As Russia continues to contend with sanctions from the United States and European Union after annexing Crimea in 2014, it has cast its eye on a new ally: China.
The two countries are already aligning themselves for security purposes, a prime example being their position against the U.S. missile shield deployment plans in South Korea. Both China and Russia have stated that the Terminal High Altitude Area Defense (THAAD) anti-missile system situated in South Korea to contain North Korea harms their relations with the U.S.
Combine this with China’s potentially shaky relations with America (depending on the results of the election) and a stronger economic alliance between China and Russia may be on the horizon.
At present, trade dependence and credit flows between the two countries remain relatively low. However, China is already Russia’s largest trading partner, comprising $88 trillion in combined export and import volume in 2015.
The two nations have also signed major oil and gas export agreements since 2009, which promise to bring in fossil fuels from Russia to China. These contracts permit Russia to diversify away from the EU as a source of demand and allow China to diversify sources away from Malacca-strait bound oil cargoes emerging from the Middle East.
China now imports 550,000 barrels of oil per day from Russia or five million tons per year, making Russia the largest crude oil exporter to China. This is only set to increase as the Eastern Siberia-Pacific Ocean oil pipeline will be linked to Northeast China next year and the pipeline linking Siberia’s Chayandinskoye oil and gas field to China comes online in 2018. By 2038, 7.5 million tons of crude oil will be delivered annually.
Raw materials for China
Further economic cooperation between the two nations, if realized, is likely to include trade in raw materials from Russia to China and investment from China to Russia.
China’s demand for raw materials promises to grow as urbanization expands. They won’t likely be in historically important categories such as metal ore, but rather in food commodities to feed a more affluent society. China already imports cereals from Russia and the two nations signed agreements on safety regulations on wheat, corn, rice, soy and rapeseed last December.
Already, despite China’s economic slowdown, imports of food commodities such as oilseed, grain and pork have increased in volume. China now consumes about 60% of world exports of soybeans, and grain imports rose 20% from 2014 to 120 million tons in 2015. Many of the imports come from the U.S and renegotiated trade contracts by presidential hopeful Donald Trump may send China looking elsewhere for these food commodities.
Russia needs investments
Russia’s demand for investment is high, as the nation continues to lack sufficient funds to spur growth. The country is in dire need of foreign direct investment (FDI), fixed investment in infrastructure and other public assets and private investment. FDI fell 40% in 2014 and has remained at ten-year lows. Russia has made it clear that it would welcome Chinese money. This past June, Russian President Vladimir Putin told China’s Xinhua News Agency: “China is increasing its presence in our energy market, it is a major shareholder in one of our significant projects, Yamal LNG, and it has acquired 10 percent of the shares in one of our leading chemical holdings, SIBUR. We welcome these Chinese investments not only as a means of placing financial resources but also as a means of further developing our partnership.” For its part, China has shown that it is eager to invest in Russian energy and infrastructure.
One Belt One Road is an obvious opportunity for both China and Russia: China would provide Russia with much-needed investment in infrastructure and Russia would build up sorely needed infrastructure which could breathe some life into its lagging economy. Thomas Remington, Goodrich C. White Professor of Political Science at Emory University, states that “the One Belt One Road (OBOR) project could affect Chinese economic relations with Russia if both countries take material steps to increase investment in transportation and logistics projects connecting them.” OBOR promises to connect Europe to Moscow, to Central Asia and China, through six transnational corridors, reducing the cost of transportation among nations in these regions and spurring economic growth. Russia and China both stand to benefit.
While Russia and China have not yet solidified logistics projects under OBOR, Chinese companies have now been allowed to bid on Russian infrastructure projects, including railway projects. China is now developing high speed trains for the Moscow-Kazan railway, which is projected to cost more than $15 billion. Alexander Gabuev, Senior Associate and the Chair of the Russia in the Asia-Pacific Programme at the Carnegie Moscow Center, writes in a policy brief that “the tone of the conversation [on China’s participation in constructing Russian railways] marks an important shift in Russia’s attitude toward Chinese participation in the development of its infrastructure.” This marks an important step toward Russia’s participation in OBOR projects.