When I served in Moscow from 2010 to 2014, I most frequently traveled through Sheremetyevo, one of the central international transport hubs in Russia. The signs in front of and within the airport, as is customary outside the Anglo-Saxon world, were bilingual: Russian in Cyrillic and English. Therefore, I was all the more surprised when I returned to Moscow in the years following: bilingual signs were replaced with trilingual ones. And the added language was – Chinese. This symbolically illustrates Russia’s pivot towards China, which gained momentum especially after 2014, following the war in eastern Ukraine and the imposition of extensive Western sanctions against Russia.
In recent years, we often hear that with numerous economic sanctions, “the West is pushing Russia towards China,” and that the Russo-Chinese strategic partnership is significantly strengthening, primarily in the international political arena (voting in the UN Security Council), security (similar views on international hotspots), energy, and gradually in broader economic and investment domains. How deeply has the Russian bear fallen into the embrace of the Chinese dragon?
Broadly speaking, the dynamics in bilateral economic relations change relatively slowly, measured in years and often even decades. Therefore, in the early years after the imposition of sanctions (2014), it was still difficult to analyze and understand the extent of the changed dynamics of economic cooperation between the two countries. Now, the seven-year period already offers us the first concrete results. And these should worry many in Brussels and in individual European capitals.
Balanced trade exchange with different signs
The trade exchange between the two countries, which exceeded one hundred billion US dollars in 2019, has been relatively balanced over the past decade, but that doesn’t mean the relative weight and importance of both trades are similar. For the rapidly growing Chinese economy, the Russian market still represents a relatively small share of exports, as despite a nominal increase in recent years, the Russian share in Chinese exports remains relatively unchanged, hovering around just over two percent. Similarly small is Russia’s share in Chinese imports, which increased by one percentage point over the past decade to three percent. But looking at the picture from the Russian perspective, we see a completely different dynamic.
Russia’s dependence on China in trade has significantly changed and increased in the 21st century: China’s share in Russian imports was only three percent in 2002, but by 2014, it had increased to 18 percent, and in just the next five years, it increased by an additional four percentage points, reaching 22 percent of Russia’s total imports by 2019, before the global COVID-19 pandemic. In absolute terms, this amounts to over 50 billion dollars in imports. At whose expense has Russian imports from China increased so significantly? The answer is not surprising: mostly at the expense of the EU. While imports from China have increased significantly, the EU’s share has proportionally decreased. In 2002, it accounted for 53 percent, but by 2019, it had fallen to 40 percent. Thus, the EU lost approximately 20 billion euros in exports to Russia just from 2014 to 2019.
The EU remains Russia’s central trading partner, exceeding Russo-Chinese trade by almost twice, but the trend of turning towards the East is clear, and the dynamics from the perspective of the European economy and even post-COVID recovery are concerning. Russia and China are increasingly trading with each other, and China’s share in Russian imports is growing significantly. Chinese products are gradually displacing European ones, and European companies are losing market shares. Sanctions have added strong momentum to this trend, not so much due to state-regulated policy – despite strong political will on both sides, which is certainly not negligible – but due to the workings of purely market forces. With limited exports from the West as a result of sanctions, someone had to fill the existing demand in the market – partly done by domestic (Russian) producers, but mostly by Chinese companies.
Investments, flowing in one direction like a river
In the field of investments, statistics do not detect major shifts. China’s share of foreign direct investment in the Russian economy is relatively small, with most investments still coming from the EU. This is especially true for the technological and manufacturing sectors, where investments by European companies, including several Slovenian ones such as Krka, Iskratel, Helios…predominate. But that doesn’t mean there are no shifts – especially in the most strategic sector, energy.
In recent years, an increasing number of strategic energy projects have been financed from China. A prime example is the largest Russian liquefied natural gas (LNG) production and export project, the Yamal LNG, developed by the private Russian company Novatek. Since 2019, China has a 30 percent ownership stake in the project (through the national energy company CNPC and a dedicated fund established to finance projects along the new Silk Road), with Chinese banks providing most of the necessary financing for the project ($12 billion out of a total of $18 billion).
