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By Oren Laurent
President, Banc De Binary
Russia is facing its most severe standoff with the Western powers since the Cold War. It is isolated over Ukraine, suffering from the resultant six months of sanctions imposed by the US and the EU. Moscow’s answer? To turn East to China.
Over the past decade, the relationship between Russia and China has been growing steadily. Both are wary of US global dominance and have been increasing the amount of trade they conduct with each other. In 2011, China surpassed Germany as Russia’s top trading partner, and last year, Chinese imports reached a record $53 bln, while $40 bln worth of Russian exports went to the superpower.
The recent dynamics of global power following the conflict in Ukraine have left Russia with no choice but to become increasingly dependent on China. No longer able to export so much energy into Europe, it made sense to the Kremlin to offer its eastern neighbour the energy that China itself needs thanks to booming consumption. It signed a $400 bln agreement in May to export a future annual 38 bln cubic meters of gas.
Thus, the relationship between these nations may have been given a new lease of life, but make no mistake: this is certainly not a marriage of equals. Although Russia has supplied arms to China for decades, it has previously refused to sell its best systems. It was reluctant to empower a neighbour that already had four times its economic output, but at present, it is preparing to deliver its top S-400 missile systems and Su-35 fighter jets. Russia has what China wants, and is not in a position to refuse.
Yet, what Moscow needs now, Beijing is in no rush to supply. Businesses, stripped of ties with the West, could become increasingly desperate for money, and Chinese investors know it. Many may be biding their time, waiting for Russian companies to face further struggles, before pouncing to make major acquisitions.
Further, while Russia is keen to diversify trade and become less dependent on its 70% of exports which are raw materials, China is mainly interested in Russian arms and energy. From China’s perspective, although the two nations may share anti-US sentiment, its primary goals of fostering economic growth and expanding its influence in Asia are best served by ongoing trade and partnerships with the US and Europe, along with other Asian countries. Here is the crux of the imbalance: for China, Russia only accounts for a small percentage of its global trade.
Russia may be under pressure economically, but it is politically savvy. It will hope to benefit as much as possible from its partnership with China, even if it has to cut itself less good deals out of necessity, and it may also make a bigger scene out of these deals than is proportionate. It may be hoping that its close ties with Beijing offer it additional leverage in negotiations with the West. After all, in the long-term, as the world watches, that will certainly matter.
