3 Sep 2020

The domains and the future of Sino-Russian economic relations

Dr. Renny Castaneda

The most conventional approach to the concept of geo-economics bounds territorial, economic, and strategic conventions directed to assess and to comprehend the economic and political shifts that characterize global and regional competition. This can be further understood as the transboundary administration of assets and resources of territories eager to participate in an increasingly global market. As the events of 2020 have substantially modified expectations related to the role played by the United States and China during the Covid-19 crisis, and how the increasing distrust between the two countries indicates an unprecedented shift of political power, it is necessary to address the variables of the alliances emanating from this tension.

While the Western hemisphere aims to rearrange coalitions according to their electoral periods and ideological trends, the eastern hemisphere increasingly shows signs of coordination. Among these alliances, China and Russia present the most highly natural features, binding economic, geographic, cultural, ideological, ethnic, and political similarities. This article aims to provide the most salient aspects and strategic domains of a future characterized by Sino-Russian economic interests and how they can play an increasingly paramount role in the upcoming geo-economic political future, where entire civilizations can gain terrain over a highly uneven Western hemisphere (Dibb, 2019).

An introduction to a Sino-Russia economic partnership

The most salient aspects of a Sino-Russian economic alliance are characterized by the well-documented natural resources and the geostrategic location of both territories. China and Russia occupy more than 26.6 million square kilometers, which is more than the combined European and US territories with 20 million square kilometers. Russia and China’s population and potential markets account for more than 1,537 million people, which is more than two times Europe’s population, with 741 million, and almost five times the US population of 328 million.

Russia and China share at least 4,209 kilometers of the international border, which defines a historical and geographical interdependency and the strategic feature of a highly influential commercial node with intensive demands of raw materials and large-scale infrastructure projects eager to connect Europe with Asia.

In contrast, the size of the economy of Russia with around 1.7 trillion, pales in comparison to the size of the European (USD18.2 trillion), Chinese (USD13.6 trillion) or American (USD 20.5 trillion) economy. The contrast suggests that a potential articulation of a Sino-Russian coalition implies more than today’s economic numbers. Indeed, such a move can be considered a strategic partnership between two highly influential political countries within a hemispheric sphere of influence.

This can be explained by the geopolitical shifts affecting relations between the East and the West since the beginning of the century, where China’s constant rise and the consistent Russia initiatives to participate in the global political affairs have rearranged the global perception of economic and political power all over the planet. The possibility of a Sino-Russian partnership is a highly strategic move and an expansionist evolution of their sphere of influence over a substantial part of the Eurasian landmass that includes countries such as Mongolia, India, Kazakhstan, Turkmenistan, Georgia or Ukraine, among others.

This single shift in the transcontinental region’s political spectrum is characterized by Russia’s hybrid cultural and political potential as an economic and security bridge between the Eastern and the European Western hemispheres (Wallin, 2017). The country has been able to enhance its military interventionism but also implemented economic collaboration schemes with Europe and China based on its energy resources (Korolev, 2018). This background explains why Gazprom, the leading partially state-owned multinational energy corporation of Russia, has been eager to increase its commercial ties with China and Germany through large-scale pipeline projects.

Such bilateral exploration of energy markets, led by Russia, has further become a cornerstone for Russian Energy Diplomacy with the Western hemisphere while ensuring its role as an economic nodal point between China, its Belt and Road Initiative (BRI), and Europe.

Finally, this complementary partnership between China and Russia not only incorporates the energy market as the indispensable cornerstone for the development of Sino-Russian economic ties but also aims to ensure the autonomy of the vast territories as a natural assumption of market stability, hemispheric security, and economic growth.

A short landscape of Sino-Russian economic relations

Rather than competition, the economic ties and realms of a Sino-Russian economic alliance rely on developing a set of multi-rooted domains of political and economic collaboration. Indeed, while a substantial part of the Chinese economy is characterized by a large and increasing middle-class market of nearly 400 million people, and the largest supply chain on the planet, the Russian economy is mainly portrayed as resource-dependent and technology-oriented.

The strong economic differences between the two countries increased the room for mutual collaboration in sectors and projects, which were spotted back in 1996, when China, Kazakhstan, Kyrgyzstan, Russia, and Tajikistan founded an international cooperation agreement known as the Shanghai Cooperation Organization (SCO). Later, Chinese President Xi Jinping and Russian President Vladimir Putin decided to end decades of long border disputes by supporting the treaty that demarcated the totality of their 4,300 kilometers of frontiers.

