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Teneo

Vision 2019

Russia and China: Towards a (More) Strategic Partnership



Russia and China have been on a diplomatic honeymoon for the past five years.

The two countries presidents, Vladimir Putin and Xi Jinping, have put on a display of friendship and partnership, and their frequent summits showcase intensifying bilateral cooperation. However, what does the future hold for this important power partnership? Are Russia and China on the road to an alliance or are there hidden fault lines that could soon ruin their relations?

Russia’s Pivot to Asia

To project an image of global power, Russia typically engages with the United States. However, its relations with other key countries are gradually increasing in importance as the international order shifts away from its post-Cold War unipolar structure of U.S. dominance. In 2014, amid souring relations with the United States and the European Union, Russia’s engagement with rising powers gained even more importance as Moscow sought new financing and trade links, in particular with China.

Russia and China share a resentment towards the unipolar world order that has dominated the post-Cold War era. They agree on a multi-polar future and have jointly placed effort in creating structures that seek to challenge the primacy of U.S.-dominated international institutions. Finally, they also share the sense of being encircled by U.S. policies, which has intensified in recent years.

Over the past four years since Russia announced its “pivot to East,” the number of summits, staff-level meetings, military exchanges and joint exercises has increased rapidly. Russia and China announced joint energy and infrastructure projects, and the alignment of their respective flagship regional economic development projects – the Eurasian Economic Union and the Belt and Road Initiative. Extrapolation of this development would suggest an emerging alliance. However, under the surface, the story is significantly more complicated.

The results thus far of the intensifying bilateral relations have fallen well short of expectations. For example, in 2015, instead of increasing, mutual trade in monetary terms dropped significantly on the back of declining oil prices, and ruble exchange rate and trade flows only surpassed their pre-crisis levels in 2017. Some Chinese investment intentions have not been followed through, even in the most promising areas, such as the energy sector. Chinese banks have not replaced the lost financing from Europe and the U.S. to Russia, where European countries remain the most significant investors and trading partners even in the current sanctioned environment.

There are a few reasons why economic cooperation has not lived up to the hype. Chinese banks typically offer to finance those projects with Chinese content that contract Chinese companies, which differs from the long-term capital financing that Russian companies and banks seek. Moreover, worthy projects in Russia's priority areas (the Far East regions bordering China) are few and far between. Chinese companies have also found it difficult to operate in Russia and complained about deficient governance and high corruption.

It follows from the above that the relationship is slanted significantly toward favoring China’s priorities. Russia seeks the trade, investment, and financing from China. The Chinese economy is eight times larger than the Russian one. Russia's economy is stagnant and has little to offer beyond energy exports. Russia is the junior partner in this disproportionate relationship and is wary of becoming overly dependent on its more economically powerful and dynamic neighbor. The result is a reluctance to accept Chinese financing into some types of projects and feet-dragging on projects that should otherwise have been expedited.

Geopolitics: Fault Lines and Tension Points

Russia and China do not necessarily see eye to eye on issues of crucial geopolitical interest to one another. For example, China disapproved of Russia’s annexation of Crimea, as it opposes boundary changes on self-determination grounds – as claimed on the basis of the controversial referendum held in Crimea in March 2014 – due to its claims over Tibet and Taiwan. Conversely, Russia is hedging its stance on the South China Sea dispute. Depending on the context, Moscow’s policy on the matter alternates between supporting some positions voiced by China (such as the Hague arbitration court decision rejecting Beijing’s territorial claim) and some voiced by other parties (for example, by Russian companies taking part in the development of hydrocarbons resources in disputed areas on Vietnamese licensing).

In conducting bilateral relations, Chinese officials are well aware of Russia's power ambitions (as well as insecurities) and go out of their way to emphasize the two countries are equal partners. The language used between the two sides is always courteous, polite and appreciative, throwing into sharp relief the abrasive style and language that the Kremlin officials assume in its relations with the United States or European countries. China is also cautious about not stepping on Russia's toes in its perceived sphere of influence. However, again, Russia has no interest in becoming too dependent on one partner and seeks to develop relations with other Asian countries as well, most notably Japan and India, but also Vietnam.

Most importantly, however, the two countries share their backyard – Central Asia, where Russia may be set to gradually lose the most. The Russia-led Eurasian Economic Union (EEU), which includes Armenia, Belarus, Kazakhstan, and Kyrgyzstan is a project that seeks to emulate the European Union by developing a free-trade area with a political overlay. In contrast, China's Belt and Road initiative (BRI) is a more flexible concept, which envisages the development of infrastructure and trade links to ease movement of Chinese goods to westward markets. Kazakhstan is the most important node in the land-based ‘Belt,’ though other Central Asian countries also play a role. The EEU does not offer significant development incentives that these countries crave and relies on the importance of access to the Russian market for their economies. The BRI provides trade, investment, job creation and infrastructure development – a far more attractive offer with seemingly fewer political strings attached. Unsurprisingly, China is fast replacing Russia as the dominant economic power in the region. The May 2015 declaration on cooperation between the EEU and the BRI was interpreted as Moscow’s tacit agreement to China’s emerging economic dominance in Central Asia, while Russia would maintain its security role in the region.

