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The Lopsided Reality of the Russia-China Relationship

The US is China's largest and most important purchaser of their exports. As their RE sector implodes and their demographic nightmare unfolds we become increasingly critical to their survival.

That provides a great op the for the US to shift it's leverage and relationship with China. To get there the Ukraine fiasco needs to be wrapped up...meaning Putin gets the Donbas. In the long run that's in our strategic interest bringing the major powers into alignment.

China can no longer afford to be the gremlin it's been for several decades, else it's markets for purchasers in the US and EU will dry up. It can't afford that.

The Lopsided Reality of the Russia-China Relationship

Beset by Western sanctions, Moscow has increasingly turned to Beijing for economic and security support

By Georgi Kantchev, WSJ

Updated May 15, 2024

When Russian President Vladimir Putin visits Chinese leader Xi Jinping in Beijing this week, the two leaders will seek to project their customary united front against the U.S.-led global order.

Beneath the surface, however, the relationship isn’t one of equals.

Beijing has provided a lifeline to the sanctions-stricken Russian economy, supplying it with everything from electronics to washing machines to tractors. But while China accounts for around 33% of Russia’s overall trade, Russia makes up only 4% of China’s trade, according to data provider CEIC Data.

China has become a critical source of optics, microelectronics, drone engines and other materials that enable Russia’s weapons production, while Russia’s arms exports to China have fallen precipitously in recent years. Meanwhile, Russia, its oil and gas now shunned in Europe, has had to sell at significant discounts to China. Beijing has yet to agree on a major new gas pipeline, using its leverage to squeeze Russia on price.

“It’s a strategic partnership where both sides need each other but it’s increasingly asymmetrical in China’s favor,” said Alexander Gabuev, director of the Carnegie Russia Eurasia Center in Berlin. “China is not only the more powerful partner, but also the one that has many more options than Russia and the war has exacerbated that.”

“Russia is now locking itself into vassalage to China,” Gabuev said.

Despite the escalating imbalance, the bond between two nuclear-armed powers carries profound implications for the West. Those include intensifying military collaboration and heightened geopolitical rivalry with the West across Africa and Asia. The surge in their oil and gas trade is meanwhile fundamentally reshaping the global energy map.

Worries are also growing among Western officials that, as China helps backfill Russia’s war economy, Moscow could win against Ukraine in a war of attrition while Europe and the U.S. struggle to mobilize their own industries to match Russian production.

In recent meetings with Xi, both European leaders and Secretary of State Antony Blinken have pushed the Chinese leader to cut back on his nation’s support for Russia’s defense industry. Washington has also warned Beijing that it could take action against Chinese banks handling trade in so-called dual-use goods that have both civilian and military purposes. The threat of extending sanctions on Chinese banks could already be having some effect as recent monthly data shows Chinese exports to Russia have moderated, analysts say. They caution, however, that as with previous sanctions on Russia, companies would switch to other banks and use middlemen, including in third countries.

Russian officials have pushed against the notion that their country is becoming dependent on China. The Kremlin’s spokesman last year said “relations between Russia and China are a partnership, not dependence.” China’s Ministry of Foreign Affairs and the Kremlin didn’t respond to requests for comment.

Putin’s two-day visit set to begin Thursday marks his first foreign trip since winning a rubber-stamp election in March, underscoring the priority that the Kremlin places on further expanding its security and economic ties with China. Putin will visit the capital Beijing and the city of Harbin, the Kremlin said Tuesday.

Though historically the relations between the two countries have oscillated between periods of mutual support, ideological competition and even outright hostility, Moscow and Beijing have long viewed the U.S. as their main challenger and sought to undermine its global influence.

After Russia annexed Crimea from Ukraine in 2014, the Kremlin pivoted to China in a bid to shield its economy from Western sanctions. Less than three weeks before Russian tanks rolled into Ukraine in February 2022, Putin and Xi declared that the friendship between the two countries “has no limits” and that there are no “forbidden areas of cooperation.”

Ties have only deepened since then, including a flurry of diplomatic, military and business meetings. But in one indication of the shifting weight in the relationship, traffic has been mostly one-sided, with senior Russian officials and business leaders going to China much more frequently than their Chinese counterparts going the other way, said Gabuev, who regularly talks to officials in both countries.

