Three ways China and Russia are building closer economic ties

Hong Kong
CNN Business

Chinese leader Xi Jinping and his Russian counterpart Vladimir Putin will meet face to face 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 declared that their friendship “has no bounds.” Since then, Russia has sought closer ties with China as Europe and the United States have responded to the invasion with wave after wave of sanctions.

Beijing carefully avoided violating Western sanctions or providing direct military support to Moscow. Experts say that balance is a sign that Xi will not sacrifice China’s economic interests to save Putin, who reached the Shanghai Cooperation Organization summit in Uzbekistan this week as his army withdraws from swathes of Ukrainian territory.

But the trade relationship is thriving, in a lopsided way, with Russia desperately seeking new markets and China – an economy ten times the size – scrambling for cheap goods.

Trade in bilateral goods has reached record levels as China snaps up oil and coal to tackle the energy crisis. Meanwhile, Russia has become a major 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 in August increased by 60% compared to last year, reaching $11.2 billion, according to Chinese customs statistics, exceeding July gains 49%.

Meanwhile, its shipments to Russia 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 increased by 31% to $117.2 billion. That’s already 80% of last year’s total – which amounted to US$147 billion.

“Russia needs China more than China does,” said Keith Krach, former undersecretary of state for US economic growth, energy, and the environment.

“As the war in Ukraine continues, Putin is rapidly losing his friends and increasingly dependent on China,” 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 single largest trading partner before the war, accounting for 16% of its total foreign trade.

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

The Russian Central Bank stopped publishing detailed trade data when the war in Ukraine began. But Bruegel, a European economic think tank, They analyzed statistics from Russia’s 34 largest trading partners recently and estimate that China accounted for roughly 24% of Russia’s exports in June.

“Sino-Russian trade is booming because China is taking advantage of the Ukraine crisis to buy Russian energy at a discount and replace Western companies that are out of the market,” said Neil Thomas, chief China analyst at Eurasia Group.

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

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 shipment at Tomusinskaya railway station near Mezhdurechensk, Russia, on Monday, July 19, 2021.

The Ukraine war has also driven up demand for the Chinese yuan in Russia, as Western sanctions have largely isolated Moscow from the global financial system and restricted its access to dollars and euros.

The yuan trade on the Moscow Stock Exchange accounted for 20% of the total trading volumes of the major currencies in July, up from 0.5% in January, according to Russian media Kommersant.

The daily trading volumes in the yuan and the ruble exchange rate also hit a new record last month, surpassing the ruble against the dollar. Trade for the first time in history, according to Russia’s state-controlled RT.

According to statistics published by SWIFT, The messaging system used by financial institutions globally to process international payments, Russia was the world’s third largest market for yuan payments outside of China in July, after Hong Kong and the United Kingdom. The country did not even appear on SWIFT’s list of the 15 best yuan markets in February.

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

Last week, Russia’s Gazprom said it would start billing China in yuan and rubles for natural gas supplies, while Russia’s VTB Bank said it would launch remittances to China in yuan.

For Beijing, it is 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 re-declining a global currency, insulating itself from Western financial sanctions, and strengthening its institutional strength in international finance,” said Thomas of Eurasia Group.

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

“Since Russia is so severely weakened, in part by sanctions, Putin is ready to cut a deal with a predatory power as long as it gets the capital,” he added.

Chinese companies are also benefiting from the exit of Western brands from Russia.

Chinese smartphones accounted for two-thirds of all new sales in Russia between April and June, Reuters reported, citing Russia’s leading electronics company M Video Eldorado. Video M.

Xiaomi was the best-selling smartphone maker in Russia in July, capturing 42% of the market, according to Russian media Kommersant.

Samsung (SSNLF), once a market leader, only had 8.5% of the market in July. Apple (AAPL) got 7%. The two companies accounted for nearly half of the Russian market before the invasion of Ukraine, but suspended sales of new products in the country after the war began.

Chinese cars also flooded Russia.

Passenger cars from Chinese manufacturers accounted for nearly 26% of the Russian market in August, an all-time high, according to Russian analysis agency Autostat. Compared to only 9.5% in the first quarter.

Major global automakers, including Ford and Toyota, have pulled out of Russia this year.

But analysts said there are significant limits to the Sino-Russian partnership.

Thomas of Eurasia Group said China is not providing military, trade or technical support that would “risk significant US sanctions against China”.

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

Fearing a U.S. backlash, China has so far “consistently” refused to violate international sanctions against Russia, forcing Moscow to seek military support from North Korea, according to Craig Singleton, a senior Chinese fellow at the Washington-based Foundation for Defense of Democracies.

“Beijing’s refusal to violate US and international sanctions reflects its grudging acceptance that China still relies on Western capital and technology to maintain its continued development, even though Xi personally tends to aid Putin’s war efforts,” he said.

Moreover, the rapid economic slowdown in China This year will further constrain Xi’s willingness to help Putin. The Chinese president will not want to risk anything further destabilizing the economy A few weeks before his arrival Preparing to secure a historic third term in the Communist Party Congress.

future relationships are likely to remain strained, Analysts said China would want to keep its options open.

“There has always been a mistrust between the two regimes that have treated each other as competitors,” Krach noted.

Susan Thornton, a fellow and visiting lecturer at Yale Law School, said the current Sino-Russian partnership is essentially a “defensive” one, reinforced by Beijing and Moscow’s shared view that NATO and the United States pose a “concrete threat to national security.”

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

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