Russia and China: Brothers in Sanctions
Image: SASHA MORDOVETS / GETTY IMAGES
By Jan Gerber
Today, the chessboard of great power relations begins to resemble that from the 1950s as Russia and China are coming together in a spirit of solidarity and antipathy for America not seen since Mao Zedong's Communist China cozied up to its "big brother," the Soviet Union. Ironically, it is the United States that is pushing China and Russia into an uncomfortable embrace. To put an end to this course, and maybe even to avoid a new Cold War in the 21st century, the U.S. must first reverse its double pressure policy of trade tariffs and sanctions which like a band pulls Beijing's and Moscow's economic and political interests together.
On November 7, 2018, Dmitry Medvedev, the former Russian president-in-tandem with Vladimir Putin and current prime minister travelled to Beijing amid rising concerns over new U.S. sanctions to present to his Chinese counterpart a new financial payments system. The pact is designed to facilitate bilateral trade between the two countries and strengthen the rubble and the yuan in the foreign exchange market. Some have pointed to more subversive objectives of the new financial scheme––to undermine the dollar and to circumvent some of the financial channels controlled by western banks, like the SWIFT transaction system, which the U.S. and its allies could use to punish Russia for misbehavior. But don't trust the skeptics––consider Medvedev's own words from the meeting: "I want to say something that may raise a few eyebrows, but I think some of these sanctions are good or useful because they forced us to do what we should have done 10 years ago." This sentiment, coming from the Russian prime minister, may indeed raise eyebrows of the causal news reader, but it should not be in the least surprising to the foreign policy establishment in Washington. It should rather serve as a warning.
Since Russia annexed Crimea in 2014 and launched a series of military interventions in Ukraine, the U.S. has imposed and expanded sanctions on Russia––in 2016 for alleged interference in the U.S. elections and again in 2018 for cyberattacks and for the poisoning of Sergei Skripal, a Russian former double agent, which British intelligence agencies traced back to The Kremlin.
In the face of these punitive measures, Putin's overarching goal for the past four years has been to make Russia immune to western sanctions. As these mainly target Russian finances, energy, and industry, it follows that these areas have the biggest incentive to explore alternatives to western markets and capital that the U.S. Treasury Department now denies them. Western funding no longer available, Russia now turns east, where the world's biggest and hungriest economy beckons.
Behind Medvedev's trip to Beijing is this very need for Russia to insulate its banking industry from the far-reaching influence of the dollar. The payments system he hailed in China, Karta Mir, was in fact developed in 2014 in response to the first wave of U.S. sanctions over Russian aggression in Crimea and Ukraine. Since then, Karta Mir has been adopted by hundreds of banks and used by millions of Russians domestically. Now Russia is offering to combine Karta Mir with Chinese Unionpay payments system to increase the use of both currencies in international transactions. If the deal is signed, China gets to internationalize the yuan in competition with the dollar and Russia gets protection in cross-border payments from the U.S. restrictions.
As China suspended all its oil imports from the U.S. for a period of four months from August to November in yet another shot fired in the U.S.-China trade war, Russia's oil producers stepped in to meet China's enormous demand for oil. Reuters calculated that Chinese crude oil imports from Russia are up by 58% since last year, based on data released by the Chinese government in October. Meanwhile, Gazprom, Russia's biggest natural gas producer, announced in September that it is finishing the Power of Siberia gas pipeline that will pump 1.3 trillion cubic feet of natural gas across the Russian-Chinese border each year for 30 years beginning in December 2019. China's CNPC (China National Petroleum Corporation), a state-owned energy company, has a contract with Gazprom for this and another pipeline, the Power of Siberia 2. The latter project, announced in 2015, was to deliver 30 billion cubic meters of gas to China from the Western Siberia gas fields but so far construction has stalled. Gazprom CEO, Alexey Miller said in April 2018, when he saw his name on the U.S. sanctions list, that he is proud that "his company must be doing everything right" to provoke the ire of the U.S. government.
Indeed, the impact of U.S. sanctions on the Sino-Russian trade is already palpable. ING's Chief Economist for Russia Dmitry Dolgin reports that the share of Russian imports from China has grown from 17% to 22% since 2014, which has elevated China to Russia's number 1 trading partner taking up 15% of Russia's total foreign trade, up from 11% in 2013. Dolgin explains that the boom in overall trade between Russia and China reflects the increased volume of gas and oil, while Russia's imports from China make up for those the E.U used to supply before sanctions hit.
Perhaps the most revealing instrument of tightening economic integration between the two countries is China's Belt and Road Initiative (BRI). The legacy project of the Chinese President Xi Jinping, the BRI is a trillion-dollar investment and infrastructure scheme that shoots right through Russia's backyard in Central Asia, aiming for the European Union markets.
