The coronavirus pandemic and the accompanying economic crisis are impacting Russia-China relations just like the 2014–2015 crisis unleashed by the war in Ukraine did: the bilateral relationship is not fundamentally changing, but existing trends are picking up speed. Russia’s economic and technological development will become increasingly dependent on China, and U.S.-China tensions, which are worsening as a result of the pandemic, may soon make Moscow’s balancing act more precarious.
Since 2014, far-reaching U.S.-EU sanctions have pushed the Kremlin to deepen Sino-Russian cooperation in multiple domains. Ever since, Russia’s asymmetrical dependence on the Chinese economy has grown continuously. China’s share in Russia’s trade turnover increased from 10.5 percent ($88.8 billion) in 2013 to 15.7 percent ($108.3 billion) in 2019. Meanwhile, Russia’s central bank has increased the proportion of the Chinese yuan in its foreign currency reserves from 0.1 percent in 2015 to the current 13.2 percent. Moscow is also increasingly relying on Chinese technology, and firms like Huawei are set to make major inroads in the Russian market as key decisions on 5G approach. In 2016, China for the first time surpassed Germany as the number one source of industrial equipment and other technology-related imports in the Russian market. This trend continued in 2019, as Russia imported $30.8 billion worth of equipment and technology-related products from China (28 percent of all technology-related imports that year), while imports from Germany dropped to $12.9 billion, or just 12 percent.
The deepening of Sino-Russian ties following the war in Ukraine and Western sanctions extended beyond trade. To highlight only a handful of key examples, in 2018 Russia’s armed forces carried out the biggest military exercises in the country’s history in which they were joined by a 3,200-strong contingent from China’s People’s Liberation Army. President Vladimir Putin announced in October 2019 that Moscow is helping Beijing create its own missile early warning system, thus tying China’s strategic nuclear deterrent to a Russian technological backbone.
Crises aside, however, there are several objective reasons for the Sino-Russian rapprochement. The structures of their economies naturally complement each other. The political regimes are similar, which frequently inspires joint approaches on issues like human rights, NGOs, and the future of the internet. The strategic imperative to spend once-scarce resources on a heavily fortified, 4,200-kilometer border has given way to new forms of cross-border cooperation and trade. For all of these reasons, Moscow and Beijing were well-inclined toward each other and likely to become closer partners even without a well-timed nudge from recent crises. But their actions scarcely would have been as coordinated as they are now.
The pandemic is accelerating a wide-ranging set of processes and incentives inside both Russia and China that are helping pull the two largest Eurasian powers toward each other. Unprecedented synchronized global economic turbulence and the drop in oil and gas demand from locked-down economies set the stage for a period of painful adjustment for the Russian economy. Trade with Beijing becomes increasingly important to offset the immediate shocks, as China appears to be the first major economy to recover after the pandemic.
By dealing with the coronavirus generally effectively, China’s leaders have had a head start on reinvigorating the economy. The pace of recovery is uncertain, not least because of weaker demand from traditional overseas markets, debt-related challenges, and deflationary pressures. The blueprint for China’s economic recovery is still in flux, and the scale of emergency measures unveiled to date at the annual “two sessions” in late May 2020 is decidedly more modest than those embraced by European and U.S. decisionmakers. Still, some measures announced by Premier Li Keqiang, such as ambitious infrastructure projects, could potentially lead to increased demand for Russian oil, gas, and other commodities.
Trade data show that Russia’s economic exposure to China continues to grow as a result of the pandemic. In the first quarter of 2020, China’s share in Russian trade turnover reached an all-time high of 17.3 percent ($31.8 billion) compared to 15.8 percent ($34.1 billion) in the same period last year, despite the decline in oil prices. (Since oil constitutes over 70 percent of Russian exports to China, price fluctuations can have outsized impact.) The recent Saudi-Russia oil price war prompted a spike in Russian crude exports to China as refiners sought to take advantage of lower prices. In March 2020, as energy prices plummeted, China bought a record 7.02 million tons from Russia. In the first quarter of 2020, Russia’s oil shipments were 16.7 percent higher than in the same period last year, rising from 18.06 to 21.07 million tons. In April, Russia overtook Saudi Arabia as the top oil supplier to China, shipping 18 percent more (7.2 million tons) than in 2019. The trend continued in May with Russian oil exports growing by 19.2 percent over the previous year.
A gradual reorientation of Russian oil exports from west to east is also an important factor. That dynamic has been increasingly evident since the opening of the Eastern Siberia–Pacific Ocean (ESPO) oil pipeline in 2010. ESPO’s key champion was Rosneft, Russia’s powerful state-owned oil company. In 2009, Rosneft borrowed $15 billion from the China Development Bank in order to complete ESPO and a branch pipeline (Skovorodino-Mohe) that brings oil from ESPO directly tо China.
In addition, multibillion dollar loans from three Chinese state-owned oil companies in June 2013 helped Rosneft’s ambitious CEO Igor Sechin finance a shopping spree of domestic acquisitions. To service the loans, Rosneft agreed to advance sales of 360 million tons of oil to China over a twenty-five-year period. At the time of the deal, oil prices were on average $110, so the contract’s total volume was estimated at $270 billion, and Rosneft got $70 billion as an advance payment. Market conditions became far more challenging for Rosneft at the end of 2014 as prices declined sharply. As a result, Rosneft has prioritized pumping increasing volumes of oil to China and expanding pipeline capacity to carry additional volumes, including doubling the capacity of the Skovorodino-Mohe pipeline in 2018 and transit via Kazakhstan using swap deals with Kazmunaygas.
