Recently, V. Putin stated that Russian-Chinese relations “surpass the military-political alliances of the Cold War era,” and in them “there is no leader and follower, no restrictions or taboo topics.” According to him, the political dialogue between the two countries “has become extremely trusting, strategic interaction is comprehensive and entering a new era.”
It is generally accepted that relations between Russia and China are built on the principles of good neighborliness and peaceful coexistence, that they are reliable and mutually beneficial. In fact, shortly before his visit to China in May 2024, Putin said: “We know, and I will simply repeat, I am obliged to do this, that our level of interaction with the People’s Republic of China is unprecedentedly high.” The Russian leader called relations between the two countries “one of the significant guarantors of stability in the world,” and then noted: “We are not creating any blocs, and our friendship is not directed against third countries, it is aimed at benefiting ourselves, but not against anyone else.”
Indeed, back in 2012, China defined a number of conceptual guidelines coordinating the directions of its foreign policy that directly relate to partnership relations with Russia: “harmonious peace and development,” “mutual learning and cooperation,” “mutual trust,” and “the spirit of equality.”
However, many years have passed since then, the contradictions between Russia and the “global West” led by the USA have intensified, and a lot has changed. First of all, China has experienced active economic growth.
WIDENING GAP IN ECONOMIC POWER
First of all, let’s look at the list of countries by the size of the gross domestic product calculated at purchasing power parity (GDP at PPP). According to the IMF for 2023, China’s GDP at PPP was $32931 billion. This is 18.7% of the global level. But for Russia, this figure is $5180 billion, and this is only 2.9% of the global level. In nominal terms, China’s GDP was $17662.0 billion, and this is 2nd place in the world, and for Russia this figure is 8.8 times less ($1997.0 billion), and this is 11th place in the world. For comparison: in 2010, Russia’s GDP was $1.6 trillion, and China’s GDP was $6 trillion, that is, the difference was only 3.75 times.
This widening gap has a negative impact on the relations between our countries. This mainly relates to the structure of trade turnover, which is currently not favorable for the Russian economy. Many economists even consider it a serious threat. However, Vladimir Putin notes that “the growth of the Chinese economy is not a threat at all, but a challenge that carries with it colossal potential for business cooperation, a chance to catch the Chinese wind in the sails of our economy.”
The Russian leader constantly emphasizes that “we must more actively build new cooperative ties, combining the technological and production capabilities of our countries and the Chinese potential for the purpose of economic development in Siberia and the Far East.”
What’s the reality? According to the results of 2023, the volume of trade between Russia and China reached a record $240.11 billion, an increase of 26.3%. Exports from China to Russia grew to almost $110.97 billion. Imports of Russian products to China increased to $129.14 billion.
Having reached the planned volume of trade turnover of $200 billion ahead of schedule, the parties raised the bar to an ambitious amount of $300 billion. It seems to look quite decent. But, on the other hand, the volume of trade turnover between China and the United States amounted to $759.4 billion in 2022, and in 2023, having decreased slightly, to $664.45 billion.
At the same time, China’s share in Russia’s trade turnover increased from 27% to 45% by the end of 2023, and this is extremely dangerous in terms of the risk of a decrease in mutual trade in the event of secondary sanctions (where would we be without this, and this will inevitably lead to the problem of filling the Russian budget).
It turns out that Russia is now a much less significant trading partner for China: its share in Chinese trade turnover is only 3.9%. And China’s key trading partners have become countries that Russia considers “unfriendly.” These are, first and foremost, the EU states and the United States.
RUSSIA HAS BECOME A RAW MATERIALS APPENDIX OF CHINA
Shortly before his visit to China, Putin said: “What makes me happy is the diversification of our relations. We are developing relations in the infrastructure sphere, and we are building bridges, roads, working in high-tech areas together. And we will continue to do this.” A good word is “diversification”. It comes from the English word “diversify”, which means “variety”. In economics and finance, this is a strategy that allows you to save resources and ensure a stable income by distributing risks.
What does Russian diversification look like in the case of China?
Yes, in 2023, China increased imports of Russian goods by 12.7%, but among the main commodity groups, purchases of Russian aluminum (2.1 times), vegetable oils (2 times), oilseeds and fruits (by 80%), and precious metals (by 43%) grew at an accelerated pace.
