Home Finance The Economic Implications of Stronger Chinese-Russian Relations

The Economic Implications of Stronger Chinese-Russian Relations

by internationalbanker

By Nicholas Larsen, International Banker

 

Right now, there are changes the likes of which we haven’t seen for 100 years, and we are the ones driving these changes together,” China’s President Xi Jinping told his Russian counterpart, President Vladimir Putin, at the end of his visit to Moscow in March, to which the Russian president responded, “I agree.” Xi Jinping added before leaving, “Take care, please, dear friend.”

Perhaps a performative dialogue for the many journalists stationed outside the Kremlin building waiting for the two leaders to appear, the display of solidarity between the two presidents nonetheless demonstrated to the world the unshakeable alliance that now exists between their nations. And the global economic consequences this year and beyond will be profound.

“Over the years, [we] have withstood the test of various twists and turns and have become stronger,” China’s president separately noted after his visit, suggesting that relations between Beijing and Moscow are currently near all-time highs. On its face, this is understandable. As neighbours that share an approximate 4,200-kilometre border, it seems only reasonable that Russia and China should enjoy a strong “sibling” relationship. Their ties are further strengthened by their individual global systemic importance—one being easily the world’s largest country by geographical size and the other the world’s biggest economy (when adjusted for purchasing power parity) and most populous, although recent figures suggest it may have been eclipsed by India in that regard.

But given the emerging geopolitical climate that now pits this alliance against the Western world, the further solidification of Russia-China ties is hugely consequential for the world, particularly the global economy. In terms of their March meeting in Moscow, the leaders confirmed the signing of an agreement to bring their relations into a “new era” of cooperation.

“The two joint statements we have just signed set forth a framework and fully reflect the special nature of Russian-Chinese relations, which are at the highest level in all our history, offering a model of a genuine comprehensive partnership and strategic cooperation,” according to the Kremlin. “Russia and China share solid bonds of neighbourly relations, mutual support and assistance, and friendship between our peoples. We maintain proactive dialogue at all levels.”

Many of the affirmations that were included focused on strengthening their economic relationship. The Chinese readout specified that bilateral economic cooperation would be based on eight key pillars, abridged as follows:

  1. Expand trade, e-commerce and other innovative models, as well as deepen cooperation in the digital economy and sustainable “green” development.
  1. Develop an interconnected logistics system with convenient two-way exchanges of goods and people through various transportation methods. Also, improve the infrastructure of the Sino-Russian border, mainly by constructing key ports.
  1. Improve financial cooperation in bilateral trade, investments and economic exchanges whilst steadily increasing the proportion of local-currency settlements.
  1. Strengthen long-term cooperation in the key areas of energy, energy technology and energy security in both countries and the world.
  1. Bolster long-term, mutually beneficial supply cooperation in bulk commodities and mineral resources through market-oriented principles.
  1. Promote high-quality cooperation in technology and innovation between the two countries.
  1. Upgrade industrial cooperation, including a new industrial chain involving local enterprises in the two countries.
  1. Improve agricultural cooperation to ensure the food security of both countries.

From a global economic perspective, the agreement to boost settlements in local currencies is arguably the most significant, given its implications for currencies that dominate the global trade system—not least the US dollar. Indeed, the Central Bank of Russia has already reported that the yuan’s share in Russia’s import settlements last year jumped from 4 percent to a hefty 24 percent and is set to swell further this year. “Expanding settlements between our countries in national currencies is a serious incentive for promoting trade and investment cooperation,” Moscow noted. “As of the end of the first three quarters of 2022, the share of the ruble and yuan in mutual commercial transactions reached 65 percent and continues to grow, which allows us to protect mutual trade from the influence of third countries and negative trends on global currency markets.”

