealth funds in a direct investment vehicle with a 70% allocation to Russia and 30% to China. The largest deal, however, was a $1.5 billion Chinese investment in an aluminum smelter in Siberia owned by UC Rusal.
The flow of Chinese cash into the Far Eastern Region and its growing economic strength across the border have created incentives for Russian manufacturing plants to move eastward and export raw materials to the Middle Kingdom at a lower cost. This trend is further compounded by Russia’s recent accession into the World Trade Organization, which has led to the imposition of a uniform customs code and reduced export tariffs. The resulting increase in competition from Chinese raw material production, however, has made it risky for Russian firms to invest in high value-added products that could finally decouple Russia’s economy from oil and gas. Furthermore, price disputes between Gazprom and the China National Petroleum Corporation concerning the construction of a gas pipeline through Altai have dragged on for a third year, and in the interim China has already constructed a gas pipeline through Tajikistan and Kazakhstan. Russia currently accounts for a mere 6% of China’s current energy needs, the same level as Iran.
Russian arms sales to China have also reached a low point due to declining Russian industrial capacity, and tensions over intellectual property rights and industrial espionage. On the eve of Putin’s visit to Beijing, Russia announced that it had detained a Chinese citizen for trying to acquire sensitive military technologies. Nevertheless, military and security cooperation itself between the two nations has continued. Both are wary of perceived U.S. military intervention in Central Asia and the continuing presence of U.S. forces in Afghanistan. However, it will be some time before China will be in a position to project military power in the region. Russia’s large military presence in Central Asia will continue and even increase in the future. The Collective Security Treaty Organization recently gave Russia veto power over any member state’s decision to host a foreign army.
Nonetheless, Russia’s defacto monopoly on military security has not removed the risk of losing its economic supremacy in this former Soviet space. The latest meeting of the Shanghai Cooperation Organization (SCO) in St. Petersburg indicated an impasse over the essential purpose of the organization and led to concerns that the SCO itself was becoming irrelevant. Chinese Premier Wen Jiabao used the summit to call for greater economic integration and cooperation in trade, agriculture, and energy—a common market in which Chinese goods would dominate. Simultaneously, Putin proposed that the SCO admit Iran and India—two countries receptive to Russian arms sales—to membership. He has also announced plans to counteract Chinese penetration in the Central Asian market with the creation of a Eurasian Union. Unsurprisingly, Xinhua’s account of the summit made no mention of India or Iran.
In spite of intermittent disagreements, both nations endorse India’s proposal to create a new international lending agency to replace the International Monetary Fund (IMF). The BRIC countries (Brazil, Russia, India, China) have also collaborated to nominate the first non-American candidate for the presidency of the World Bank. In the Russian and Chinese context, the democratic pluralist and capitalist narrative that provides the foundation of Western ideology is self-contradictory and aggressive, with a marked tendency to “spread democracy” by military means and to increase socio-political inequality. All this is underpinned by the desire to challenge what University of Tartu Prof. Viacheslav Morozov, a specialist in Russian views of democracy, has labeled the Western “transitological stereotype”—the presumption that democratic institutions provide the only model for self-governance and as such can be imposed from the outside. China’s authoritarian development strategy, complemented by the projection of soft power, has provided a catalyst for sweeping economic changes throughout Asia at a time when the West is questioning its ability to sustain its social safety nets.
A model of development where economic progress can only be achieved by putting power and property in the hands of an entrenched elite has gained momentum in some quarters and in fact already come to pass. The Russia-China relationship reflects alternative strategy for development; it remains to be seen how this new dynamic will affect a world where laissez-faire capitalism has begun to falter and to lose its absolute hold.
by Justin Burack
In an article dated on March 8th, China’s state-owned People’s Daily hailed Vladimir Putin’s controversial election victory four days earlier as a popular endorsement of his entire career and proof that he was still Russia’s “most popular politician.” This implicit commentary on Russia’s political landscape was both a statement of approval for Putin’s policies towards China and his leadership techniques. The Chinese Communist Party and Putin’s United Russia party both derive their legitimacy from narratives of stability and development, and as such have de-fanged the liberal opposition in both their respective realms. This congruency in strategy allows for a high amount of political and economic cooperation, as it can be facilitated with no political strings attached. Nonetheless, Russian attitudes towards China are becoming apprehensive as the latter seeks a more assertive role on the world stage.
The final draft of the Russia’s Strategy 2020 report (commissioned by Prime Minister Putin in 2010, and led by Rector of the Higher School of Economics Yaroslav Kuzminov and Rector of the National Economy Academy Vladimir Mau) outlines some rather frank concerns about the tribulations Russia faces in the next ten years. Chief among them was that the Yuan would eventually become the world’s settlement and reserve currency, undermine the “stability” of the international currency system, and threaten the ruble in international transactions. The report also mentioned China’s economic encroachment into Central Asia. However, by far the most alarmist statement to come out of the study was that “The highly competitive Chinese processing industry… will continue to squeeze out Russian counterparts from the Russian market and prevent the trade and investment expansion of Russian companies abroad.”
While China has successfully created a dynamic industrial economy of scale, Russia is heavily dependent upon oil and natural gas exports, mostly to Europe, leaving the economy vulnerable to volatile global commodity pricing. Illustratively, Russia fared the worst during the 2009 economic crisis among the BRICS. This was due partly to a sharp decline in demand for raw commodities worldwide, difficulties for Russian investors in penetrating European markets, and a 10.4% plunge in economic output, 9% of which was apparently due to a “massive inventory adjustment” according to former Moscow IMF head Martin Gilman. Europe had tapped into its domestic gas reserves in the first half of fiscal year 2010 as oil prices skyrocketed so quickly that the markets could not immediately adjust. This led then- president Dmitri Medvedev to call Russia’s comparative bondage to the oil and gas sector “humiliating.”
