MAY 29, 2015
The photographs of Putin and Comrade Xi sitting together at the Victory Day parade on May 9, as well as photos of Chinese soldier marching through Red Square, are the main symbolic takeaways of the Chinese leader’s visit to Moscow. These are winning images for both leaders, especially for Vladimir Putin. The presence of a true world leader at a parade that was boycotted by the U.S. and its allies is an important demonstration of the fact that Russia is not internationally isolated (with all due respect to other guests, they don’t quite rise to the level of world leaders). That’s why Xi and his wife Peng Liyuan were assigned best seats at the event. That’s why during his speech, Putin mentioned China’s important role in the war as well as plans for a reciprocal visit to a parade in Beijing.
Xi can count all of these points as assets, too. It’s always good to remind his countrymen that China is managed by a strong-willed leader who doesn’t factor the West into his decision-making. And it’s twice as important to demonstrate this as a purge of the communist party is gaining ground and as the 2017 party congress relentlessly approaches. Putin’s upcoming visit to Beijing on September 3 is no less important. After all, the Beijing parade is also the subject of a diplomatic battle— less visible than it was in Moscow, but by no means less dramatic. Because the Beijing parade is being portrayed as a celebration of the triumph over Japanese militarism, we can hardly expect Shinzo Abe to make an appearance. And given how sensitive this issue is for Japan’s allies, and considering Beijing’s ostentatious displays of force in the South China Sea, the U.S. and many ASEAN member states will think twice about participating in the Chinese festivities. So Xi also stands to gain from an early declaration of a historical and symbolic alliance with Putin, who is quite popular in China now.
In a situation where Russia can count the number of its strategic allies on one hand, we can now confidently refer to China as Russia’s “key strategic partner”—the expression used by Putin himself after the May 8 talks. Although Beijing has other, more important partners (at least six of them, if measured by trade), the Chinese leadership is quite content with gradually turning Russia into China’s junior partner, while keeping up the appearances of equality.
SIGNALS TO THE WEST
The symbolic part of Xi Jinping’s visit to Moscow was not limited to his appearance at the parade. Some of the thirty-two documents signed during the visit are also largely symbolic. This is particularly true of the agreement between Gazprom and CNPC on basic conditions for gas shipments to China along the “Western route.” Gazprom hasn’t told us how this “basic conditions” document is different from the “framework agreements” on gas shipments along the Western route, which was signed on November 10, 2014. As demonstrated by the history of the “Eastern route” (Power of Siberia gas pipeline with the resource base in Chayanda and Kovykta fields), four years of negotiations and any number of non-binding interim documents can come between signing onto the “basic conditions” and the actual sales contract.
It’s clear that Gazprom’s European consumers and, to a lesser extent, foreign gas importers to China are the target audience of this new document. In an April 13 speech in Berlin, Gazprom head Alexei Miller mentioned the company’s new “Eurasian strategy” and urged the EU to decide whether the European market needs Russia’s resource base and infrastructure, hinting at the possibility of turning toward China. Of course, the EU is taking these threats with a grain of salt: China will not replace the European gas market for Russia in the foreseeable future. Even if both Western and Eastern pipelines to China are built, their aggregate yield after 2020 will at best amount to 78 billion cubic meters a year (and that’s a very optimistic scenario), as opposed to the 146 billion cubic meters that Gazprom sold to Europe and Turkey in 2014. And that’s even before we get to the issue of a price: China pays roughly as much on the Eastern route as Germany does (although price calculations aren’t transparent and can change depending on the loan from China that Gazprom might need to complete the construction of Power of Siberia), but so far along the Western route the Chinese aren’t prepared to pay more than they do for cheap gas from Turkmenistan (approximately $150 less per 1,000 cubic meters than what Gazprom wants for the gas from the Western Siberian fields).
