The Silk Road Goes North: Sino-Russian Economic Cooperation and Competition

by Michal Makocki

President Vladimir Putin’s visit to China in May 2014 was an important milestone in China-Russia relations. Isolated by the post-Ukraine sanctions regime, Russia turned to China not only for political support but also as an alternative to Western markets and investment. The leaders of the two countries touted trade and economic cooperation as one of the key pillars of their comprehensive strategic partnership. Lofty goals were established, including to reach a bilateral trade volume of $100 billion by 2015; to enable China to tap the East Siberian gas fields through the Power of Siberia pipeline; and to allow China to invest in infrastructure in Russia, in particular in the underdeveloped Russian Far East.

Two years since the visit, progress on many of the goals is mixed at best. Despite the rhetoric, the China-Russia relationship continues to suffer from strategic mistrust, preventing the two sides from fully embracing mutual commercial opportunities. This is particularly the case for projects that would lock the two countries into long-term dependency, such as the Power of Siberia pipeline. Bilateral trade has not been going as well as could be hoped, either: with a 28 percent decrease from the previous year, bilateral trade between China and Russia totalled $64 billion in 2015 – well short of the stated target, as Liu Changmin observes. In spite of setbacks like this, the majority of the Chinese research community continues to emphasise the enormous potential of economic cooperation between the two countries. However, some authors disagree, suggesting the possibility of a less cooperative relationship, or even a direct clash, between the two countries, especially in Central Asia.

Russia’s missed opportunity

Chinese analysts recognise that Russia’s rapprochement with China is driven by Western sanctions. Zhao Mingwen says that Russia simply has no alternative to embracing China: “Russia’s hopes for cooperative ties with the West have been dashed after the imposition of sanctions. As a result, China has become the only global player with which Russia can cooperate.” Liu Changmin agrees: “As China’s relationship with the United States increasingly experiences turbulence and uncertainty, Sino-Russian ties will continue to rise in their overall importance in China’s foreign diplomacy outlook.”

With this in mind, the fall in trade can be explained by factors exogenous to Sino-Russian relations and, Zhao says, should not be made the yardstick for assessing the relationship. He explains that the 2015 drop in bilateral trade was “mainly due to the landslide fall of crude oil prices”. Russia actually exported a record 37.63 million tonnes of crude to China last year, a 28 percent increase from the previous year – but the total dollar value of these exports still declined, because of the drop in crude oil prices. This underlines the importance of fossil fuels in the trade relations between the two neighbours, as well as evidencing their clearly delineated roles: Russia is the provider of raw materials, and China is their consumer.

Zhao says that although China benefits from cheaper fuel imports from Russia, limiting the two countries’ economic cooperation exclusively to energy deals is a weakness that needs to be overcome. This pattern of oil-for-cash trading is not sustainable, particularly for Russia: according to Zhao, “Russia’s focus on Europe in the past two decades meant that the country lost the opportunity to capitalise on the rise of China, and Russia would be better off not replicating the pattern of dependence on oil sales that characterises its trade with Europe, but instead fully embracing cooperation with China in fields other than energy and primary materials exports.”

Russian politicians and industry leaders apparently share this view: Zhao says that this is one reason for Russia’s willingness to expand high-tech collaboration. Some examples of this cooperation are the new China-Russia Silk Road Innovation Park on the outskirts of Xi’an City, as well as the two countries’ joint efforts to manufacture civilian jet engines using Russian technology, and joint R&D in the development of a satellite navigation system. Likewise, Wang Gang points out the convergence of China and Russia’s competitive advantages in fields such as agriculture, forestry, high-speed railway, civil aviation, outer space exploration, infrastructure building, finance, investment, education, technology, medical care, and tourism.

