3 ways China and Russia can create much closer economic ties

Hong Kong
CNN business

Chinese leader Xi Jinping and his Russian counterpart Vladimir Putin will meet face-to-face this week after Moscow sent troops to Ukraine earlier this year.

When they last met, at the Beijing Winter Olympics in February, they claimed their friendship “knew no bounds”. Since then, Russia has sought ever-closer ties with China as Europe and the US have responded to the invasion with waves of sanctions.

Beijing has carefully avoided violating Western sanctions or providing direct military aid to Moscow. This balancing act, experts say, is a sign that Xi will not sacrifice China’s economic interests to rescue Putin, who arrived at the Shanghai Cooperation Organization summit in Uzbekistan this week as his army was withdrawing from large swaths of Ukraine.

But the trade relationship is on the rise, lopsidedly, as Russia desperately seeks new markets and China — an economy 10 times its size — seeks cheap goods.

Bilateral goods trade is at record levels as China acquires oil and coal to combat an energy crisis, while Russia has become a major market for China’s currency, and Chinese companies are rushing to fill the void left by Western brands.

China’s spending on Russian goods surged 60 percent in August from a year ago, reaching $11.2 billion, according to Chinese customs statistics. July profit of 49%.

Shipments to Russia, on the other hand, rose 26% to $8 billion in August, also accelerating compared to the previous month.

In the first eight months of this year, the total trade in goods between China and Russia increased by 31% to 117.2 billion dollars. That is already 80% of last year’s total – which was a record of 147,000 billion dollars.

“Russia needs China more than China needs Russia,” said Keith Krachek, former US Secretary of State for Economic Growth, Energy and Environment.

“As the war in Ukraine drags on, Putin is rapidly losing friends and becoming increasingly dependent on China, whose economy is 10 times larger than Russia’s,” he added.

For China, Russia now accounts for 2.8% of its total trade volume, slightly higher than its share of 2.5% at the end of last year. The European Union and the United States have a much larger share.

China was already Russia’s largest trading partner before the war, accounting for 16% of its total foreign trade.

But the world’s second largest economy has become much more important for Russia, which is mired in recession due to Western sanctions.

Russia’s central bank stopped publishing detailed trade data when the war in Ukraine began. But Bruegel, European economic thought, It recently analyzed statistics from Russia’s 34 major trading partners and estimated that China accounted for about 24% of Russia’s exports in June.

“China-Russia trade is growing because China is taking advantage of the crisis in Ukraine to buy Russian energy at a discount and replace Western companies that have exited the market,” said Neil Thomas, a senior China analyst at Eurasia Group.

Russia replaced Saudi Arabia as China’s top oil supplier in May. Moscow held the top spot for three consecutive months through July, according to the latest data from China’s customs office.

China’s coal imports from Russia also hit a five-year high of 7.42 million tonnes in July.

Coal in freight cars before shipment at the Tomusinskaya railway station near Mezhdurechensk, Russia, Monday, July 19, 2021.

The war in Ukraine has also boosted demand for the Chinese yuan in Russia, as Western sanctions have cut off Moscow’s global financial system and limited access to the dollar and euro.

On the Moscow stock exchange, Yuan accounted for 20% of the total trading volume of major currencies in July, compared to no more than 0.5% in January, according to Kommersant Russian media.

The daily trading volume of the yuan-ruble exchange rate also hit a new record last month, surpassing the ruble-dollar one. trade for the first time in history, according to Russian state-controlled media RT.

According to statistics published by SWIFT, the messaging system used by financial institutions globally to process international payments, was the world’s third-largest market for yuan payments outside mainland China in July, behind Russia, Hong Kong and the United Kingdom. The country did not appear on SWIFT’s list of top 15 yuan markets in February.

Russian companies and banks are also increasingly turning to the yuan for international payments.

Last week, Russia’s Gazprom said it would begin billing China in yuan and rubles for natural gas supplies, while Russia’s VTB bank said it was making yuan money transfers to China.

For Beijing, it is a boost to its ambitions to make the yuan a global currency.

“Increasing use of the Russian yuan helps advance China’s long-term goals of making the red a global currency, insulating it from Western financial sanctions and increasing its institutional power in international finance,” said Eurasia Group’s Thomas.

For Russia, this partnership with China is “born out of desperation,” Krache said.

“Because Russia has been so weakened, in part because of sanctions, Putin is willing to make a deal with a predatory power as long as he gets access to capital,” he added.

Chinese companies are also filling the void after Western brands leave Russia.

Chinese smartphones accounted for two-thirds of all new sales in Russia between April and June, Reuters reported, citing Russia’s top electronics retailer M.Video-Eldorado. Their total share in Russia has steadily increased from 50% in the first quarter, to 60% in April, and to more than 70% in June, M.Video said.

Xiaomi was the best-selling smartphone maker in Russia in July, with 42% of the market, according to Russian media outlet Kommersant. Samsung, once the market leader, had just 8.5% of the market in July. Apple had 7%. The two companies accounted for almost half of the Russian market before the invasion of Ukraine, but after the start of the war they stopped selling new products in the country.

Chinese cars have also flooded Russia.

Passenger cars from Chinese manufacturers accounted for nearly 26% of the Russian market in August, the highest on record, according to Russian analysis agency Autostat. Compared to 9.5% in the first quarter.

Major global automakers, including Ford and Toyota, have pulled out of Russia this year.

But there are also significant limits to China-Russia cooperation, analysts said.

China does not provide military, commercial or technological aid “that would risk imposing significant US sanctions on China,” said Thomas of the Eurasia Group.

“Beijing will not sacrifice its economic interests to help Moscow,” he said.

Fearful of a US backlash, China has so far “resolutely” refused to violate international sanctions against Russia, forcing Moscow to seek military aid from North Korea, said Craig Singleton, senior China fellow at the DC-based Foundation for Defense of Democracies.

“Beijing’s refusal to violate US and international sanctions reflects its acceptance that China remains dependent on Western capital and technology to sustain its continued development, even as Xi is personally inclined to support Putin’s war effort,” he said.

Also, China’s rapid economic slowdown this year Xi will further limit his willingness to support Putin. The Chinese president will not want to risk anything that destabilizes the economy further a few weeks before him is poised to secure a historic third term at the Communist Party congress.

Future relations will remain strained, and China wants to keep its options open, analysts said.

“There has always been mistrust between the two regimes, which historically treated each other as rivals,” Krach said.

Current Sino-Russian cooperation is primarily “defensive,” with Beijing and Moscow’s view that NATO and the U.S. pose a “clear national security threat,” according to Susan Thornton, a professor and visiting professor at Yale Law School.

“Russia’s war in Ukraine is not in China’s interest, but given the hostility of the West, China will not oppose Russia,” he added.