At the same time, the overwhelming share of Chinese purchases from Russia is mineral fuels (oil, oil products, natural gas, coal). In 2023, China imported a record 107 million tons of Russian crude oil, which is 24% more than in 2022. In value terms, oil supplies from Russia to China amounted to $60.6 billion. Gas supplies from Russia (including LNG) increased by 6.5% to $11.7 billion.
China also imports copper, ore, timber, fish and crabs from Russia. But Russia imports from China, according to Chinese customs statistics, mainly cars and vehicles (they make up almost 60% of the value of Chinese exports to Russia). For example, Chinese exports of passenger cars increased more than 7 times in 2023 (to $11.5 billion). And taking into account trucks, buses, tractors and auto parts, such supplies reached $22.5 billion. Russia also imports machine tools, tools, electronics, electrical equipment, clothing, footwear, etc. from China.
In this regard, the well-known sinologist, director of the Center for the Study of Far Eastern Countries in St. Petersburg Kirill Kotkov notes: “There are some problems. More than 73% of what Russia sells to China is mineral fuel. And vice versa, most of the products that China sends to us are machine tools, cars and other high-tech products. There is a trade imbalance.” As we can see, there is a raw material imbalance in Russian supplies to China and an increase in Russia’s dependence on Chinese supplies of highly processed products. Moreover, if we talk about cars, the Chinese, taking advantage of the opportunities that opened up due to the departure of Western brands, have completely captured the Russian market. Approximately the same can be said about electronics and household appliances.
And another very important point. Considering the fact that it is easier to replace raw materials than industrial goods, we can say that China’s dependence on countries “unfriendly” to Russia significantly exceeds its dependence on Moscow. This, as already mentioned, increases the possibility of using secondary sanctions to limit mutual trade between China and Russia – especially in the case of sanctions against individual companies.
WHAT ABOUT ECONOMIC EFFICIENCY?
The Chinese wind in the sails of our economy is, of course, great. But in practice, Russia has become not just a raw materials appendage of China, it has also practically lost the European market (in the European direction, for example, only Turkey and Bulgaria continue to buy oil from Russia), that is, as they say, “it put all its eggs in one basket”, which popular wisdom categorically does not recommend doing.
Yes, China has increased its purchases of Russian oil and gas, but the question is – at what prices is it doing this?
Despite the price ceiling set by the West at $60 per barrel, China pays an average of $77. This is according to official information. More precisely, at the end of 2023 it was $77.84 per barrel. But this is lower than the average annual price of Brent (the world standard of “black gold”). The Russian high-sulfur standard is called Urals, and it is traded at a discount. For example, in 2023, the average price of Brent oil was $82.6 per barrel, and the average annual price of the most popular Russian Urals grade in 2023 was $62.99 per barrel, and it is still falling. Plus, Russian Urals oil is characterized by higher overhead costs for trading: it has high costs for renting a vessel (freight), for insurance, for bypassing restrictions, etc.
Yes, in 2019–2022, Saudi Arabia was the largest supplier of oil to China, and last year the situation changed: now Russia has taken its place. But the discount of Russian Urals oil to the international benchmark Brent increased by about 40%. Plus, China’s share in the structure of Russian oil and oil product exports amounted to 45–50%, while the share of exports from Russia to Europe, on the contrary, sharply decreased from 40–45% to 4–5%.
Now Chinese oil refineries are eagerly buying up Russian oil at reduced prices. But the situation with Russian gas is even more dramatic: the price of gas for China in 2023 was $286.9 per 1000 cubic meters, but for Europe and Turkey – $461.3 per 1000 cubic meters. And, as experts note, Russian pipeline gas for China will be cheaper than for the European market, at least until 2027. That is, there is economic inefficiency (lower profitability) in the supply of Russian pipeline gas to China, while Europe has already practically switched to LNG.
BOTTLENECKS IN ECONOMIC COOPERATION BETWEEN RUSSIA AND CHINA
Yes, economic cooperation between Russia and China has significantly increased since the start of the SVO in Ukraine. This is due to the fact that since the fall of 2022, Chinese industrial goods and components have begun to occupy numerous niches in the Russian market that were vacated by the departure of Western companies.
