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China and Russia aren’t economic equals but, thanks to the US trade war, their partnership looks built to last

Even as Russia’s economy modestly rebounds amid rising oil prices, its pivot to the east is expected to persist. But while China has already become Russia’s major trading partner, helping offset the impact of geopolitical uncertainty with the West, the Kremlin is now striving to assert itself as an indispensable destination for Beijing amid the trade war with Washington.

Russia’s economic growth reached a six-year high last year, but despite the need to introduce effective structural reforms and boost decreasing household incomes, the model relying on the export of hydrocarbons remains intact, and appears to be a double-edged sword.

Russia remains an attractive market for speculators of all stripes, while remaining less vulnerable to external shocks. The capacity to reorient trade to other locations – in this case, China – is another advantage.

The two nations today are arguably more aligned than at any point since the Sino-Soviet split of the early 1960s. Chinese President Xi Jinping has visited Moscow more than any other capital since he assumed power. Last June, he awarded Russian President Vladimir Putin China’s first-ever friendship medal, honouring him as “my best, most intimate friend”.

Bilateral trade grew from US$69.6 billion in 2016 to US$107.1 billion last year, with China as Russia’s largest individual partner in both exports and imports. Moscow has also emerged as the largest supplier of crude oil, and is planning to supply 38 billion cubic metres of gas annually for three decades via the Power of Siberia pipeline in an agreement worth US$400 billion.

Russia’s largest petrochemical company, Sibur, also targets China as the main growth market for its polymer products. The company’s production complex in western Siberia, worth around US$9 billion, will soon be one of the world’s five biggest petrochemical plants, while another large-scale gas chemical complex is about to emerge on China’s board in the Far East.

While it is hard to underestimate the importance of China for Russia’s financial and economic stability and as its perfect trading partner post-Crimea, the partnership is nonetheless marked by deepening asymmetries.

Although ties seem strong and growing, Russia does not make it into the top 10 in imports and ranks 10th in Chinese exports. More than three-quarters of Russia’s exports are raw materials, while China sells back electronics and a variety of consumer goods.

This pattern concerns many in the Kremlin, as Russia resembles a raw materials appendage of lesser importance than Beijing’s other partners.

Data seems to favour such an impression. Although China remains the third-largest global source of outward foreign direct investment flows, worth US$124.6 billion in 2017, the Central Bank of Russia shows that Beijing FDI to the Russian economy was slightly above US$16 billion from 2011 through 2017. Despite close political ties, China remains extremely cautious about the Russian economy and invests primarily in minerals and energy.

Although the Power of Siberia pipeline aims to supply 38 billion cubic metres annually, China already imports more than 90 billion cubic metres each year, with most of the liquefied natural gas coming from Australia, Asean countries and Qatar. Therefore, Russia will not secure a monopoly on Chinese energy exports, but be integrated into broader diversification efforts.

This disparity in relations seems unfair to many in Moscow. Thus, the evolving US-China trade conflict could be a blessing in disguise for Russia’s quest to assert itself as a more reliable, even indispensable, partner.

Although China’s rapid expansion and closer integration into global trade patterns has delivered strong dividends, Beijing has also become more vulnerable to geopolitical threats.

The possibly of disruptions caused by trade war escalations and new tariffs or even direct tensions over China’s growing military presence in open seas might inflict serious and lasting economic damage. Trade wars can significantly affect such sensitive sectors as agriculture and petrochemicals, so Russia could emerge as a natural hedge.

Having a reliable supplier capable of withstanding times of international confrontation might be crucial for Beijing’s trade and energy strategy.

For instance, the Gulf of Aden and the Strait of Malacca are some of the major international trade routes critical for China’s security, yet they appear to be extremely vulnerable strategic chokepoints. By contrast, Russian exports do not need to be shipped by sea and their value in times of possible disruption are difficult to underestimate.

The Russian style of political leadership is also more familiar to Beijing. Therefore, doing business and assuring delivery with state-run corporations such as Gazprom or the privately owned Sibur, of which a 10 per cent stake is owned by Chinese Sinopec and another 10 per cent by the Silk Road Fund, seems easier and more reliable.

As trade wars and tariffs appear to be the new reality in global trade, there is a strong chance that reliability in difficult times will outweigh existing asymmetries between Moscow and Beijing.

With Russia growing more dependent on China, political ties deepening and little chance of serious disruptions on the scale of the Sino-Soviet split, Moscow can be reasonably optimistic that its reliability and geographic proximity will turn into a major asset and solidify economic relations.
Source: South China Morning Post

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