To illustrate the significance and scope of this project: Russia, the world’s largest natural gas producer, plays a relatively minor role in the LNG market (holding about a three percent global market share before the project’s launch). With the project’s completion, production capacities will more than double, reaching (together) 26 million tons of LNG annually, slowly approaching a ten percent global market share. While international political spotlight in recent times has been on the Nord Stream 2 gas pipeline, which, despite strong opposition from the US, is dividing Europe, China has quietly managed to take a much more active investment approach to an energy project, from which it also expects significant dividends. These dividends are measured not only in financial terms but also strategically – in the form of diversified supply of this energy source.
As mentioned, Yamal LNG is not an isolated case. As expected, after 2014, all major Russian energy companies (state-owned and private) began turning to China for new sources of financing. Not because they could obtain financing there under more favorable conditions, but because Western banks began turning their backs on them. Under the weight of American sanctions, which effectively operate beyond US borders, larger Western banks either withdrew or significantly reduced their exposure to Russian companies. These are companies directly on the sanction lists, or their (co)owners against whom restrictive measures have been imposed.
Yuan steps onto the scene
Hardly does a meeting of the Russian and Chinese political leadership pass without discussions about greater independence of the international monetary system from the US dollar, the increased role of both national currencies in bilateral trade, and cooperation between central banks regarding the basket of currency reserves. Clearly, China especially desires the yuan’s share in the international financial system to at least roughly reflect the weight of the Chinese economy in the 21st century. The ambitions of the Russian political leadership are realistically much smaller, even though public rhetoric may be equally ambitious but lacks a basis in the actual weight of the Russian economy. However, when it comes to the question of changing the broader international financial framework, established with the Bretton Woods Agreement in 1944, both countries are limited to a broader consensus of the international community and primarily the key economic powers with the US at the helm. In bilateral relations, the political will quickly translates into tangible results.
For example, in the first quarter of 2020, for the first time in history, the share of the dollar in the Russian-Chinese trade balance slipped to 46 percent, while the share of the euro increased significantly (30 percent) along with that of both national currencies (24 percent). Among the latter, there is very little ruble, but much more yuan. Just a few years ago, it was completely different story: the dollar’s share accounted for over 90 percent, with the euro being the only other currency with a few percent share. There was no mention of these national currencies; it was much easier to trade in dollars.
The same applies to currency reserves, where the dollar long dominated the Russian basket, while the share of the euro gradually increased among other currencies. However, until 2014, when the two countries first agreed to a direct currency exchange worth 150 billion yuan (approximately $24.5 billion), followed by an extension of this agreement in 2017. In 2019, there was a remarkable sale of US dollars by the Russian central bank amounting to $101 billion, which at the time represented half of all Russian currency reserves in green banknotes. The Kremlin naturally invested most of the proceeds in yuan. It is therefore not surprising that Russia currently holds a quarter of all yuan reserves outside of China.
The two-headed eagle looks eastward
Of course, the moment when the yuan could threaten the dominant position of the dollar in international trade and the financial system is still far off. However, the example of Russia clearly shows the effects of systematic policy over a period of five to ten years, supported by shutting doors in the West. US and EU sanctions against Russia, as well as the trade war between the US and China (which the EU has not followed so far), actually strongly encourage and provide additional leverage for this type of economic and financial integration.
As renowned economist Jeffrey Frankel from Harvard says, sanctions are “a very effective tool for the US, but like any other tool, there is a risk that if you overdo it, they will start looking for alternatives on the other side.” And at least concerning Russia, this alternative today can only be China, which has never been its first choice in terms of strategic economic cooperation. Bilateral trade and investment cooperation were at extremely low levels in the early years of the 21st century. In contrast to the EU, with which the Soviet Union actively developed economic and energy cooperation despite ideological differences during the Cold War, and which started to develop very positively until the economic and financial crisis of 2008-2009.
While the US can comfortably afford economic sanctions against Russia, as the mutual dependence of these two economies is relatively weak and therefore sanctions do not have a significant (negative) impact on the US economy, it is entirely different in the case of the European continent. As we can see, sanctions since 2014 have accelerated the strengthening of Russo-Chinese economic relations, mainly at the expense of the EU. Continuing this trend will lead to the EU and European companies losing their strategic position in Russia, which could have not only immediate economic consequences but also long-term geostrategic ones.
China’s influence will therefore greatly increase through Russia in the entire Eurasian space (taking into account the fact that China has already economically displaced Russia from Central Asia), while the Russian two-headed eagle will increasingly drowsily look towards the West and increasingly wink towards the East.
Published in April 2021, Media Vecer.