What makes BRI a good point of reference is Putin's initial reluctance to sign on to the project. The Kremlin's concerns were that the BRI would vastly outperform Russia's own regional project, the Eurasian Economic Union (EEU), in investing in the economies of Kazakhstan, Kyrgyzstan, and other Central Asian countries that have traditionally remained in the Russian economic and political orbit. But then 2015 came and with it the Russia's inaugural deal with the BRI ––a 9.9% stake for the Silk Road Fund in a liquified natural gas project in north Siberia. The name of the project was Yamal LNG and the man instrumental in the sale was Gennady Timchenko, a Russian oligarch and a trusted accomplice of Putin. Both Yamal LNG and Timchenko figured on the first lists of U.S. sanctions over the crisis in Crimea in 2014. In the same year the first deal was struck, Russia joined the Asian Infrastructure Investment Bank (AIIB) set up to finance the BRI, and Putin and Xi met to discuss the possibilities of merging the EEU and the BRI into one gigantic zone of increased economic activity and trade under the auspices of the two countries. Aside from The Silk Road Fund with Chinese capital, joint investment funds sprang up in Russia, including the Russia-China Investment Fund, which together have made China Russia's biggest source of foreign direct investment (FDI).
The promise of Chinese funding to fill the void left by western capital eventually trumped even the political ambitions of the Kremlin.
As U.S. sanctions on Russia have increased, mutual suspicion between Xi and Putin has turned into a common sense of purpose, and the two leaders have warmed to each other. Although mounting sanctions have been a constant in the U.S. foreign policy for five years now, the hundreds of billions of dollars in tariffs that the Trump Administration has imposed on Chinese goods in 2018 is a new impetus for the entente. Meeting for the third time this year at the Eastern Economic Forum in Vladivostok in October, Xi and Putin, now both victims of U.S. economic leverage, presented themselves as champions of free trade, world economic integration, and multilateralism. Over pancakes and vodka, both leaders expressed their heartfelt desires for a world free of U.S. repressive practices. China and Russia, said Xi, "have to oppose unilateralism and trade protectionism, and build a new type of international relations and shared human destiny." Putin lauded the accomplishment of the two nations in building a "relationship of trust in the sphere of politics, security and defence."
Just days later, Putin would indeed oversee Russia's annual strategic exercises, Vostok 2018, which turned out to be its largest war games in four decades, with official numbers running up to 300,000 troops and thousands of tanks, aircraft, and other armored vehicles. Even more than a show of power, Vostok 2018 was likely meant as a show of unity––over 3,000 troops from China's own People's Liberation Army (PLA) trained alongside Russian military personnel for the first time in such a high-level strategic exercise preparing Russia for a war on multiple fronts.
The Chinese media's loud and open coverage of the exercises is a further sign that Beijing, along with sending some of its elite troops and equipment to Vostok to learn modern warfare from the Russian experience in Ukraine and Syria, is sending a message to its neighbors as well as the U.S. that it stands by Moscow in the deepening rift between America and Asia.
Even despite building together payments systems, meeting mutual demand for energy and investment, and conducting large-scale joint military exercises, the Sino-Russian entente, let alone an actual alliance, is far from guaranteed. They are not the communist brothers from the height of the Cold War––incentive, not ideology, is the main engine of their rapprochement. A closer analogue today would be the relationship of the United States and Saudi Arabia, who came together not out of similarities but despite differences, with economic gain and a common enemy in sight.
Russia acceded to the BRI out of necessity, but it remains critical of Beijing's growing political clout in its "backyard." China, for its part, continues to eye Russia's foreign military adventurism with distrust while the asymmetry between its economy and Russia's as well as regional power dynamics will likely prevent any deep economic integration of Central Asia by the two powers.
Both Xi and Putin are well aware of what fine line they tread, which is why it took them years of talks and a common adversary to come this far. For Washington, the worst course of all would be to continue being the boogeyman and thus the catalyst for the two countries' synergy. It will not be enough to slap more sanctions on Russia and tariffs on China and hope for a different result.
Only once Washington realizes the extent to which its own foreign policy has set the stage for this unprecedented reset in the relations of Russia and China can it begin to implement a long term strategy to actually do something about it.
Jan Gerber is a sophomore at The King's College in New York City, majoring in Politics, Philosophy and Economics (PP&E). He is the founder and the president of the John Quincy Adams Society Chapter at King's. Originally from Poland, he moved to the U.S. for higher education and the experience of living abroad. He is also a languages enthusiast and an American history wonk.
Posted in East Asia, russia
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