1 The “New” Russia-China Relations -Implications for the EU Summary Russia is increasingly turning towards China as a result of Western sanctions. But although there is much talk and diplomatic support there are few concrete results due to Russia’s structural economic problems. This short-term ‘axis of convenience’ could, however, develop into a more strategic alliance in the future given the right incentives on both sides. The EU has taken a relaxed position to this new relationship. This may not be possible in future and the EU should reflect on how closer ties between Russia and China might affect important EU interests. 1 Introduction For cultural and geographical reasons, Russia and China have always faced in different directions: China towards Asia and Russia towards Europe. Their relations before the 20thC were cautious with few close ties. When the Chinese Communist Party took power in 1949 it led to a decade of close relations between the two major communist powers. But China was reluctant to play the little brother role and following the death of Stalin in 1954 relations began to deteriorate. In 1960 Khrushchev decided to withdraw Soviet economic and technological support. The following year Mao accused the Soviet leadership of revisionism and the Sino-Soviet alliance was over (although some Western experts considered this was a plot to confuse the West). Relations continued to deteriorate leading to serious border clashes along the Ussuri River in 1969. This event led both China and the Soviet Union to explore alignments against each other with the US. Relations began to improve in the late 1970s when Deng Xiaoping became leader. By 1989 the process of rapprochement was complete allowing Gorbachev to visit Beijing shortly before the Tiananmen Square disturbances. He refused to involve the USSR in the sanctions the western powers imposed on China following Tiananmen. Yeltsin, regarded with suspicion in Beijing for promoting the break-up of the Soviet Union, remained a firm advocate of good relations with China and worked to build on the breakthrough achieved in the 1980s. In 1997 Jiang Zemin already spoke of Russia as China’s key strategic ally. In 1998 the two countries acted jointly for the first time in the UNSC to oppose the US bombing of Iraq. Subsequently both countries strongly opposed the US led attacks on Yugoslavia in 1999 and on Iraq in 2003. Under Putin, cooperation between Russia and China has steadily intensified. The long standing border issue was finally resolved and Russia and China began to deepen their cooperation in global affairs.
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1
The “New” Russia-China Relations -Implications for the EU
Summary
Russia is increasingly turning towards China as a result of Western sanctions.
But although there is much talk and diplomatic support there are few concrete
results due to Russia’s structural economic problems.
This short-term ‘axis of convenience’ could, however, develop into a more
strategic alliance in the future given the right incentives on both sides.
The EU has taken a relaxed position to this new relationship. This may not be
possible in future and the EU should reflect on how closer ties between Russia
and China might affect important EU interests.
1 Introduction
For cultural and geographical reasons, Russia and China have always faced in
different directions: China towards Asia and Russia towards Europe. Their relations
before the 20thC were cautious with few close ties. When the Chinese Communist
Party took power in 1949 it led to a decade of close relations between the two major
communist powers. But China was reluctant to play the little brother role and
following the death of Stalin in 1954 relations began to deteriorate. In 1960
Khrushchev decided to withdraw Soviet economic and technological support. The
following year Mao accused the Soviet leadership of revisionism and the Sino-Soviet
alliance was over (although some Western experts considered this was a plot to
confuse the West).
Relations continued to deteriorate leading to serious border clashes along the Ussuri
River in 1969. This event led both China and the Soviet Union to explore alignments
against each other with the US. Relations began to improve in the late 1970s when
Deng Xiaoping became leader. By 1989 the process of rapprochement was complete
allowing Gorbachev to visit Beijing shortly before the Tiananmen Square
disturbances. He refused to involve the USSR in the sanctions the western powers
imposed on China following Tiananmen. Yeltsin, regarded with suspicion in Beijing
for promoting the break-up of the Soviet Union, remained a firm advocate of good
relations with China and worked to build on the breakthrough achieved in the 1980s.
In 1997 Jiang Zemin already spoke of Russia as China’s key strategic ally. In 1998 the
two countries acted jointly for the first time in the UNSC to oppose the US bombing
of Iraq. Subsequently both countries strongly opposed the US led attacks on
Yugoslavia in 1999 and on Iraq in 2003. Under Putin, cooperation between Russia
and China has steadily intensified. The long standing border issue was finally
resolved and Russia and China began to deepen their cooperation in global affairs.
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This report reviews the new Russia-China relationship under the impact of Western
sanctions, focusing on the possible mid-and longer-term developments. It also
discusses the implication of this new relationship for the EU.
2 Russia’s Accelerating Pivot to the East
The deterioration in Russia’s relations with the EU and US following Moscow’s
aggression in Ukraine, and the corresponding need to find an alternative partner, was
a powerful factor in accelerating Russia’s pivot towards China. Although the
sanctions hastened Moscow’s tilt to the east, Putin officially announced Russia’s Asia
pivot in June 2013 even before Western sanctions were imposed. The Kremlin
announced ambitious plans to boost the Russian economy by switching its focus to
the Asia-Pacific region. The aim was to develop the depressed Far-East regions by
investing in massive new infrastructure including a new gas pipeline to China. From
the geopolitical perspective, the Asian pivot was initially meant to add to the Europe-
Atlantic dimension of Russia’s foreign policy. Within the Asia-Pacific, Moscow was
looking for a balance in relations with all the key powers (China, India, and Japan).
Until June 2104 there was little progress to show in the Russian pivot. Moscow was
still concerned at the growing imbalance in relations with China.
But the triple whammy of Western sanctions, the collapse in the oil price and
diplomatic isolation (Russia excluded from the G8) meant a step change in Russia-
China relations. Economic factors played a key role. The World Bank’s 2015 report on
Russia -The Dawn of a New Economic Era? forecasts a negative outlook for the
Russian economy, with respective GDP growth of -3.8% and -0.3 % in 2015 and 2016.