In a recent foreign policy paper published in Moscow News before his reelection to the presidency, Putin placed much of his nation’s hopes upon technological and economic cooperation with China, particularly through the development of the sparsely-populated Russian Far East after centuries of relative neglect. This region contains the world’s largest reserves of natural gas and the seventh largest reserves of crude, in addition to large mineral deposits. Russia, Putin wrote, would do well to “catch the Chinese winds in the sails of our economy” and would benefit greatly from a “prosperous and stable China” and “a solid mechanism of bilateral ties.” Quite simply, access to these resources would allow the Russian government to devote newfound export revenues towards financing the re-industrialization of the national economy, and thereby break its commodity dependence. However, this requires a massive capital infusion that Russia cannot produce on its own initiative or from contact with its other trade partners.
In April 2011, Xinhua reported that Chinese businessmen were already investing greater raw capital assets into the Russian Far East than the Russian government itself—by a factor of three—during the year 2010. China has also set up 34 special economic zones in Amur, Primorye, the Jewish Autonomous Region, and Khabarovsk. The economic links between China and Russia were physically cemented by the construction of a 3,700km oil pipeline running from Taishet (Irkutsk Oblast) to Daqing (Heilongjiang Province); this pipeline, the first linking Russia and China, made China Russia’s largest foreign trading partner with a volume of $70 billion. According to Putin, cross-border exchanges between China and Russia are projected to reach $200 billion in value by 2020.
Meanwhile, the Russian Direct Investment Fund, the nation’s sovereign wealth entity, has increased its holdings of Foreign Direct Investment (FDI) by 33% due to a rise in oil prices ($18.3 billion in 2011). This is the largest such increase in FDI in the world economy to date. During Putin’s visit to Beijing in October, the two countries announced plans to pledge $1 billion each from their sovereign wealth funds in a direct investment vehicle with a 70% allocation to Russia and 30% to China. The largest deal, however, was a $1.5 billion Chinese investment in an aluminum smelter in Siberia owned by UC Rusal.
The flow of Chinese cash into the Far Eastern Region and its growing economic strength across the border have created incentives for Russian manufacturing plants to move eastward and export raw materials to the Middle Kingdom at a lower cost. This trend is further compounded by Russia’s recent accession into the World Trade Organization, which has led to the imposition of a uniform customs code and reduced export tariffs. The resulting increase in competition from Chinese raw material production, however, has made it risky for Russian firms to invest in high value-added products that could finally decouple Russia’s economy from oil and gas. Furthermore, price disputes between Gazprom and the China National Petroleum Corporation concerning the construction of a gas pipeline through Altai have dragged on for a third year, and in the interim China has already constructed a gas pipeline through Tajikistan and Kazakhstan. Russia currently accounts for a mere 6% of China’s current energy needs, the same level as Iran.
Russian arms sales to China have also reached a low point due to declining Russian industrial capacity, and tensions over intellectual property rights and industrial espionage. On the eve of Putin’s visit to Beijing, Russia announced that it had detained a Chinese citizen for trying to acquire sensitive military technologies. Nevertheless, military and security cooperation itself between the two nations has continued. Both are wary of perceived U.S. military intervention in Central Asia and the continuing presence of U.S. forces in Afghanistan. However, it will be some time before China will be in a position to project military power in the region. Russia’s large military presence in Central Asia will continue and even increase in the future. The Collective Security Treaty Organization recently gave Russia veto power over any member state’s decision to host a foreign army.
Nonetheless, Russia’s defacto monopoly on military security has not removed the risk of losing its economic supremacy in this former Soviet space. The latest meeting of the Shanghai Cooperation Organization (SCO) in St. Petersburg indicated an impasse over the essential purpose of the organization and led to concerns that the SCO itself was becoming irrelevant. Chinese Premier Wen Jiabao used the summit to call for greater economic integration and cooperation in trade, agriculture, and energy—a common market in which Chinese goods would dominate. Simultaneously, Putin proposed that the SCO admit Iran and India—two countries receptive to Russian arms sales—to membership. He has also announced plans to counteract Chinese penetration in the Central Asian market with the creation of a Eurasian Union. Unsurprisingly, Xinhua’s account of the summit made no mention of India or Iran.
In spite of intermittent disagreements, both nations endorse India’s proposal to create a new international lending agency to replace the International Monetary Fund (IMF). The BRIC countries (Brazil, Russia, India, China) have also collaborated to nominate the first non-American candidate for the presidency of the World Bank. In the Russian and Chinese context, the democratic pluralist and capitalist narrative that provides the foundation of Western ideology is self-contradictory and aggressive, with a marked tendency to “spread democracy” by military means and to increase socio-political inequality. All this is underpinned by the desire to challenge what University of Tartu Prof. Viacheslav Morozov, a specialist in Russian views of democracy, has labeled the Western “transitological stereotype”—the presumption that democratic institutions provide the only model for self-governance and as such can be imposed from the outside. China’s authoritarian development strategy, complemented by the projection of soft power, has provided a catalyst for sweeping economic changes throughout Asia at a time when the West is questioning its ability to sustain its social safety nets.
A model of development where economic progress can only be achieved by putting power and property in the hands of an entrenched elite has gained momentum in some quarters and in fact already come to pass. The Russia-China relationship reflects alternative strategy for development; it remains to be seen how this new dynamic will affect a world where laissez-faire capitalism has begun to falter and to lose its absolute hold.