Yes, trade between Russia and China is showing record volumes, but we cannot ignore the bottlenecks and barriers that hinder the effective development of bilateral relations in the long term. The main thing here is logistical difficulties. Plus negative trends in the global economy and problems of the Russian economy. Plus unpredictable energy prices and possible secondary sanctions from the US and the EU. It is necessary to create an infrastructure for conducting transactions bypassing the SWIFT system, from which ten of the largest Russian banks have been cut off since March 2022. It is necessary to develop a strategy to overcome imbalances in trade between Russia and China. But how to do this?
According to Vasily Kashin, Director of the Center for Comprehensive European and International Studies at the National Research University Higher School of Economics, despite the fact that Russia and China have significantly increased the share of national currencies in mutual settlements, Chinese banks are afraid of falling under secondary US sanctions, and they refuse to open accounts for all Russian companies, and not just those on the sanctions lists.
China’s Ambassador to Russia Zhang Hanhui also cites third-country interference as the main reason for the disruptions in cooperation between Moscow and Beijing. He recently said: “The disruptions occurred because some countries created problems for us. But I believe that we will find a way to overcome these problems.”
Yes, third countries are deliberately creating problems. But there are also many objective difficulties, and, first of all, they lie in the inadequacy of Russian infrastructure in the eastern direction. The railway network is already overloaded with export cargo to China, so not all shippers can send their cargo. There is also a shortage of maritime transport capacity due to the sanctions, and there is a lack of pipeline infrastructure. And most importantly, there is no way to attract “long” money to eliminate all these bottlenecks. And China is not showing any activity here. According to the Ministry of Commerce of the PRC, at the end of 2022, the total volume of accumulated Chinese investments in Russia amounted to $9.9 billion, which is only 0.3% of the total volume of Chinese foreign direct investment.
BLOCKING BY CHINESE BANKS
Putin constantly talks about the “colossal potential of business cooperation” with China, about the “new powerful impetus for the entire range of bilateral cooperation,” about the “partnership aimed at the future.” But at the same time, since the end of March 2024, Chinese banks have begun blocking payments from Russian companies for components for assembling electronics. It is clear that this is being done after the US threats against Chinese banks in an attempt to avoid secondary sanctions, but the fact remains that Russian distributors have already begun to have difficulties paying for finished electronic products from China.
The Chinese fear that the US President’s order gives the US Treasury Department the authority to impose sanctions on foreign banks for helping to conduct transactions for sanctioned Russian entities or for facilitating the supply of certain materials and equipment to the Russian military-industrial complex.
China expert Konstantin Kotkov states: “China is integrated into the global economy, it is the world’s factory and is afraid of falling under secondary sanctions. That is why we have problems with money transfers between our countries.”
In fact, payment for the supply of “kitnaborki” is blocked even for those organizations that have concluded long-term contracts for the production and supply of components for the assembly of electronics. And this is scary, since China has essentially become a monopolist in the component base for Russia.
Problems also arose with payment for services related to the delivery of finished products (computers, servers, etc.).
The Russian President proudly states that China has not only become Russia’s main trading partner, but the two countries are also increasing the volume of mutual settlements in national currencies. Russia and China have concluded a number of agreements for making payments in national currencies, and as a result, by September 2023, the share of the ruble and Chinese yuan in bilateral trade settlements reached 90%. Moreover, Russia ranks 6th in the world in terms of foreign exchange reserves, and now Russia’s reserves are replenished with yuan.
But the situation is as follows: some Chinese banks were able to accept dollars from Russia before December, but now they cannot. Moreover, the three largest Chinese banks, Industrial & Commercial Bank of China, China Construction Bank and Bank of China, and then others stopped accepting payments from Russia and in yuan. Problems with financial logistics through Chinese banks are now observed in the payment of almost all goods and services, but Vladimir Putin is confident that “all planned measures will be implemented.”
Chairman of the Russian-Asian Union of Industrialists and Entrepreneurs Vitaly Mankevich states: “In December 2023, the American regulator gathered the heads of Chinese banking organizations and threatened to impose sanctions against them if cooperation with Russian legal entities was detected. Therefore, the outlook is not bright for now.” He also notes that payment blocking affected “almost all Asian banks.”
As a result, shipments of goods from China have fallen by about a third, and new payment schemes to ensure that payments are made have still not been found.