On the military front, trade in critical dual-use goods, including electronic and mechanical components used in Russian weapons systems, surged after Xi’s meeting with Putin in March last year, according to a recent analysis published by the Center for Strategic and International Studies, a Washington-based think tank. That has helped ease pressure on Russia’s defense industrial sector, enabling Russia to wage a long war of attrition against Ukraine, CSIS said.

“When it comes to Russia’s defense industrial base, the primary contributor in this moment is China,” Blinken said last month.

The Sino-Russian economic relationship has also deepened, with Russia playing the junior partner.

Bilateral trade reached a record $240 billion last year, a year earlier than a goal set by Putin. That’s dwarfed, however, by China’s trade with the European Union at nearly $800 billion and with the U.S. at around $660 billion, according to Chinese customs data.

To cope with the surge in trade, the Russian Far East customs service had to hire 1,000 additional staff over the past two years, basing most on the border with China.

“China has almost everything that Russia lacks because of sanctions,” said Janis Kluge, an economist focusing on Russia at the German Institute for International and Security Affairs. “Without imports from China, Russia’s economy would almost immediately falter. This gives Beijing a lot of leverage over Moscow.”

The Chinese yuan has overtaken the U.S. dollar in Russia’s exports, while Russian companies are increasingly borrowing in yuan and households are stashing savings in it.

The exodus of Western brands from Russia following the war has created a void swiftly filled by Chinese manufacturers, which now dominate markets from smartphones to household appliances.

Around 60% of newly sold cars in Russia were Chinese at the end of last year, almost double their share in 2022, according to Russian data provider Avtostat.

Not everyone is happy.

Russia’s AvtoVAZ, the maker of Lada cars, said that Chinese carmakers are crowding out Lada by offering large discounts.

“Many Chinese brands, carrying out, I would say, aggressive expansion into the Russian market, are beginning to break through,” Maxim Sokolov, president of AvtoVAZ, told the Russian newswire Interfax in March.

Deeper economic cooperation with China, though, is inevitable for many Russian businesses faced with Western sanctions.

Norilsk Nickel, a metals giant controlled by Russian oligarch Vladimir Potanin, will shift a portion of its copper-smelting operations to China after sanctions hindered access to crucial equipment and impacted the company’s payments. Potanin said last month that the company’s dependence on China increases along with sanctions pressure.

“If this cannot be avoided anyway, if we cannot diversify our supplies so as not to depend on the Chinese market, then it is better to enter deeper into it and integrate,” he told Interfax.

There are growing concerns in Moscow about Russia’s dependence on China, said Vasily Astrov, an economist at the Vienna Institute for International Economic Studies.

“But, under the current circumstances for Russia, growing dependence on China is effectively the only alternative to isolation, which Russia is seeking to avoid at all costs,” he said.

After the Ukraine invasion severed decades-old oil and gas links between Russia and Europe, China stepped in as a willing buyer. China has also supplied much-needed parts for Russia’s oil-and-gas industry that used to come from the West.

But that leverage also means that China could command discounts. Russian ESPO blend oil delivered to China currently trades around $5 cheaper a barrel than other comparable crude deliveries to China, according to data from Argus Media.

Beijing has so far been reluctant to sign up for the Power of Siberia 2 gas pipeline. A massive project that would carry gas from the Yamal region in northern Russia to China via Mongolia, the pipeline has become critical for Russia ever since its traditional European market shrunk in the wake of Putin’s invasion of Ukraine.

Sticking points such as financing and gas pricing remain unresolved, industry watchers say. China, which can tap other gas suppliers such as Australia and Qatar, can afford to wait it out and then force lower prices from Russia.

China has consistently paid lower prices than Europe for Russian gas, according to calculations by Sergey Vakulenko, a nonresident scholar at the Carnegie Russia Eurasia Center and former Russian energy executive. Even if Moscow and Beijing agree on the new pipeline soon, this precedent, coupled with Moscow’s limited alternatives for gas export beyond China, has weakened Russia’s bargaining power in negotiations, Vakulenko said.

Kluge, the economist focused on Russia, said that Moscow’s dependence on China represents a long-term shift.

“The reorientation of Russian trade flows is permanent,” he said. “Dependence on China will shape Russia’s economic future for years to come.”

Kate Vtorygina contributed to this article.

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