The borders treaty finally ended after long-term negotiations conducted by the Russian Foreign Minister Sergei Lavrov and former Chinese Foreign Minister Yang Jiechi in 2008. These steps set the ground for upcoming agreements and joint projects that reveal economic cooperation between the two superpowers. Such commitments have yielded strategic dividends in infrastructure and digital economy, especially after the Russian Direct Investment Fund’s (RFID) increasing activities.

The Fund, which initially had a reserved capital of USD10 billion, and was able to attract more than USD 40 billion, became in 2011 the single-most direct corporate initiative of the Russian government to join the investment efforts of China to develop Sino-Russian economic relations. Over the last decade, the Fund became the Russian government’s greatest strategic effort to build economic ties with the Middle East and Asia, establishing intentional economic partnerships with  Saudi Arabia, UAE, China, Qatar, Kuwait, Bahrain, South Korea, Japan, and Vietnam. In contrast, in the West, the Fund’s economic alliances remained confined to Italy and France.

To understand the level of coordination of the Fund with the East, it is worth noticing Russia’s prompt reaction in working with one of its allies, Japan, to put in place the Russian-Japanese coronavirus diagnostics system EMG rapidly. During 2020, the system was used in Russian hospitals, laboratories, and industrial enterprises to achieve 30-minute results on infections during the pandemic. With China, the Fund’s first main accomplishment was to set the provisions for developing strategic infrastructure between the two countries.

The partnership began with constructing the first-ever bridge between Russia and China, cutting up to 500 kilometers of traffic and replacing the previous Sino-Russian roads with a highway bridge that connects Blagoveshchensk in Russia and Heihe in China. The project, which is scheduled to open by mid-2021, was announced by Kirill Dmitriev, CEO of the Russia Direct Investment Fund. Later, in 2018, up to $100 billion investment programs for infrastructure were added to the portfolio to attract Chinese companies and investors to Russia with a public-private partnership (PPP) that guarantees returns funded by the Russian government (RDIF, 2018).

 

China-Russia trade balance: 2006-2020

China-Russia trade balance 2006-2020

Source. UN Comtrade; Trade Map; Federal Customs Service of Russia

The Sino-Russian infrastructure partnership is also a consequence of the strategic 40 percent investment of the Russia Direct Investment Fund (RDIF) directed exclusively to large-scale infrastructure projects, mostly tied to the Chinese  BRI, joining the two primary Public-Private Partnerships (PPP) over the two regions. The system is also tied up to the interests of Xi Jinping and Vladimir Putin, who have coordinated further decision-making steps between the 2017 and 2019 meetings of the Belt and Road Forum for International Cooperation in Beijing, raising collaboration between the countries reaching up to USD 110 billion in bilateral trade in 2019.

 

China and Russia technological indicators
Country Global competitive Index. 2019 IDI (2017) E-Government Development Index (EGDI) 2018 Telecommunications Infrastructure Index (TII) (2018) Logistics Performance Index Rank, Ease of Doing Business Index Rank,2020 The Inclusive Internet Index Rank,>2019
Russia 43 45 32 0.6219 75 28 19
China 28 80 65 0.4735 26 31 42

Source: (Revinova & Lazanyuk, 2020)

In the digital economy, the public-private Russian Fund is on track to develop “Digital Silk Road” (Revinova & Lazanyuk, 2020) initiative of the two governments to endorse a Sino-Russian alliance over the Chinese development in artificial intelligence, quantum technology, e-commerce, and financial technology (fintech). This explains why throughout 2018, the Russian Fund invested directly in an Alibaba joint venture to operate in Russia, with 52 percent of property of participation. The joint venture agreement reached completion on October 9, 2019, when the RDIF, Alibaba Group, MegaFon, and Mail.ru Group announced the launch of the leading transnational Sino-Russian joint venture to operate legally within the two countries, distributing the economic and voting rights of the two territories based on shareholder interests after different rounds of negotiations.