In the telecom sector, Huawei is now poised to expand its well-established presence. Russia’s top three telecom operators, especially Megafon, have relied on Chinese equipment produced by Huawei and ZTE alongside hardware supplied by Nokia and Ericsson. The Kremlin knows full well that Russia is unlikely to produce its own 5G hardware any time soon. In June 2020, a government working group on the digital economy (which includes regulators and the major telecom companies) blocked a proposal mandating the use of Russian-made hardware in the rollout of the new national 5G network.
While there are national security concerns about the possible backdoors and kill switches in Chinese- or Western-supplied equipment, China is seen as the lesser evil. No one in the Kremlin loses sleep worrying that Beijing might try to topple the Putin government or impose sanctions on key members of the Russian elite. Huawei has also formed important marketing and technological partnerships with influential Russian players. For example, Sberbank’s ambitions to become the leading supplier of cloud computing services on the Russian market will now be powered by Huawei. Finally, Beijing’s reliance on AI-powered digital surveillance and facial recognition technology for tracking and controlling the spread of the virus has triggered widespread Russian interest in emulating the Chinese model of societal control. That newfound level of fascination carries with it a whole slew of commercial opportunities for Chinese firms.
The pandemic appears to be speeding up other preexisting trends. For example, in March 2020, Russian Railways, the Russian state-owned railway monopoly, revised its 2020 investment program. While the size of the investment program was cut by roughly a quarter to 622 billion rubles, significant funds were reallocated for upgrades of the Trans-Siberian and Baikal–Amur Mainline (BAM) railways. These are important transport corridors to China for Russian commodity exporters. Such investments will help facilitate future shipments of Russian commodities to Asian markets, primarily to China, which remains the major buyer of Russian coal and metals in the region.
Even more important is a recent political decision to revive the Power of Siberia-2 (PoS-2) project, which was announced by Gazprom CEO Alexei Miller in mid-May 2020. According to Miller, the company has already started design and survey work for a new natural gas pipeline that will carry up to 50 billion cubic meters (bcm) a year to Chinese customers. The previous route of PoS-2, which was intended to run from Western Siberia to China’s Xinjiang via the Altai Mountains according to a 2006 memorandum between Gazprom and China National Petroleum Corporation (CNPC), has been discarded. The new route for the pipeline now will go through Mongolia. Relying on a transit country had for many years been anathema to Beijing and Moscow. Both capitals feared that Ulaanbaatar would be able to play them off of each other. There was no appetite to re-create the long-running disputes between Ukraine and Russia over Europe-bound gas transit.
Such concerns have largely disappeared in light of Mongolia’s heavy economic dependence on China, as well as growing strategic cooperation between the Kremlin and Zhongnanhai. The new route will bring gas to China from fields in Western Siberia and Yamal that are already operational. This should make the project far less capital-intensive than the original Power of Siberia, which involved development of two entirely new gas fields, Kovykta and Chayanda, whose output required processing in order to meet contractual conditions imposed by Chinese purchasers. (The official cost estimate of the Power of Siberia project stands at $55 billion.) Also, the benchmark gas price on PoS-2 will be the price for Power of Siberia, which is one of the most profitable prices in Gazprom’s export portfolio. In theory, bringing gas to China from the same fields that currently supply the EU is intended to strengthen Russia’s position in the European market, where Gazprom currently faces multiple challenges.
As with the 2014 crisis, the pandemic is helping to reorient Russia’s trade from west to east, gradually reducing the share of EU-bound exports and slowly but surely increasing the amount of exposure to China. To be sure, the dramatic jump in physical volumes of oil shipments from Russia to China may be short-lived. Yet the behavior of leading Russian players such Rosneft, Gazprom, and Russian Railways suggests that a new strategic imperative is guiding post-coronavirus decisions on expanding land-based pipeline and railway infrastructure that tie Russian commodities exports to the Chinese market. It is not unreasonable to view such decisions as merely an acceleration of existing trends. But there is every reason to believe that eventually bringing trade with China to the same levels seen with the EU (roughly 40 percent of total trade turnover) will have potentially far-reaching consequences.
For all of the traditional Russian grumbling about dealing with EU customers, the Kremlin knows how to maneuver between Brussels and national capitals such as Berlin. It also mastered long ago how to navigate European institutions such as the Stockholm Court of Arbitration. Dealing with China, where there are no competitive power centers beyond the Communist Party, is another story entirely. If the Party decides one of these days to treat Russia’s growing dependence on China as a source of leverage to squeeze concessions, that ought to surprise no one. Beijing has already used such tactics in the high-profile 2011 spat between Rosneft and CNPC on oil pricing. Even back then, when Russia’s ties with the United States and the EU were booming under then president Medvedev, Moscow still had no choice but to knuckle under China’s pressure.
Going forward, the strategic landscape for Russia is likely to be less favorable. The pandemic has pulled the curtain back on the country’s one-dimensional economic model. There is no likelihood of a speedy reconciliation with the West, which is contending with serious coronavirus-related economic challenges of its own. Against that backdrop, the Kremlin’s hand vis-à-vis Zhongnanhai is likely to become even weaker.