Moreover, Chinese investment is now flowing into projects that may directly challenge energy imports from Russia. The China National Petroleum Corporation has recently expanded its portfolio of upstream projects in Kazakhstan despite the restrictive investment climate. While the Kazakh economy is still closely tied to Russia, it is increasingly defined by regional economic ties and imports from its eastern partners, perhaps foreshadowing the future of the region – a shift of the economic center of gravity from Russia to China.

The situation is similar in the Balkans – another region where Russia seeks to project its power, clashing this time with the EU. Western Balkan countries hope to benefit from the BRI, as the first European port on the maritime ‘Road’ ends in the Greek port of Athens and goods could be transported by rail and road North through the Western Balkans to core European markets. Most prominently, Serbia has been attracting probably the highest Chinese interest, with projects ranging from acquisition of the troubled Smederevo steel mill to wastewater treatment plant financing. Chinese banks finance nearly half of all ongoing infrastructure development projects in Serbia. Beijing is thus gaining outsized political influence in a country that is Russia’s most outspoken ally in the region.

What the Future Holds

Despite the intensifying bilateral engagement, the disproportion in economic relations and differences on items considered to be of crucial importance to their respective interests suggest that the future of the relationship between Russia and China lies in the continuation of their strategic partnership rather than a formal alliance.

All other things equal, the power disparity between the two countries will continue to grow. China will become increasingly more powerful economically, while Russia stagnates. Chinese influence in Central Asia and the Balkans will continue to grow at the expense of Russian power as the BRI continues to develop. However, Russia seeks a global power position for itself and is unlikely to accept a junior role, while becoming more economically dependent on China and losing influence in Central Asia and elsewhere. As a result, tensions between China and Russia may emerge as their interests begin to clash.

However, it is unlikely that the two countries would allow their strategic partnership to fall apart. They both oppose the U.S.-led unipolar world and feel encircled by Washington’s policies. They both actively work towards and seek to secure their positions in an emerging multipolar structure. And they need each other to create an alternative global multipolar order to challenge the dominance of U.S.-led institutions.

North Korea is one example where Russia and China have the ability to undermine the interests of the U.S. by acting together. In July 2018, the two countries used their votes in the United Nations Security Council to block disciplinary action against Pyongyang (over petroleum import limits breaches). Moscow has also sought a more active role in negotiations with North Korea, which may add a new multilateral dynamic to future talks.

Russia will probably use diplomacy rather than force if it finds that its interests clash with those of China, most likely over Central Asia. It is unlikely that Russia would use the same methods as it did in Ukraine to prevent Kiev signing an association agreement with the European Union if one of the Central Asian countries was shifting ever closer to China. On their part, the Chinese maintain an open dialogue with Moscow on their actions in the region and consult their moves to avoid tensions. The BRI and EEU projects have been formally aligned and are considered complementary rather than competing plans. China also emphasizes Russia's role as a provider of security in the region. China's tendency to create multilateral forums rather than act bilaterally also aids in providing a sense of partnership. These three tactics – consultations, recognition of Russia's role in the region and multilateralism – will likely prevent a significant falling-out, even if a crisis arises in their shared backyard.

On the other end of the spectrum of potential developments in bilateral relations, the disproportionate economic power relationship also limits the potential for the two countries to shift their intensifying ties to a new level and create a fully-fledged alliance. Such a scenario would only become an option if the two nations feel a long-term sense of encirclement by U.S. policies. In other words, if their shared nemesis becomes a more critical factor in their foreign policy decision making than differences in their interests. In the current situation, marked by sanctions and tariffs, such a scenario cannot be ruled out. However, in such case, Russian-Chinese cooperation would likely take the form of deepening collaboration without a formal treaty of alliance.

Towards a More Strategic Partnership

In sum, despite the intensifying bilateral relations and the surrounding hype promoted by both sides to boost the perception of the importance of their partnership and leverage in relations with other partners internationally, the economic achievements of the engagement between Russia and China on the whole have been modest. It is likely that in the near future, bilateral trade will continue to grow, although perhaps not crossing the proclaimed goal of overall trade turnover reaching USD 200bn a year by 2020.

Investment flows from China to Russia will depend mainly on the quality of opportunities offered and the Russia’s level of comfort with such investment. However, given that the economic strength of China and Russia will likely continue to diverge in favor of Beijing, Moscow's insecurities are more likely to grow than to diminish.

However, despite their geopolitical differences, the two countries remain united on their basic vision of the world structure they wish to create. The depth of their cooperation will depend on both the alignment of their interests and the perception of the level of external threat they face together. In any case, both will continue to emphasize multilateral engagement, mutual consultations, and trying to avoid treading on each other's toes in areas where their interests overlap.

Overall, it is likely that in the next year or two, Russia and China will continue to do more together. While on the economic front, the picture may be mixed, their strategic partnership will likely deepen, as long as the U.S. remains in an adversarial position to both. Expect the two countries, the two leaders and the two militaries to do more together, even without a formal treaty of alliance.