 

Russia-China joint ventures in the technology sector

At Closing (1) With RDIF $194 million
Call Option Exercised
Economic Rights Voting Rights Economic Rights Voting Rights
Alibaba Group 55,7% 49,9% 47,8% 47,6%
MegaFon 24,3% 30,2% 24,3% 26,4%
Mail.ru Group 15,0% 18,7% 15,0% 16,3%
RDIF 5,0% 1,2% 12,9% 9,6%
Total 100,0% 100,0% 100,0% 100,0%
Source: Russian Direct Investment Fund (RDIF). Press release, 09.10.2019

One of the main goals of the alliance is to provide a common platform that unifies the customs to processing goods, providing supply chain and shipment systems, and endorsing the already overarching influence of Chinese giants such as Huawei, Lenovo, ZTI, Xiaomi, and the so-called BAT companies; Baidu, Alibaba, and Tencent, to reach bilateral trade levels of up to USD 200 billion by 2025. Russia aims to enlarge its Internet and Communications Technology (ICT) sector that includes a mixture of private and partially state-owned companies such as Yandex, Sverbank (artificial intelligence), Gazprom avtomatizatsiya, Rostec (quantum sensors and AI), Rostelecom (wireless technologies), NCC, Rosatom (quantum computing) and Kaspersky (cyber security), among others. In this background, the Sino-Russian Digital Silk Road aims to improve Russian digital transformation with the country’s digitalization based on the number of mobile phone users and public acquisition of fiber optic Internet (Alexeeva & Lasserre, 2018).

The growing economic partnership between Russia and China belong to functional reality associated with their natural leadership over the Asia Pacific region. This partnership was further consolidated through the establishment of a Secretariat of the Asia Pacific Economic Cooperation forum in Singapore in 1993. The country’s optimism over the future of the eastern hemisphere lies on the Asia-Pacific Economic Cooperation (APEC) economic role, representing over 60 percent of the world GDP, with 2.9 billion people and an average economic growth that has almost doubled the rest of the world within an annual range from 5-6 percent.

Future domains

China and Russia’s increasing proximity represents a clear strategic indicator to overcome the Western hemisphere’s geopolitical dominance, particularly of the United States (USA Congress, 2019). The evolution of relations between the two countries started with the revival of their diplomatic representations after the Cold War and the fall of the Berlin Wall in 1991. Authors like Joseph Nye explained how “the collapse of the Soviet Union” implied “that the de facto US-China alliance ended, and a China-Russia rapprochement began. In 1992, the two countries declared that they were pursuing a “constructive partnership”; in 1996, they progressed toward a “strategic partnership;” and in 2001, they signed a treaty of “friendship and cooperation.” (Nye, 2015) This speedy evolution is grounded in a set of geo-economic and political variables that shape the future domains of economic and political interests between the two territories, binding commercial, cultural, political, and civilizational roots that can extensively shape the future global power.

The Northern Sea Route and access to Arctic trade

While the overarching territories of China and Russia define de facto features of their demographic and development potential, as well as their combined natural resources, as a very northern country on the planet, Russian latitude crosses the 60th parallel north, covering the longitudinal extensions and time zones of Europe, the Middle East, and China. This location ensures Russian dominance over Arctic shipping routes, ensuring a combined Sino-Russian Arctic access with some of the most influential manufacturing and shipping companies in Beijing. This is why since the beginning of the Putin administration, in 2005, Chinese banks provided loans and prepayments for Russian energy firms that further allowed China to have a monopoly over Russia’s pipeline in charge of Rosneft and Transneft in 2009. Later, in 2013, China rescued Rosneft again, in return of 2.64 billion barrels over the next 25 years.

Northern Sea and Suez Canal routes

Northern Sea and Suez Canal routes
Source: The Economist

Finally, in 2016, Chinese firms provided external financing to Yamal, a Russia-US sanctioned company, through the Silk Road Fund. Yamal LNG launched in 2014 one of their most complex LNG projects to leverage the onshore gas resources of the Russian Yamal Peninsula with Novatek, CNPC, and the Silk Road Fund. Located above the polar circle, the remote region is frozen seven to nine months with temperatures as low as -50C, ensuring transregional shipment with the LNG Icebreaker tanker that inaugurated the Northern Sea shipping route under the Arctic, warranting the transportation to China in 15 days, and replacing the Suez Canal route that required 30 days for vessels to arrive in China via the Bering Strait.

Geostrategic asymmetry and mutual evolutionary interests

The economic partnership, digital collaboration, common border, and inner infrastructure, financial joint ventures, Northern Sea route projects, and the increasing synergy between the two countries facilitate the enduring coordination and communication amid the regimes and strengthen the ideological and political ties that bind the two countries. Indeed, a single economic alliance reveals the asymmetric markets and industrial potential of the two territories rapidly amid an ever-growing pressure from the West (Kaczmarski, 2016).

