US Perspective

"Sino-Russian Relations"

The Ukraine Crisis and the Future of Sino-Russian Relations

President Vladimir Putin has described the improvement of relations with Beijing as one of his major foreign policy accomplishments. While this rapprochement has had concrete economic and political benefits, Russia tended to view relations with China instrumentally, using China as a “card” to be played in what remained a highly Western-centric approach to foreign policy. Over the past few years, Russia has been moving towards a more comprehensive partnership with China and Asia as a whole, one focused on harnessing Chinese investment for the development of Siberia and the Russian Far East and deepening Russia’s integration with East, Southeast, and South Asia at a time when Western economic dynamism appeared to be slipping.

The crisis in Ukraine has led Moscow to shift back towards a more instrumental view of its partnership with China, and a more sinocentric approach to Asia. Since the onset of the crisis in late 2013, Putin’s Kremlin has again turned to China as a bulwark against a West that appears intent on punishing and isolating Russia over its role in Ukraine. More than in the past, though, Russia today finds its choices limited. Its efforts to play the China card are coming at a higher price than previously. In bilateral as well as regional affairs, China has proven willing to accommodate Russian interests, but on terms increasingly favorable to Beijing.

That reality reflects the transactional nature of the Sino-Russian relationship. Despite rhetoric of a “comprehensive strategic partnership,” which Moscow has been keen to play up as the West has sought Russia’s isolation, Sino-Russian relations lack trust and are characterized by strategic competition, especially in the two countries’ shared region. Absent outside stimulus, the relationship is likely to remain transactional, with Beijing increasingly in the driver’s seat. As uncomfortable as Russia might be with the role of a “brilliant second” to China, the West needs to be cautious lest it push Russia too hard, leaving it little alternative.

Crisis and Cooperation

Since the onset of the Ukraine crisis, Sino-Russian cooperation has become more visible and more explicitly anti-Western. Russia has pursued deals with China to limit the ability of Western sanctions to leave Russia diplomatically and economically isolated. While China also worries that the West could seek to isolate it in the future (US officials have warned China that it could face sanctions similar to those being imposed on Russia should it pursue an expansionist campaign in Asia), it has also taken advantage of Russia’s predicament to strike agreements largely on its own terms.¹

During Putin’s May 2014 visit to Shanghai, Russia’s Vneshtorgbank (VTB) and the Bank of China signed an agreement calling for transactions to be settled in local currencies (rubles and renminbi) rather than dollars; Russia’s main savings bank, Sberbank, signed a similar agreement a few days later.² These agreements make the prospect of “Iran-style” financial sanctions, prohibiting banks that deal in dollars from conducting business with Russian or Chinese entities, even more far-fetched than would otherwise be the case. Nevertheless, they do mark a step in the campaign, which Russia, in particular, has emphasized in recent years, of reducing the centrality of the dollar to the global economy.

While the currency deal was important, the centerpiece of Putin’s trip to Shanghai was a long-awaited USD 400 billion, 30-year agreement to construct a gas pipeline (the so-called Power of Siberia) from Russia to China. Designed to provide up to 38 billion cubic meters (bcm) of Russian gas per year when finished, the pipeline would allow Russia to open up new supplies in Eastern Siberia, while China would be able to diversify its supplies of piped gas that are not vulnerable to maritime chokepoints. While the precise terms have not been made public, the timing and general outlines that are known point to the geopolitical underpinnings of the deal. Russia has long sought to expand its energy sales in Asia, especially to China, for both commercial and strategic reasons. Europe remains Russia’s principal market for gas, with more than 77 percent of its gas exports (162.4 bcm) going there in 2013.³ Energy exports, moreover, account for more than half of Russia’s state budget, and the potential for sanctions to deal a crippling blow to the Russian economy was undoubtedly at the forefront of the Kremlin’s mind as it put the finishing touches on the agreement with Beijing. While the deal would not see the diversion of any gas contracted for Europe to China (gas for sale to Europe comes from currently-operating fields in Western Siberia while Beijing contracted to buy gas from undeveloped fields in Eastern Siberia), it was read in the West as a signal that Moscow could adapt to the imposition of sanctions, even those targeting its energy industry.