And now the press secretary of the President of the Russian Federation Dmitry Peskov was forced to admit: “There are problems. We all know what they are connected with. We are in a close dialogue in order to look for options for hedging risks without damaging our volume of bilateral trade and economic relations.”
LEAVING RUSSIA WITHOUT WARNING OR EXPLANATION
And there’s more. In May 2024, Hikvision, a major Chinese manufacturer of video surveillance systems, left Russia. It left without warning anyone, and now the company’s official Russian website is unavailable and the phones are not answered.
For Russian clients and partners, this step was an unpleasant surprise, because the Chinese company, according to some estimates, managed to occupy up to 70% of the video surveillance market in Russia (at the end of 2021, Hikvision’s share of the Russian market was from 24% to 30%). It is clear that this is also due to the wave of US sanctions. It is also clear that cooperation will continue anyway, but under different schemes, and this is guaranteed to lead to an increase in prices for Chinese products, as well as problems with technical support for equipment.
There have been more and more examples of this kind lately. For example, in June 2024, the Chinese company Wison New Energies, which is building modules for Arctic LNG 2, stopped participating in the Russian gas project. The Arctic LNG 2 project is being implemented by Novatek, which was hit by US sanctions at the end of last year. The contract with the Chinese, which is engaged in engineering services, shipbuilding and green energy, was signed in 2019 through the French company Technip. The Chinese company supplied modules for the first (already launched) and second (under construction) lines of the project, and was also supposed to build them for the third line, which is scheduled for completion in 2026. Now, the scheduled shipment of liquefied natural gas (LNG) is at risk of being disrupted, since Russia does not have enough ice-class tankers, which does not allow the product to be exported through the northern seas.
Wison New Energies was also involved in the construction of the onshore power plant for Arctic LNG 2, and such a decision by the Chinese calls into question the entire project, which is especially unfortunate in conditions when the European Union is going to ban the “transshipment” of Russian LNG in its ports for deliveries to third countries.
NEW MAPS WITH CHINESE NAMES
In terms of “guarantees of stability in the world,” “mutual trust,” and “the spirit of equality” in relations with China, there are other serious problems. For example, on Chinese maps, the Southern Kuril Islands are marked as territories belonging to Japan but occupied by Russia. Moreover, on Chinese maps, Sakhalin Island is marked as Kuedao, the cities of Blagoveshchensk as Hailanpao, Vladivostok as Haishenwai, Ussuriysk as Shuangchengzi, Khabarovsk as Boli, Nerchinsk as Nibuchu, and Nikolaevsk-on-Amur as Miaojie.
To be clear, all these territories were ceded to the Russian Empire in the 19th century, since the then China, ruled by the Qing Dynasty, was so weakened by internal and external contradictions that it could not govern them. So what now? Now on the map, which is recommended for distribution and sale in China, the borders of the “historical” territories of China are marked in purple, and the modern borders are marked in red.
You can talk as much as you like about the “unprecedentedly high level of interaction with the People’s Republic of China,” but in the current difficult situation for Russia, China is acting the way it is. Chinese leader Xi Jinping says that “his support for Putin remains unwavering,” and potential sanctions are “an acceptable price for his strategic partnership with Russia.” But at the same time, it seems that China is now simply using our country as part of its confrontation with America.
And in August 2023, China approved new maps of the country with part of Russia’s territory included in them. A typical example: Bolshoy Ussuriysky Island on the Amur River has remained a disputed territory between Russia and China for the past 100 years. In 2008, the countries signed an agreement dividing the island in half, but this is not indicated on the new maps in China. At one time, Bolshoy Ussuriysky Island, along with neighboring Tarabarov Island and the small islands surrounding them, were “taken under protection” by Soviet troops. After the collapse of the USSR, both islands remained under the control of the Russian Federation. In 2004, Putin signed an agreement to transfer the western part of Bolshoy Ussuriysky (170 sq. km) and some small islands to China. And in October 2008, as a result of the drawing of the interstate border along the center of the Amur River, China received a territory with a total area of 337 square kilometers (the islands of Tarabarov, Vinogradov, Koreisky, Romashkin, etc.), and it was said then that this decision was based on Moscow’s long-term interests concerning the stability of Russian-Chinese relations.
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