3 ways China and Russia are forging much closer economic ties

hong kong
CNN Business

Chinese leader Xi Jinping and his Russian counterpart Vladimir Putin will meet this week for the first time since Moscow sent troops to Ukraine earlier this year.

When they last met, in February in Beijing during the Winter Olympics, they proclaimed that their friendship had “no limits”. Since then, Russia has sought ever-closer ties with China as Europe and the United States have responded to the invasion with waves of sanctions.

Beijing has carefully avoided violating Western sanctions or providing direct military support to Moscow. Experts say the balancing act is a sign that Xi will not sacrifice China’s economic interests to save Putin, who arrived at the Shanghai Cooperation Organization summit in Uzbekistan this week with his military pulling out of vast areas of Ukrainian territory.

But the trade relationship is booming, in an unbalanced way, as Russia desperately seeks new markets and China – an economy 10 times larger – scrambles for cheap goods.

Bilateral goods trade is at record highs as China grabs oil and coal to tackle an energy crisis. Russia, meanwhile, has emerged as a prime market for Chinese currency, and Chinese companies are rushing to fill the void left by the departure of Western brands.

China’s spending on Russian goods soared 60% in August from a year ago, to $11.2 billion, according to China Customs statistics, topping Gain of 49% in July.

Its shipments to Russia, meanwhile, jumped 26% to $8 billion in August, also accelerating from the previous month.

In the first eight months of this year, total merchandise trade between China and Russia jumped 31% to $117.2 billion. That’s already 80% of last year’s total – which stood at a record $147 billion.

“Russia needs China more than China needs Russia,” said Keith Krach, former U.S. undersecretary 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 the 2.5% share at the end of last year. The European Union and the United States have much larger shares.

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

But the world’s second-largest economy has taken on much greater importance for Russia, which has plunged into a recession due to Western sanctions.

The Russian central bank stopped publishing detailed trade data when the war in Ukraine started. But Bruegel, a European economic think tank, recently analyzed statistics from Russia’s 34 major trading partners and estimated that China accounted for around 24% of Russian exports in June.

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

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

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

Coal in freight wagons before shipping at Tomusinskaya station near Mezhdurechensk, Russia, Monday, July 19, 2021.

The war in Ukraine has also caused demand for the Chinese yuan in Russia to skyrocket, as Western sanctions have largely cut Moscow off from the global financial system and restricted its access to the dollar and euro.

Yuan trading on the Moscow Stock Exchange amounted to 20% of the total trading volume of major currencies in July, compared to no more than 0.5% in January, according to Russian media Kommersant.

Daily trading volumes of the yuan-ruble exchange rate also hit a new high last month, surpassing the ruble-dollar 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 around the world to process international payments, Russia was the world’s third-largest market for payments made in yuan outside mainland China in July, after Hong Kong and the United United. The country was not even on SWIFT’s list of the top 15 yuan markets in February.

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

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

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

“Russia’s increased use of the yuan also helps advance China’s long-term goals of making the redback a global currency, protecting itself from Western financial sanctions, and strengthening its institutional power in international finance,” said Thomas of Eurasia Group.

For Russia, this partnership with China “was born out of desperation,” Krach said.

“Because Russia has been severely weakened, in part by the sanctions, Putin is ready to make a deal with a predatory power as long as it has access to capital,” he added.

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

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

Xiaomi was Russia’s top-selling smartphone maker in July, holding 42% of the market, according to Russian news outlet Kommersant. Samsung, once the market leader, held just 8.5% of the market in July. Apple held 7%. The two companies accounted for almost half of the Russian market before the invasion of Ukraine, but suspended sales of new products in the country after the start of the war.

Chinese cars 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. It compares to just 9.5% in the first quarter.

Major global auto players, including Ford and Toyota, pulled out of Russia this year.

But the Sino-Russian partnership also has significant limitations, analysts said.

China does not provide military, commercial or technological support that “would risk significant U.S. sanctions against China,” Eurasia Group’s Thomas said.

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

Fearing a US backlash, China has so far “consistently” refused to violate international sanctions on Russia, forcing Moscow to seek military support from North Korea, said Craig Singleton, senior China researcher at the Foundation for the Defense of Democracies based in Washington.

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

Moreover, China’s rapid economic slowdown this year will further limit Xi’s willingness to help Putin. China’s president won’t want to risk anything that further destabilizes the economy a few weeks before it is about to win a historic third term at the Communist Party Congress.

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

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

The current Sino-Russian partnership is primarily a “defensive” partnership, bolstered by Beijing and Moscow’s shared view that NATO and the United States pose a “palpable threat to national security”, said Susan Thornton, Principal Scholar and Visiting Lecturer at Yale Law School.

“Russia’s war in Ukraine is not in China’s interest, but given Western hostility, China will not oppose Russia,” she added.


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