Negotiations, ongoing for a decade, had never been able to overcome disagreements over the pricing formula for Russian gas. Press reports and statements from officials indicate that Russian gas monopoly Gazprom eventually accepted an effective price of around USD 360 per thousand cubic meters, around the lower end of the price band for Russian supplies to Europe. Beijing also reportedly agreed to provide USD 25 billion in financing to develop the new supplies, which could further reduce the actual price.⁴ As part of the broader deal, the Chinese National Petroleum Company (CNPC) was also allowed to acquire a stake in the Vladivostok LNG plant and in Russian state oil major Rosneft, concessions that have been consistently denied Western energy companies.⁵

The urgency created by the Ukraine crisis clearly enhanced Chinese leverage in the final negotiations. Even as the talks with Moscow have dragged on for a decade, China has expanded its purchases of pipeline gas from Central Asia as well as Myanmar, reducing the need for a deal with Russia in the short term. Under a recently accelerated timetable, China is set to purchase as much as 65 bcm from Central Asia by 2016. Already, China had torpedoed a Russian plan to supply gas from the existing West Siberian fields it uses to supply Europe, which would have allowed Moscow to shift supplies between its Asian and European customers. The Sino-Russian deal instead allowed China to access a new dedicated source of gas on reasonable commercial terms, even as its efforts at supply diversification will leave it insulated against the kind of pressure Russia has brought to bear against its European customers in recent years.

Similarly, the Ukraine crisis appears to have accelerated Sino-Russian military cooperation in ways that primarily benefit China, and could negatively impact Western interests. Sales of Russian military equipment to China plummeted over the past decade, declining from USD 3 billion in 2005 to less than USD 700 million in 2012, with no new contracts being signed for almost a decade after 2003.⁶ The decline was partially due to increased domestic demand, which made sales to Beijing less critical for sustaining Russia’s military industrial complex. More broadly though, shrinking sales reflected the growth of tensions between Moscow and Beijing. Many in the Russian military viewed China as an emerging strategic rival and opposed giving it advanced weaponry that could be turned against Russia. Reverse-engineering was another concern, as China’s defense industry was reportedly copying Russian technology and seeking to resell it to third parties, often in competition with the Russian original. Russian analysts believe China’s J-11 fighter plane is an almost exact copy of the Russian Su-27, which Moscow sold to Beijing in the late 1990s.⁷

New deals between Moscow and Beijing were already under discussion before the crisis in Ukraine began, including for the advanced S-400 air defense system, Amur-class attack submarines, and Su-35 fighters. Yet, it was only after the crisis started and Western sanctions had been imposed that these negotiations began bearing fruit. Most notably, agreement in principle was reached in April 2014 for China to become the first foreign customer for the S-400 and the Su-35—though no contracts have been announced yet. US officials worry that the S-400 in particular could change the balance of power in the Western Pacific, since it would extend Chinese air defense coverage over Taiwan as well as disputed islands in the South and East China Seas.⁸

Russia and China also carried out joint naval maneuvers in late May 2014. While the two navies had conducted joint drills in the past, the Joint Sea 2014 exercise was the first to be held in the East China Sea, not far from the Senkaku/Diaoyu Islands, which are subject to a dispute between China and Japan. In the past, Moscow had always insisted that joint exercises take place far from disputed waters. In 2012 they were held in the Yellow Sea, in 2013 in the Sea of Okhotsk, and a smaller exercise in January 2014 was even held in the Mediterranean Sea.⁹ The decision to hold Joint Sea 2014 in the East China Sea was interpreted as a concession to China, especially since Russia is continuing efforts to achieve a rapprochement with Japan. Secretary of the Russian Security Council (and close Putin ally) Sergey Naryshkin traveled to Tokyo in early June 2014, and allegedly communicated to his hosts that Beijing left Moscow with little choice about the location of the exercises, which would not affect Russia’s push for an agreement with Japan.¹⁰

Regional Tensions

While the Ukraine crisis has reinforced Sino-Russian cooperation at the global level, Moscow and Beijing still confront a range of tensions in their shared neighborhood that act as a brake on their comprehensive strategic partnership. These tensions are concentrated in Central Asia, where the growth of Chinese trade and investment increasingly poses a threat to Russian influence, as well as in East Asia, where Russia’s efforts to become a more important player run up against China’s push for regional domination. Here too, though, the Ukraine crisis appears to have changed the power dynamic in Beijing’s favor. Competing Sino-Russian ambitions are most starkly visible in Central Asia. Russian efforts to reintegrate the former Soviet Union focus on the Slavic core (i.e. Ukraine, Belarus, and at least northern Kazakhstan), but extend to the entirety of the ex-USSR. Kyrgyzstan has already made a decision in principle to join, while Tajikistan is strongly considering the possibility. With the withdrawal of US forces from Afghanistan and the closure of the Manas Transit Center in Kyrgyzstan, the primary source of “external” influence in Central Asia is increasingly China, which has over the past five years emerged as the number one trading partner and source of foreign investment in the region.