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Winking Towards the East: The Russian Bear in the Wide Embrace of the Chinese Dragon (April 2021)
When I served in Moscow from 2010 to 2014, I most frequently traveled through Sheremetyevo, one of the central international transport hubs in Russia. The signs in front of and within the airport, as is customary outside the Anglo-Saxon world, were bilingual: Russian in Cyrillic and English. Therefore, I was all the more surprised when I returned to Moscow in the years following: bilingual signs were replaced with trilingual ones. And the added language was – Chinese. This symbolically illustrates Russia’s pivot towards China, which gained momentum especially after 2014, following the war in eastern Ukraine and the imposition of extensive Western sanctions against Russia.
In recent years, we often hear that with numerous economic sanctions, “the West is pushing Russia towards China,” and that the Russo-Chinese strategic partnership is significantly strengthening, primarily in the international political arena (voting in the UN Security Council), security (similar views on international hotspots), energy, and gradually in broader economic and investment domains. How deeply has the Russian bear fallen into the embrace of the Chinese dragon?
Broadly speaking, the dynamics in bilateral economic relations change relatively slowly, measured in years and often even decades. Therefore, in the early years after the imposition of sanctions (2014), it was still difficult to analyze and understand the extent of the changed dynamics of economic cooperation between the two countries. Now, the seven-year period already offers us the first concrete results. And these should worry many in Brussels and in individual European capitals.
Balanced trade exchange with different signs
The trade exchange between the two countries, which exceeded one hundred billion US dollars in 2019, has been relatively balanced over the past decade, but that doesn’t mean the relative weight and importance of both trades are similar. For the rapidly growing Chinese economy, the Russian market still represents a relatively small share of exports, as despite a nominal increase in recent years, the Russian share in Chinese exports remains relatively unchanged, hovering around just over two percent. Similarly small is Russia’s share in Chinese imports, which increased by one percentage point over the past decade to three percent. But looking at the picture from the Russian perspective, we see a completely different dynamic.
Russia’s dependence on China in trade has significantly changed and increased in the 21st century: China’s share in Russian imports was only three percent in 2002, but by 2014, it had increased to 18 percent, and in just the next five years, it increased by an additional four percentage points, reaching 22 percent of Russia’s total imports by 2019, before the global COVID-19 pandemic. In absolute terms, this amounts to over 50 billion dollars in imports. At whose expense has Russian imports from China increased so significantly? The answer is not surprising: mostly at the expense of the EU. While imports from China have increased significantly, the EU’s share has proportionally decreased. In 2002, it accounted for 53 percent, but by 2019, it had fallen to 40 percent. Thus, the EU lost approximately 20 billion euros in exports to Russia just from 2014 to 2019.
The EU remains Russia’s central trading partner, exceeding Russo-Chinese trade by almost twice, but the trend of turning towards the East is clear, and the dynamics from the perspective of the European economy and even post-COVID recovery are concerning. Russia and China are increasingly trading with each other, and China’s share in Russian imports is growing significantly. Chinese products are gradually displacing European ones, and European companies are losing market shares. Sanctions have added strong momentum to this trend, not so much due to state-regulated policy – despite strong political will on both sides, which is certainly not negligible – but due to the workings of purely market forces. With limited exports from the West as a result of sanctions, someone had to fill the existing demand in the market – partly done by domestic (Russian) producers, but mostly by Chinese companies.
Investments, flowing in one direction like a river
In the field of investments, statistics do not detect major shifts. China’s share of foreign direct investment in the Russian economy is relatively small, with most investments still coming from the EU. This is especially true for the technological and manufacturing sectors, where investments by European companies, including several Slovenian ones such as Krka, Iskratel, Helios…predominate. But that doesn’t mean there are no shifts – especially in the most strategic sector, energy.
In recent years, an increasing number of strategic energy projects have been financed from China. A prime example is the largest Russian liquefied natural gas (LNG) production and export project, the Yamal LNG, developed by the private Russian company Novatek. Since 2019, China has a 30 percent ownership stake in the project (through the national energy company CNPC and a dedicated fund established to finance projects along the new Silk Road), with Chinese banks providing most of the necessary financing for the project ($12 billion out of a total of $18 billion).
