China and Russia Look to the Future

Following Russian Prime Minister Vladimir Putin’s visit to Beijing last week, there has been much talk about the future of China-Russia relations. The official report from China is filled with optimism. From Xinhua:

Russian Prime Minister Vladimir Putin on Monday said that he saw China as a “reliable partner”, not a threat to Russia.

In an interview with local TV channels, Putin said that Moscow sees the “readiness of the Chinese people and the Chinese leadership to build friendly, neighborly relations” with Russia.

He said that Russia “has no plans to compete with China” for global leadership.

Russian accounts echo this hope for an amicable and mutually beneficial future, as illustrated in an article from The Moscow Times focusing on China’s willingness to send investment to their northerly neighbors:

It appears that China is steadily stepping up efforts to build and own assets in Russia, bringing the economic relationship beyond just bilateral trade.

If all goes well, this trend may boost Chinese investment here and dent the longtime conventional wisdom that business ties between the large neighbors do not measure up to their geopolitical camaraderie.

Last week, China made its biggest equity commitment so far as it hosted a visit by Prime Minister Vladimir Putin, agreeing to contribute $1 billion to a joint state fund that will inject most of the capital into Russia.

This is about equal to the value of all Chinese direct investment in its neighbor since the Soviet breakup.

In contrast to hopeful domestic forecasts into the future, The Diplomat describes the three major obstacles to be expected as this relationship unfolds:

First, energy is – and will continue to – serve as the foundation of Russia-China economic ties, making the diversification of trade a long and difficult process. It’s a reality that the Kremlin has become all too familiar with over a decade. Trade between the two nations – which, according to Prime Minister Vladimir Putin, will hit $70 billion this year – remains defined by energy. Even if both governments pursue diversification in the fields listed in the recent memorandum – China is to assist Russia in areas like high-speed rail network, shipbuilding, and alternative energy – this won’t in the near future serve as the foundation for sustainable economic integration. These projects involve high-level cooperation between some of the largest Russian and Chinese firms and thus face significant logistical difficulties (such as Russia’s notorious bureaucracy) and political difficulties, as was demonstrated with recent gas pricing disagreements.

Second, there’s a fundamental inequality between the two trading partners in terms of energy trade. Steering the negotiations is China, which doesn’t necessarily need Russia to fulfil its energy needs. Indeed, in recent years, China has looked beyond Russia to other gas producers in the Middle East and Central Asia (another point of contention, since Russia considers Central Asia a privileged sphere of influence). On the other hand, China is the only nation that serves as a major client for Russia, outside of Europe. Such an unbalanced relationship promises trouble for Moscow, and the recent foot dragging over a gas deal between the two indicates that the energy trade relationship isn’t exactly mutually beneficial.

And, despite all of the meetings and agreements between the two nations, Russia still views China as a potential future enemy. Once lucrative Russia-Chinese military trade has all but disappeared. Many of Russia’s military technologies, which have fed China’s military industrial complex, were refitted and undercut Russia’s military sales abroad. Further exacerbating the problem is the overwhelming Chinese presence in the sparsely populated Russian Far East (RFE), which many have described as the basis for a Chinese takeover of the area. Chinese investors have invested nearly $3 billion in the RFE, three times the amount the Russian federal government has invested there. Even the Kremlin has acknowledged this disparity of influence, and has expressed the need to partner with China to cooperatively develop the RFE. But Chinese investors have yet to indicate any significant desire to invest in Russian enterprises or RFE’s infrastructure.

For more on complications in the China-Russia energy trade and Putin’s recent trip to Beijing, see coverage of the Russia-China gas talks, via CDT.