 

Russia: Real GDP growth rate from 2009 to 2021

(compared to the previous year)

Russia Real GDP growth rate from 2009 to 2021
Source: World Economic Outlook Database April 2020

This table reveals how, over the last two decades, Russia has adapted a post-Cold War survival strategy to align its economy with the East, while becoming a deterrent political instrument for China’s military and trade relations with the world. During the same time-frame, the international sanctions after the controversial 2014 Crimean referendum, and the further annexation of  Crimea and Sebastopol as the 84th and 85th federal subjects of Russia, dramatically raised tension between Russia and the European Union, leading to a rapid decline of the Russian economy that closed the year 2015 with the country’s real GDP growth at -1.96 percent (IMF, World Economic Outlook Report, 2019).

Indeed, the Crimean Annexation accelerated the active engagement of the United States and Europe, led by Germany, to apply strong economic sanctions against an already distressed Russian economy, prohibiting US business, trade, or investment in occupied Crimea, or imposing sanctions over trade-related developments of Russian deep-water, the Arctic offshore, or shale oil projects (Congress Service, 2020).

 

Real GDP growth rate in China from 2011 to 2019 with forecasts until 2021

Real GDP growth rate in China from 2011 to 2019 with forecasts until 2021
World Economic Outlook Database April 2019

Such numbers contrast dramatically with China, which had achieved an average growth rate above 7 percent before the Covid-19 crisis impacted its global supply chains. Moreover, the country overcame the challenge in rapid social control protocols that contrast with the pandemic’s effect in the West, particularly with the United States (IMF, World Economic Outlook Report, 2020). Such institutional coordination harmonizes structurally with the Russian political system that allowed the president in July 2020 to extend his rule until 2036.

The Chinese Communist Party and the Russian government have endorsed mutual coordination and exploration that may further deepen economic and political collaboration in the years to come. This comes into effect while analyzing the recent social disruptions in the West with the rearrangement of Western diplomacy in the face of a post-Brexit Europe and the United States directing its efforts to overcome the pandemic while dealing with social unrest at home.

These variables can reconfigure historical economic and political alliances and strengthen an intellectual approach to domestic and regional governance. The pace at which economic events are taking shape between China and Russia could disrupt players not familiar with the previous century’s rules. For that reason, a profound Sino-Russian alliance may signify an even deeper arrangement of Eurasian diplomacy on a scale and magnitude never seen before.


References

Alexeeva, O., & Lasserre, F. (2018, September 1). The Evolution of Sino-Russian Relations as Seen from Moscow: The Limits of Strategic Rapprochement. Olga Alexeeva and Frédéric Lasserre.

Congress Service, R. (2020). U.S. Sanctions on Russia: An Overview. Congress of the United States of America, Washinton.

Dibb, P. (2019, November). How the geopolitical partnership between China and Russia threatens the West. Australian Strategic Policy Institute(Special Report).

IMF, I. M. (2019). World Economic Outlook Report.

IMF, I. M. (2020). World Economic Outlook Report.

Kaczmarski, M. (2016, March). The asymmetric partnership? Russia’s turn to China. Marcin Kaczmarski, 53(3).

Korolev, A. (2018). Beyond the Nominal and the Ad Hoc: The Substance and Drivers of China-Russia Military Cooperation. Insight Turkey, 20(1).

Nye, J. S. (2015). A New Sino-Russian Alliance?A New Sino-Russian Alliance? Project Syndicate. Retrieved from https://www.project-syndicate.org/commentary/russia-china-alliance-by-joseph-s–nye-2015-01

RDIF, R. D. (2018). Investing in the Future. Annual Review.

Revinova, S., & Lazanyuk, I. (2020). Digital Silk Road as an Integration Project: Opportunities for Russia. 2nd International Scientific and Practical Conference “Modern Management Trends and the Digital Economy: from Regional Development to Global Economic Growth” (MTDE 2020).

USA Congress, U. C. (2019). Hearing On An Emerging China-Russia Axis? Implications For The United States In An Era Of Strategic Competition. Washington.

Wallin, M. (2017, November). U.S. Foreign Policy Toward Russia. An overview of Strategy and Considerations. American Security Project.

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