Incidentally, there have been no breakthroughs in other energy projects, particularly in financing Yamal LNG (Novatek owns 60 percent stake in the company, CNPC and Total own 20 percent each). China is not about to increase its share and provide loans for these projects due to possible sanctions. The issue of allowing the Chinese companies to become controlling shareholders in Russia’s gas and oil fields also remains unsolved, as was discussed by Deputy Prime Minister Arkady Dvorkovich at the Krasnoyarsk Forum in February. Given the constant threat of sanctions against investors in Russia’s energy sector, unstable oil prices, Russia’s changing tax policy, and possible plans to consolidate China’s oil-and-gas industry (the possibility of merger of China’s state-run energy giants CNPC, Sinotec, and CNOOC is being discussed), Beijing is clearly not in a rush to make any decisions.
In addition to the energy sector, the May 8 agreements on information security are also shrouded in symbolism. The agreement on cyber-security cooperation signed by Russia and China in the Kremlin is unprecedented: it not only lays the foundation for creating communication channels to prevent cyber incidents (the kind there are between Russia and the US as per 2013 agreements) but also delineates Moscow’s and Beijing’s general approach to issues of information security (specifically, the protection of states’ sovereign rights in the national Internet segments) and their commitment to act together in international forums like the UN and the International Telecommunication Union. The document is clearly addressed to the US and Internet Corporation for Assigned Names and Numbers (ICANN), which Russia and China are trying to convince to make the global system of Internet monitoring more inclusive and transparent. However, the most serious threat that Moscow and Beijing can make is to create their own parallel Internet, which doesn’t scare the US and its allies all that much (this threat wasn’t made explicit in the text of the document, but Russian officials did express it in the behind-the-scene discussions at international industry-specific conferences before the agreement was signed). Besides, in reality, Beijing is clearly unwilling to cut itself off from the Internet, which is becoming an increasingly important driver of the Chinese economy.
ROAD TO THE FUTURE
Thus, we are left with several documents that are more likely to be implemented in practice, though each of them is but the start of a long process. The most important package of commercial documents has to do with the Russian companies’ access to China’s financial platforms and documents, primarily yuan credit lines. Moscow and Beijing have been trying to move away from using the dollar and the euro in bilateral trade since the mid-2000s. Against the backdrop of Western sanctions, and given discussions in Washington about possibly blocking Russian banks from using their correspondent accounts in the US and EU if the situation in Ukraine escalates, being able to do transactions in other currencies is becoming essential. The problem is Russia’s largest trade partner still lacks freely convertible currency. The People’s Bank of China retains control over many capital accounts operations, and the yuan isn’t expected to become freely convertible until 2020.
Nevertheless, Russia is still moving toward greater use of the yuan. Vladimir Putin stated that as of the start of 2015, transactions in national currencies comprised 7 percent of trade. Some of the documents signed on May 8 take another step in this direction. For instance, a number of Russian banks signed loan agreements with their Chinese counterparts (Sberbank will borrow 6 billion yuan from the China Development Bank; Vneshtorgbank will get 12 billion yuan from China Development Bank and 3 billion yuan from Export-Import Bank of China, and Vnesheconombank will receive 3.9 billion yuan from Export Import Bank of China for the metallurgical project in Kemerovo region). In addition, the Russian Fund for Direct Investments (RFPI) signed agreements to create a joint investment bank with CITIC group to bring Russian companies to Chinese platforms and another agreement with China Construction Bank on the joint debt mechanism which will facilitate investments in projects on Russian territory for Chinese companies. While until recently Moscow had been dreaming of ridding itself of the dollar in order to strengthen the position of the ruble in international trade, now the move is mostly about the strengthening yuan (in keeping with China’s long-term strategy to popularize its national currency). For Russian companies, it is no longer about prestige – it may be a matter of survival.