The customs union/Eurasian Economic Union is at least in part designed to slow the Central Asian states’ reorientation towards China. Kazakhstan has already seen its trade with external partners including China decline since the establishment of the customs union.¹¹ Kyrgyzstan and Tajikistan, meanwhile, are moving towards membership despite their reservations, because elites in both countries believe that they have little ability to resist Russian demands (the economies of both are heavily dependent on remittances from laborers working in Russia).

Chinese officials are quietly skeptical of the customs union.¹² Beijing has instead promoted the idea of a Silk Road Economic Belt, which would facilitate trade and transit from the Pacific to Europe across Central Asia without the political overtones or supranational architecture of Moscow’s Eurasian Union idea. This absence of political baggage makes the Chinese proposal much more welcome to elites throughout Central Asia. Russian officials worry that the Chinese plan could undermine their planned union. Tensions have been especially pronounced within the Shanghai Cooperation Organization (SCO), which Beijing believes can be a framework for implementing projects linked to the Silk Road Economic Belt.¹³ Moscow blocked the establishment of an SCO development bank that would draw most of its capital from China and, unlike the recently agreed BRICS development bank, would focus its lending on a region of Eurasia at the heart of Sino-Russian tensions. As the Ukraine crisis has dragged on, though, officials close to the talks have suggested that an agreement to set up the SCO bank is closer, perhaps in exchange for allowing India (currently an observer) to become a full member.

Of course, China’s economic interests extend far beyond Central Asia to Europe, and for that reason, Beijing has been promoting financial, trade, and investment deals in Eastern Europe, which, in turn, give China an interest in stabilizing the situation in Ukraine. Indeed, Chinese officials have quietly expressed a willingness to aid Ukraine’s economic stabilization and to press the warring sides to settle their differences.¹⁴

During the June 2014 annual summit of the Conference on Interactions and Confidence Building Measures in Asia (CICA) in Shanghai, Moscow acknowledged that the Chinese vision of an economic belt transcending the boundaries of the former Soviet Union was “vitally important,” while Beijing agreed, in turn, only to take Russian interests into consideration in setting up this belt.¹⁵ The very decision to hold the CICA summit in Shanghai is a reflection of China’s mounting regional influence. Set up in 1992 at Kazakhstan’s behest to discuss common challenges, CICA has been rather moribund for most of its history. China would like to see CICA develop as a mechanism for regional states to manage their own security interests without outside interference, sidelining the alliances the United States currently maintains in the Asia-Pacific.¹⁶ Its decision to host the 2014 CICA summit was an effort to breathe new life into the body while enhancing its security profile, and to signal to the rest of the region—including Russia—China’s importance as a regional security actor.

Conclusion

Growing Sino-Russian cooperation is part of the shift to a more multipolar global order, one where the West’s relative power is declining even as Western norms and institutions remain paramount, often to the frustration of non-Western powers like Russia and China. During this period of fluidity and shifting alignments, Russian and Chinese interests largely align at the global, systemic level. Conflicts of interest continue to beset their relations at the regional level, especially in Central Asia, where Moscow is seeking to maintain its preeminence in the face of rising Chinese economic power (the situation is similar in East Asia, where Russia’s ambitions to become a significant player are at odds with its growing dependence on China).

Indeed, Moscow’s mounting isolation as a result of its involvement in Ukraine is making it more reliant on its partnership with China, enhancing Beijing’s bargaining leverage and forcing Moscow to make concessions on a number of these regional issues, even as the rhetoric of both sides continues to emphasize their global-level cooperation. Which of these tendencies—strategic cooperation against the West or competitive regional maneuvering—will predominate in Sino-Russian relations in the longer term is among the most important questions for the future global order. US policy will be an important variable, insofar as Washington’s own actions will do much to determine what kind of partnership China and Russia maintain over the coming decade. While their competing regional ambitions will remain a source of tension, a Sino-Russian revisionist axis is, at least, a conceivable outcome should US relations with both remain strained.