The Russian-Ukrainian conflict that began in February 2022 paved the way for enhanced relations between Moscow and Beijing. This development was marked by China’s abstention from voting against Russia at the United Nations Security Council, the increased presence of both countries in various international organizations like BRICS and Shanghai, and, importantly, their shared pursuit of a multipolar world order that transcends American dominance.
As Western economic sanctions on Russia intensified following the conflict with Ukraine, Moscow and Beijing sought to bolster their trade relations. China emerged as a major source of cheap consumer goods and technological products, while Russia became an important supplier of raw materials and oil, especially given the presence of a major oil pipeline connecting the two countries since 2000.
These growing relations have concerned European circles, as they have weakened the impact of European sanctions on Russia and encouraged Russia to continue its influence within Europe. Moreover, these relations could serve as a strategic alternative to the economic ties between Russia and Europe, which had flourished after the fall of the Soviet Union but gradually deteriorated following the 2007 global financial crisis and Russia’s annexation of Crimea in 2014, reaching a severe strain with the Ukrainian war.
In this context, the German Institute for International and Security Affairs released a report in December 2023 titled “Russian-Chinese Relations and Moscow’s Trap of Economic Dependence,” analyzing the potential impacts of these relations and evaluating their future risks.
The Russian Pivot Eastward:
According to the report, Russian-Chinese relations suffered from weakness until the year 2000, when they began to grow modestly, particularly in the economic sector, through the signing of several trade agreements. However, cooperation soon waned again, as both parties then sought to engage with the United States and Europe to benefit from their technology and capital. During this period, Russian-European harmony was on the rise after the fall of the Soviet Union, especially with Russia’s shift to a market economy from a centrally planned one.
However, Russian-European relations saw a decline in trade following the 2007 global financial crisis, which led to a Russian economic recession and prompted Russian elites to diversify their economic allies and pivot eastward. This shift provided an opportunity to revitalize Russian-Chinese relations, which have grown steadily since then.
While numerous joint projects between Moscow and Beijing have flourished, particularly in defense and energy sectors, the cooperation did not reach its peak due to Moscow’s concern about Chinese goods competing with its own industries. Thus, the period between 2014 and 2022 saw moderate cooperation, resulting in the creation of the Russian-Chinese Investment Cooperation Committee and an increase in Russian exports to China, including coal, liquefied gas, minerals, and some agricultural products.
With the outbreak of the Ukrainian war, trade relations between the two countries saw unprecedented growth, with bilateral trade reaching approximately $114.5 billion in the first half of 2023. During the same period, Chinese imports exceeded 35%, compared to just 3% in 2000.
The development of relations between the two countries went beyond trade volume, as there was a qualitative shift in the composition of exports and imports. Until the mid-2000s, Russian imports were focused on cheap, labor-intensive goods from China, such as footwear, clothing, and leather goods. Since then, Chinese exports to Russia have increasingly focused on advanced investment goods.
In the first half of 2023, Chinese imports of investment goods accounted for 50% in several areas, including mechanical engineering, vehicle manufacturing, and electronics. At the same time, the composition of Russian exports to China has notably changed. Until the mid-2000s, chemical products, machinery, and steel products were the leading exports. By mid-2023, fossil fuels constituted 74% and minerals and raw materials 10% of Russian exports to China.
Despite the flourishing trade relations, obstacles remain. There are Chinese concerns about extensive investment in Russia due to potential impacts on Beijing’s interests with Europe, which could expose it to trade sanctions, as seen with Chinese company Huawei. Additionally, Russia faces a shortage of labor, inadequate infrastructure to attract investments, administrative hurdles for foreign investors, and numerous Russian lobbying groups that seek to hinder foreign investments to protect their interests.
Areas of Cooperation:
The German Institute report highlights the revival of cooperation between Moscow and Beijing in key areas following the Ukrainian war, such as: oil and natural gas, information technology, and arms manufacturing. Additionally, both countries are moving towards relying on their local currencies for trade between them to reduce dependence on the dollar and the euro. This can be detailed as follows:
Information Technology Industry: This sector flourished in Russia in the early 2000s, with some Russian companies achieving considerable success, such as Yandex, which evolved from a mere search engine into a diverse digital group. Many e-commerce sites, such as Ozon, also emerged. The growth in this sector was largely due to collaboration with the West, which provided Russia with the necessary digital and technological infrastructure.
In recent years, Chinese presence in the Russian digital market has increased. Since 2018, Chinese digital companies, led by Huawei and Alibaba, have started expanding their presence in Russia. There has also been Chinese interest in local specialists in Russia. Huawei, for example, established a network of close relationships with Russian research institutes and universities, which are leaders in the field of information and communication technology, by setting up its own research centers in university cities like Nizhny Novgorod, Novgorod, and Novosibirsk.
Financial Cooperation and Use of the Yuan: The idea of relying on the yuan or a basket of currencies different from the dollar and euro did not originate with the recent Ukrainian war but emerged after the Crimea crisis, which was followed by European sanctions on Russia. Initial steps in this area were taken between Moscow and Beijing in 2014, and the proportion of payments made in yuan for Russian exports reached 25%, and for Russian imports 31%, with many Russian banks beginning to offer yuan savings accounts to their clients.
These accounts are attractive to Russian individuals as they protect against inflation or potential devaluation of the ruble. The report concludes that the progress in financial cooperation between the two countries does not negate that there is still a long way to go to overcome the dominance of the dollar and its influence on the two countries.
Concerns about Dependence:
The elite managers and stakeholders support the Russia-China relationship, controlling significant portions of economic activities related to energy and defense in Russia. Often, this elite plays a more critical role in Chinese and Russian politics than official bodies like the Ministry of Foreign Affairs or the Ministry of Economy. Moreover, there is general Russian acceptance of relations with China, which is gaining a positive image in Russian media supportive of Putin’s regime.
However, this does not negate concerns about Russia falling into the trap of dependence on China again. Increasing reliance on the yuan raises concerns within Russia due to the potential political and economic risks it may bring. For instance, Beijing might devalue the yuan to maintain the competitiveness of its exports, leading to a loss of value in Russian reserves and deposits. Additionally, the yuan does not yet enjoy the same level of liquidity as Western currencies in Russia, affecting buying and selling activities in the country.
Source : Stiftung Wissenschaft und Politik, Janis Kluge, Russisch-chinesische Wirtschaftsbeziehungen, December, 2023.