Figure 2-1 The GDP growth outlook (GDP growth Percent, y-o-y)
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Source: World Bank 2015
As shown in the above figure, although Russia managed not to fall into recession in
2014, the World Bank predicted that recession in 2015 is inevitable. The worst case
scenario is that Russia may suffer as high as -4.6% of GDP contraction in 2015, with
the best case scenario of -2.9% of GDP contraction. The western sanctions have
played a crucial role in the ongoing economic recession of Russia, sharply reducing
Russian companies’ access to western technology, investment, and credit, especially
in the critical energy sector. In addition the plunge in the price of oil has sent the
ruble into free fall. As shown in the figure below, the oil price and the ruble’s
exchange rate dropped sharply in the second half of 2014, and so far the trend
continues albeit with a recent slight strengthening of the ruble. Since it takes time for
the full impact of the sanction to be revealed, the damage is certainly going to be
worse in the mid-term.
Figure 2-2 Oil Prices and ruble exchange rate in 2014
Source: World Bank 2015
3 Russia Pivot to the East Made Little Progress until the Ukraine Crisis
3.1 Russia and China are still competitors in many ways.
The growing gap in economic power between Russia and China is viewed with
great concern in Moscow. In 1994, the GDP of Russia ($435 bn) and China ($441 bn)
were similar, but in 2004, China’s GDP (($1640 bn) was already four times of
Russia’s ($430 bn) and in 2014, China’s GDP (($9240bn) is almost five times that of
Russia’s ($2096bn), and the gap is likely to grow bigger. Now China is the second
largest economy in the world and Russia is at the bottom of the top 10.
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Russia paid little attention to the rapidly growing Chinese market during the past
decade. It accounts for just over 2% of China’s external trade. Most of Russia’s trade
with China comprises oil and gas exports in exchange for Chinese manufacturing and
consumer imports. China has shown little interest in Russian industrial products
except for military goods. Both sides were unhappy and frustrated at the low level of
trade. Russia often targeted illegal Chinese entrepreneurs while imposing an informal
ban on Chinese investing in major infrastructure projects.
Competition in Central Asia
China’s influence in Central Asia, traditionally allies of Russia, has been growing in
recent years and is a challenge to Russia’s plans for the establishment of the Eurasian
Economic Union. China has since countered with the New Silk Road initiative and
Asian infrastructure investment bank (AIIB). Beijing is rapidly developing closer ties
with Central Asia using financial diplomacy to good effect. This in turn has led to
growing concern in Moscow about who will be the dominant external power in the
region.
Security and defence issues
There has often been tension between Russia and China over their 2200 mile land
border (see above). Although the border was settled in 2004 there remain concerns
not least because of the huge population imbalance in the Far East. The sale of
military equipment to China always causes some soul-searching in Moscow, not
simply because they might be used against Russia but because China has a record of
buying Russian military weapons and defence systems, then copying them and selling
them to third parties at a cheaper price. Russia has also been nervous about China’s
cyber security technology. No Chinese telecommunication companies were allowed to
invest in Russia until 2013.
People to people relation
There are large cultural differences between China and Russia and people to people
contacts, for example, in education and tourism are limited. There are far fewer
Chinese students in Russia than in the EU, US or even Australia. Russian students
only started to be interested in studying in China in the past decade. During Xi’s 2013
visit to Russia, the two countries pledged to raise the total number of their students in
each other’s countries to 100,000 by 2020. Even then it will be still far less than the
exchanges between Russia and the EU or between China and the EU. For bilateral
tourism, in 2013, 4 million (less than 10%) Russian tourists travelled to China. In
2014, less than 358,000 Chinese tourists went to Russia, much less than the EU
tourists.
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3.2 Russia has stronger ties with Europe compared to China
Economically, the EU is the first trading partner of Russia. In 2013 the EU accounted
for 57% of Russian exports and 46.5% of Russian imports. In the energy sector, the
EU imports from Russia more than €100 billion of crude oil and oil products, one
third of the EU’s total oil imports. In terms of gas, in 2013, Russia exported 71% of its
gas to Europe, with the largest volumes to Germany and Italy. Six Member States
(Bulgaria, Estonia, Finland, Slovakia, Latvia and Lithuania) depend on Russia as a
single external supplier for their entire gas imports. The supplies from Russia
accounted for 39% of EU natural gas imports. While EU imports from Russia are
dominated by oil and gas, EU exports to Russia are dominated by various products:
machinery and transport equipment, chemicals, medicines and agricultural products.
Furthermore, the EU is the most important investor in Russia. It is estimated that up
to 75% of Foreign Direct Investment (FDI) stocks in Russia come from EU Member
States. 1 Compared to the EU, Russia’s economic ties with China are far less
important (see below). China is a not a sophisticated trading partner as the EU and
invests much less than the EU in Russia. China imports much less oil and gas from
Russia compared to the EU.
Table 3-1 Russia's Economic Ties with EU and China (based on 2103 data)
Trading Partner of Russia
FDI stock in Russia
% of Russian exports
% of Russian imports
Gas import Oil import from Russia
EU First 75% 57% 46.5% Russia is the first supplier of EU’s gas imports
Russia’s first oil importer
China Second after EU Not in top 10
8.1% 15% Russia is the fourth supplier of China’s gas imports
Russia’s third oil importer
Source: UN comtrade
Culturally, Russia has stronger ties with Europe as well. For instance in 2013, 41
million tourists travelled from Russia and of these, 32 million (77%) travelled within
Europe. In 2014, there were more than EU tourists 700,000 tourists (318,600 from
Germany, 120,900 from the United Kingdom, and 92,600 from Italy) went to
1 The data is from The European Commission, Directorate-General for Trade.