To illustrate the significance and scope of this project: Russia, the world’s largest natural gas producer, plays a relatively minor role in the LNG market (holding about a three percent global market share before the project’s launch). With the project’s completion, production capacities will more than double, reaching (together) 26 million tons of LNG annually, slowly approaching a ten percent global market share. While international political spotlight in recent times has been on the Nord Stream 2 gas pipeline, which, despite strong opposition from the US, is dividing Europe, China has quietly managed to take a much more active investment approach to an energy project, from which it also expects significant dividends. These dividends are measured not only in financial terms but also strategically – in the form of diversified supply of this energy source.
As mentioned, Yamal LNG is not an isolated case. As expected, after 2014, all major Russian energy companies (state-owned and private) began turning to China for new sources of financing. Not because they could obtain financing there under more favorable conditions, but because Western banks began turning their backs on them. Under the weight of American sanctions, which effectively operate beyond US borders, larger Western banks either withdrew or significantly reduced their exposure to Russian companies. These are companies directly on the sanction lists, or their (co)owners against whom restrictive measures have been imposed.
Yuan steps onto the scene
Hardly does a meeting of the Russian and Chinese political leadership pass without discussions about greater independence of the international monetary system from the US dollar, the increased role of both national currencies in bilateral trade, and cooperation between central banks regarding the basket of currency reserves. Clearly, China especially desires the yuan’s share in the international financial system to at least roughly reflect the weight of the Chinese economy in the 21st century. The ambitions of the Russian political leadership are realistically much smaller, even though public rhetoric may be equally ambitious but lacks a basis in the actual weight of the Russian economy. However, when it comes to the question of changing the broader international financial framework, established with the Bretton Woods Agreement in 1944, both countries are limited to a broader consensus of the international community and primarily the key economic powers with the US at the helm. In bilateral relations, the political will quickly translates into tangible results.
For example, in the first quarter of 2020, for the first time in history, the share of the dollar in the Russian-Chinese trade balance slipped to 46 percent, while the share of the euro increased significantly (30 percent) along with that of both national currencies (24 percent). Among the latter, there is very little ruble, but much more yuan. Just a few years ago, it was completely different story: the dollar’s share accounted for over 90 percent, with the euro being the only other currency with a few percent share. There was no mention of these national currencies; it was much easier to trade in dollars.
The same applies to currency reserves, where the dollar long dominated the Russian basket, while the share of the euro gradually increased among other currencies. However, until 2014, when the two countries first agreed to a direct currency exchange worth 150 billion yuan (approximately $24.5 billion), followed by an extension of this agreement in 2017. In 2019, there was a remarkable sale of US dollars by the Russian central bank amounting to $101 billion, which at the time represented half of all Russian currency reserves in green banknotes. The Kremlin naturally invested most of the proceeds in yuan. It is therefore not surprising that Russia currently holds a quarter of all yuan reserves outside of China.
The two-headed eagle looks eastward
Of course, the moment when the yuan could threaten the dominant position of the dollar in international trade and the financial system is still far off. However, the example of Russia clearly shows the effects of systematic policy over a period of five to ten years, supported by shutting doors in the West. US and EU sanctions against Russia, as well as the trade war between the US and China (which the EU has not followed so far), actually strongly encourage and provide additional leverage for this type of economic and financial integration.
As renowned economist Jeffrey Frankel from Harvard says, sanctions are “a very effective tool for the US, but like any other tool, there is a risk that if you overdo it, they will start looking for alternatives on the other side.” And at least concerning Russia, this alternative today can only be China, which has never been its first choice in terms of strategic economic cooperation. Bilateral trade and investment cooperation were at extremely low levels in the early years of the 21st century. In contrast to the EU, with which the Soviet Union actively developed economic and energy cooperation despite ideological differences during the Cold War, and which started to develop very positively until the economic and financial crisis of 2008-2009.
While the US can comfortably afford economic sanctions against Russia, as the mutual dependence of these two economies is relatively weak and therefore sanctions do not have a significant (negative) impact on the US economy, it is entirely different in the case of the European continent. As we can see, sanctions since 2014 have accelerated the strengthening of Russo-Chinese economic relations, mainly at the expense of the EU. Continuing this trend will lead to the EU and European companies losing their strategic position in Russia, which could have not only immediate economic consequences but also long-term geostrategic ones.
China’s influence will therefore greatly increase through Russia in the entire Eurasian space (taking into account the fact that China has already economically displaced Russia from Central Asia), while the Russian two-headed eagle will increasingly drowsily look towards the West and increasingly wink towards the East.
Published in April 2021, Media Vecer.
Sharing is caring!