Perhaps the most important document for Beijing was the joint statement on integration of the Eurasian Economic Union (EEU) and the Silk Road Economic Belt (SREB). Some Chinese analysts feared that Moscow would perceive the September 2013 SREB initiative, which became a crucial foreign policy concept for Xi Jinping, as a threat to Russia’s position in Central Asia and the EEU, President Putin’s key geoeconomic project. In their May 8 declaration, the parties expressed willingness “to make coordinated efforts toward the integration of constructing EEU and SREB” in keeping with “the principles of transparency, mutual respect, equality, and complementation of different integration mechanisms.” The document names SCO as the coordinating platform for dialogue between the two initiatives and also mentions “considering a long-term goal of progressing toward the free trade zone between EEU and China.” So for now, Moscow and Beijing have attained their respective tactical goals: both integration initiatives have been mutually recognized, and the question of the Free Trade Zone (a touchy issue for Russia) has been shelved for an indefinite period of time.
But as soon as Russia tries to put political declarations about the compatibility between EEU and SREB into practice, difficulties will arise. Moscow is expecting to get the money for building the Silk Road infrastructure from China (40 billion dollars from the Silk Road Fund) in exchange for the Customs Union instruments and its symbolic “consent” to the EEU Central Asian members’ participation in SREB. The Moscow–Kazan High-speed Railway project illustrates the complexities of negotiating joint infrastructure projects with China (a memorandum regarding that was also signed on May 8). The Russian government realizes that China is the only possible source of financing for building the railway, and Russian Railways has no experience of implementing such projects (China built almost 20,000 km of high-speed railways, while Russia has built none). Nevertheless, Russia keeps insisting that Russian companies play a significant role in the project and that 60 percent of the technology used be localized.
On the other hand, Russia hopes that China will build its infrastructure to Europe primarily through Russian territory. However, only two SREB routes out of six traverse Russia, and Beijing clearly intends to complete all six to keep its production facilities and workforce occupied in the current economic slowdown. That’s what Kazakhstan, which is set to benefit from three SREB routes, is hoping for. Unlike Moscow, Astana has been set on joining the project since the day it was announced. In 2014, the Kazakh government commissioned surveys from a number of international consulting companies, trying to ascertain how to maximize its gains. It also prepared the Nurly Zhol infrastructure development plan in conjunction with SREB and in consultation with its Chinese partners. This explains the almost 24 billion dollars’ worth of deals that the Kazakh Prime Minister Karim Massimov brought from China. Moscow and Astana will have to work on resolving their misunderstandings on these issues. The fact that Russia was the only party to sign the agreement with China on behalf of the EEU (although all of the heads of EEU states were in Moscow at that time) hardly facilitated this effort. The Eurasian Economic Commission also played no role in signing the document, which devalues Moscow’s attempts to present it as an independent supranational body. Apparently, all of this is understood in Beijing, which will be dealing with all of the EEU states individually—in fact, Xi Jinping has already discussed Kazakstan’s and Belarus’ participation in SREB with Nursultan Nazarbayev and Alexander Lukashenko in Astana and Minsk.
CORRECTING ERRORS
The pause between Xi Jinping’s visit and Vladimir Putin’s upcoming trip to Beijing allows the Russian leadership to take a long-range look at Russia’s relations with China and try to make some last-minute corrections to its China policy. It should be understood that Central Asian countries may have their own interests with regard to China and if Moscow wants to retain its influence in the region with the aid of institutions like the EEU, it has to informally discuss the EEU initiatives with its partners and present a joint position rather than speaking on everyone’s behalf.
Secondly, it must be understood that because of problems with the West, the pivot toward China is not a tactic but an inevitable policy for the foreseeable future. Therefore, this policy must be conducted responsibly and cannot be used as a tactical maneuver to send emotional signals to the West. It’s time to move from summit diplomacy with scores of non-binding documents, to pragmatic agreements based on long-term calculations and an understanding of the prospects for various Chinese markets (if Gazprom had adopted this approach in its dealings with China, it could’ve entered the Asia Pacific markets as early as 2012 and wouldn’t be experiencing its current problems). Finally, it’s time to gain a better understanding of China, which would allow Russia to conduct policy that takes various China development scenarios into an account. To do that, Russia needs to have its own China expert base on the level of Canada, or better yet Australia.
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