Cooperation trumps competition

Energy cooperation with Russia has significant benefits for China. One major opportunity is the Power of Siberia gas pipeline, which is to supply gas to China’s north-eastern provinces from Russia’s East Siberian gas fields. Even though Russia’s gas fields are geographically close to China’s industrial north-eastern regions, the pipeline took ten years to be agreed, mainly because of disagreements over gas prices. When it becomes operational, the pipeline will help China to diversify its energy supply. Li Xi notes that Turkmenistan currently supplies the largest share of China’s natural gas imports, while sea-borne oil and gas supplies provide the coastal regions with most of their energy needs. But the pipeline linking Russia to northeast China raises fewer geopolitical concerns than these routes, because it will allow energy to be supplied directly to Chinese consumers without transiting through the territory of intermediary countries. Wang adds that Russia’s gas supplies could create the conditions for a new petrochemical industry in the region, thus providing “impetus for the revival of the Chinese Rust Belt”, which is currently characterised by its outdated industrial capacity.

The Chinese authors also say that Chinese companies should seize the opportunity to contribute to Russia’s national and regional development strategies. Jiang Zhenjun says that Russia’s national strategy of “going east” and China’s Silk Road Economic Belt initiative both create opportunities for infrastructure construction, in particular in high-speed railway. Jiang suggests that, to highlight their rapprochement, China and Russia should cooperate on some flagship projects, such as the high-speed railway between Moscow and Beijing (roughly 7,000km apart), which could cut travelling time between the two cities from almost a full week to 17-24 hours. At this stage, however, the project remains only aspirational: so far, only a small part of the route between Moscow and Kazan, a city 800km east of Moscow, is being developed (potentially with Chinese companies’ participation in the construction, although partnering with Western companies has not yet been ruled out). China and Russia could jointly implement other railway projects in Central Asia, a region that Jiang says offers great potential for China-Russia cooperation rather than competition.

These suggestions mirror the tone of the official announcement on pairing the Eurasian Economic Union and the Silk Road Economic Belt, which was signed at the sidelines of President Xi Jinping’s visit to Moscow in May 2015. Jiang thinks Central Asia could be the “meeting place” where the two strategies intersect. He sees potential for “a second Eurasian Intercontinental railway as a crucial part of the Silk Road Economic Belt initiative”. However, Xiang Yijun and Zhang Jinping do not share this optimistic view: they see potential for “conflicting and overlapping interests in third countries, particularly in Central Asian states, which both regional projects of China and Russia claim as their main operational space”. They add: “political stability and economic nationalism in third countries could also be a risk factor”. Xiang and Zhang seem to be in agreement with many Western commentators, who tend to see potential for a clash in China’s commercial expansion into the region that Russia perceives as its own backyard.

Jiang sees Northeast China as a key element of the Silk Road initiative. He envisions a dynamic regional economy “centred on Harbin and connected with Russia’s Siberian railway system, river ports, and airports in the region to form a mega-transportation network.” However, his expectations overestimate the economic opportunities available in Russia’s Siberia, which is a depopulated and underdeveloped region with little economic activity. Similarly, Russia’s unfavourable business environment, including cumbersome customs controls at the border, will also work against Jiang’s vision – as will Russian perceptions. As Xiang and Zhang note, “The perception of China as an economic threat, particularly related to Chinese investment and immigration into Russia’s under-populated Far East, will continue to adversely affect Russians’ willingness to cooperate with China.”

Jiang’s ideas also include a very imaginative link through the Arctic, which he calls the northern part of the Silk Road. He suggests that “Russia and China can jointly build a logistics port along the projected Arctic navigation route. The two countries can also join hands in developing the mineral resources along the route, particularly energy resources.” If developed, the Arctic route would provide China with an alternative maritime connection to the congested Malacca strait and the Suez Canal and increase its energy security by diversifying trade routes.

Trade and infrastructure cooperation between China and Russia has the theoretical potential to greatly reward both sides – but in spite of official statements, it is increasingly clear that the strategic mistrust between the two countries will prevent them from capitalising on the available opportunities.