Russia’s pivot to China: a choice between Scylla and Charybdis?

The sanctions imposed on Russia following the Ukraine crisis gave powerful impetus and made even those who had previously been skeptical about it start talking about a Russian pivot to the East. Russia hoped that political cooperation with the PRC would allow Moscow to rely on Beijing’s financial resources and neutralize the effect of the sanctions. China has also been named as one of Russia’s key political partners – the views of the two countries coincide on many issues such as sanctions against Iran, resistance to US missile defense plans and denial of Kosovo’s independence. Is this friendship mutually beneficial or is it actually a forced choice in the midst of a diplomatic crisis? This question still hangs in the air like a sword of Damocles.

Caught in the storm of economic sanctions, Russia was hoping for the wind of financial cooperation with China in its sails. Nevertheless, over the past years, it has become clear that China will not grant Russia with any status different from its other political partners and provide Russia with credit resources unless it fulfils the requirements of having an environment attractive for foreign investments and a transparent legislation for foreign investors.

Russians first faced financial problems in 2014, almost immediately after the imposition of US and EU sanctions. Already in mid-2015, the first deputy chairman of Russian bank VTB, Yuri Soloviev, told Finance Asia magazine that the Chinese “refuse to work with Russian credit organizations“.

This concerned not only state-owned and gigantic transnational corporations but also small and medium-sized businesses trading with China. The wave of panic among business owners started when Russian wholly-foreign-owned enterprises with accounts for commercial activities in Chinese banks received messages demanding to provide details for the transferring of funds, otherwise the accounts were threatened to be frozen. Then, after negotiations at the government level, the severity of the problem subsided, but in late 2017 – early 2018, due to the adoption by the United States of a new package of sanctions against companies from the Russian Federation, and in particular the Countering America’s Adversaries Through Sanctions Act (CAATSA), the question became relevant again.

Working at the time with Russian companies in China, we noticed that among the main problems, Russian business owners and Russian employees living in the PRC named such issues as:

– the delay or refusal of the bank to carry out banking operations ;

– the requirement for additional documents to confirm the transaction when applying for a bank account ;

– the occasional requirement to close the account without explaining the reason.

The situation was in stark contrast with the Elysian Fields of great friendship between Russia and China drawn by the media. Nevertheless, the issue was not getting any better and the representative of the Central Bank of the Russian Federation in China, Vladimir Danilov, officially mentioned the restrictions: “There are problems associated with the extended interpretation by a number of Chinese banks of the restrictive measures of third countries against Russia. Commercial banks in China often cite the sanctions of the EU and the US as a reason for refusing to service payments from clients of Russian banks.“

Ironically, the tragedy was not actually that tragic, nor was it a signal of a shift in political discourse. The problem was that most Chinese banks simply could not afford to have sanctions specialists who could determine whether it was safe to do business with a specific Russian company or citizen. Therefore, fearing of falling under American sanctions, Chinese banks preferred to block all immigrants from the Russian Federation, especially since the share of Russian operations in their activities often was negligible, rather than to investigate every application on a case-by-case basis.

Diversification of exports which, judging from official statements, continues to be one of the key tasks of the Russian government, has not been achieved either if we look in the direction of China. If in 2017 there were six main positions of export, then in 2019 nothing changed in terms of the number or type of the leading export industries.

Bilateral infrastructure cooperation looks more like King Minos’ labyrinth rather than a high-speed transportation line. For example, projects such as “Primorye-1” and “Primorye-2”, which  are referred to as “a significant part of Sino-Russian strategic partnership” and “important construction project in Sino-Russian infrastructure cooperation”, are not really construction but rather modernization projects: in fact, both routes have already been built and have been functioning for a very long time.

The Moscow-Kazan high-speed railway project seemed quite promising at the beginning, but despite the growth in the scale of the project, at the end of 2019 Russia abandoned the construction of a key section of the Moscow-Nizhny Novgorod highway. No other bilateral projects for the construction of “hard” infrastructure between the Russian Federation and China have appeared, except for the Nizhneleninskoye-Tongjiang bridge, which was put into operation with great fanfare in February 2019 after three years of inactivity.

As we know, and as discussed in a previous article, the Gordian knot of intellectual property (IP) violation accusations has been casting a shadow over Sino-US relations. But Sino-Russian cooperation has not been immune to IP issues either, with the leak of technology being the most concerning part. The IP theft starts from Taobao trademark copycats and proceeds to military and space technology leaks. In the end of 2019, Russian state defense corporation Rostec has accused China of illegally reproducing a range of Russian weapons and other military equipment. “Unauthorized copying of our weapons abroad is a huge problem. Over the past 17 years, 500 such cases have been registered”, said Evgeny Livadny, head of the department of intellectual property projects at Rostec on December 15. “China alone reproduced our aircraft engines, Sukhoi aircraft, carrier-based jet aircraft, air defense systems, portable anti-aircraft missile systems and built analogs of the “Pantsir” medium-range surface-to-air systems”.

Having an old historical background of cooperation with China in itself does not raise questions and can only be welcomed. However, the prospects for this cooperation are often based on theoretical constructions that have little in common with reality. Numerous agreements and memorandums signed by the two countries including the Agreement on Trade and Economic Cooperation between the Eurasian Economic Union and the PRC contain provisions on measures to protect the internal market, regulate technical barriers to trade, impose sanitary and phytosanitary measures, guarantee customs cooperation, intellectual property protection, competition, and cooperation in public procurement and electronic commerce. Russia and China have agreed on these extremely important points that have a potential to significantly affect trade between the Russian Federation and China, but only when they are well implemented on all levels, starting from small businesses trading with China.

It is a common belief, especially among small local businesses, that China is a developing country with cheap labor, which welcomes any foreign investment, and distributes it uncontrollably, but this belief can lead to ill-advised political and economic decisions. China is no longer a developing, but a rather developed country, which by any means is building up its economic power and aims to widen its control over the economic and political space.

On the government level, the two countries cooperate in the UN on most issues, have a common line on North Korea, Iran, Syria, Venezuela and other international conflicts. China and the Russian Federation have achieved the development of a similar position in the fight against terrorism and extremism, using a different method of Internet sovereignty and many other positions.

Over the recent years, the dynamics of both political and economic cooperation between Russia and China have made it possible to get rid of illusions and mythology that had presided over the bilateral relationship before. Relations between the two countries did not morph into a harmonious and stable bond, as some media would have us believe. China did not extend the financial support that Russia was looking for, especially after it faced Western sanctions, and the Chinese leadership has made it clear that, in their eyes, Russia is no different from any other country and that no special treatment is to be expected on that front.

On the other hand, a number of potential cooperation projects failed to gain support from the Russian government, indicating that Russia has no intention to become the co-dependent little brother letting China play by its own rules. Therefore, this friendship journey is still possible as long as the ship follows the compass of economic expediency and realism and does not fall for the exaggerated political promises of fabulous Sirens.

Picture credits: bne IntelliNews