This expansion will be felt no more keenly worldwide than via the energy markets, with Russia seeking to continue accepting more payments for its fuel exports in both nations’ currencies. “The yuan and ruble are in high demand, so that vector will continue,” Russian Federation’s Deputy Prime Minister Alexander Valentinovich Novak said in late April, adding that Russia is now receiving more yuan payments for its oil and gas exports and selling more oil and gas for rubles. “China already pays in yuan for gas and partially for oil; there are settlements in the ruble as well.”

And with Russia aiming to boost natural-gas exports to China by almost 50 percent this year, the impact on de-dollarisation could be substantial should this additional trade be settled in local currencies. With the majority state-owned Gazprom PJSC exporting gas to China’s Heilongjiang province via the 3,000-kilometre Power of Siberia pipeline as part of a 30-year, $400-billion contract, Russia will ramp up deliveries this year. “Last year’s gas supplies were at 15 billion cubic meters. In 2023, we expect 22 billion cubic meters, an almost 50% increase,” Novak added. The gas firm will likely continue increasing supplies until it reaches its full capacity of 38 billion cubic metres in 2027.

A new Power of Siberia 2 pipeline to deliver even more Russian gas to China via Mongolia is also in discussion, with Putin confirming during Xi Jinping’s March visit that all three participating nations had completed “all agreements” to finish building the project. The pipeline is expected to boost gas supplies to China to at least 98 billion cubic metres by 2030. Although not at the same level as the 177 billion cubic metres that Russia supplied to Europe in 2018 and 2019, mainly via the now-defunct Nord Stream pipeline that linked Russia to Germany via the Baltic Sea, the expansion of energy exports to China certainly helps Russia make up for this European shortfall and deal with the onslaught of sanctions levied by the West against Moscow after it decided to send troops into Ukraine.

There appears to be plenty of optimism surrounding the scope for heightened economic cooperation between the two nations. During China’s president’s Moscow visit, for instance, Russia’s prime minister, Mikhail Vladimirovich Mishustin, noted that trade turnover between the two countries would reach $200 billion in 2023. “Last year, mutual trade increased by almost a third—and approached $190 billion. I am convinced that already this year we will fulfill the task set by you (Chinese President Xi Jinping) and Russian President Vladimir Vladimirovich Putin to bring trade to $200 billion,” Mishustin said. “Our relations are at the highest level in the entire centuries-old history and have an impact on the formation of the global agenda—in the logic of multipolarity.”

Indeed, it is this goal of multipolarity that seems to be driving many of the decisions being taken by the two nations. And that means that while bilateral cooperation between Beijing and Moscow is undoubtedly significant, it is their joint presence as a bloc on the global stage that will trigger the greatest shifting sands in the global economy. Perhaps their crowning achievement during this new era of cooperation thus far has been their mutual commitment to achieving peace in the Middle East. In March, China brokered peace between Saudi Arabia and Iran, which has since done much to end the disastrous war in Yemen. Meanwhile, Russia played a similarly important mediating role in advancing peace between Saudi Arabia and Syria, with the latter welcomed back soon after into the Arab League alliance of regional states.

The joint presence of China and Russia within key multilateral organisations, such as BRICS (Brazil, Russia, India, China, and South Africa) and the Shanghai Cooperation Organisation (SCO), will also have a seismic global economic impact. Indeed, the recent peace deals should pave the way for the enlargement of BRICS, the bloc of emerging economies that represent more than 40 percent of the world’s population and almost a third of global economic output through members Brazil, Russia, India, China and South Africa and that seek to advance economic cooperations with each other. The group is likely to accept applications for membership from both Iran and Saudi Arabia now that they have restored diplomatic relations, which means that the inclusion in BRICS of two of the Middle East’s biggest economies, as well as the region’s largest oil producers, will significantly help both Russia and China advance many of their economic goals.

And with a proposed BRICS currency reportedly high on the agenda when its member nations’ heads of state meet in Johannesburg, South Africa, on August 22, the Chinese-Russian goal of economic multipolarity could well be given a major shot in the arm.

 

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