China and Russia began to build closer ties as of early 2014. The catalyst for the rapprochement between Moscow and Beijing was the international crisis over Ukraine, which estranged Russia from the West. For many observers it was the $400 billion gas deal signed in Shanghai in May 2014 that became the symbol of the emerging alliance. But the warming in Sino-Russian relations went much deeper than the clinching of this deal, which marked the conclusion of negotiations and bilateral cooperation efforts that have been ongoing for more than 15 years. The main shift after the crisis in Ukraine was that Russia has reassessed its strategy vis-a-vis China. Seeking a powerful partner to compensate for financial losses incurred as a result of Western sanctions and the outflow of foreign investment and capital from the Russian economy, Moscow started to take a fresh look at many issues which had been blocking cooperation with Beijing for years. This process resulted in the removal of three key informal barriers to cooperation: (i) Russia’s reticence with regard to selling advanced weaponry to China; (ii) the de facto ban on Chinese participation in large infrastructure projects; and (iii) Moscow’s reluctance to sell stakes in strategic resource deposits to Chinese investors. Examples of this new approach as applied by the Kremlin in 2014-2015 were limited, but they may serve as an important indicator of what may happen in the future on a larger scale.

Trends that will shape the future

Alexander Gabuev
Gabuev is a senior fellow at the Carnegie Endowment for International Peace.
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Predicting the future is an onerous task. One approach is to extrapolate current trends and try to predict their most likely outcome. This also involves gauging the longer-term significance of recent developments. Short of Russia or China undergoing a dramatic upheaval that would have major implications for both countries’ ties with the West and the global economy, a number of existing factors and conditions are likely to shape Sino-Russian relations in 2026.

The first set of conditions concerns the global economy. Commodity prices will remain low, due to the fact that there will be a drop in demand for commodities, as the world economy undergoes a painful readjustment process that will last for most of the decade.

The second set of conditions concerns Russia. Vladimir Putin will maintain his position as the national leader or will be replaced by a likeminded Kremlin-anointed successor. Under such circumstances the nature of the Russian polity will remain basically the same: the political system is dominated by a powerful, though inefficient, bureau¬cracy; political opposition is not tolerated; civil society remains fragmented and disorganised, while the majority of the population is disengaged from politics and preoccupied with day-to-day survival. Relations between Russia and the West have deteriorated and entered a new phase that might best be described as ‘cold peace’. The situation in Ukraine appears to have stabilised for now, but the country is battling its many domestic problems and not attracting too much attention from the West beyond symbolic support. Donbass has turned into a frozen conflict. Crimea remains under Russian control. Western sanctions against Russia remain in place. European businesses are learning to live without the Russian market, particularly as the Russian economy shrinks and becomes a less attractive prospect for investors. Moscow is still an important supplier of hydrocarbons to Europe, but no single European country is 100% dependent on Russian gas anymore as costly diversification has taken place (fighting for a slice of this lucrative market, many producers have invested in building LNG terminals in Europe).

Russia is disengaged from economic integration with the EU, and remains equally aloof from economic integration mechanisms in Asia like the Trans-Pacific Partnership (TTP). Currently the Shanghai Cooperation Organisation has an ambitious economic integration agenda, featuring the proposed creation of a free trade zone, which would strengthen China’s economic grip over Russia and Central Asia. Russia’s economy continues to be heavily dependent on commodities. The state and private companies close to the Kremlin dominate the economy, while the share of SMEs in the Russian economy remains quite small. The need to guarantee popular support means that the government pays lip service to promoting economic and infrastructural development but the country manages to avoid painful structural reforms by kicking the ‘resource curse’ can down the road. As a major exporter of commodities, Russia’s attractiveness to foreign investors remains limited as commodities are cheap and available in other parts of the world and the domestic market is small due to falling incomes.

The third set of conditions concerns China. The Chinese Communist Party (CCP) maintains its rule. It is currently presiding over a painful rebalancing process with GDP growing on average by 2-4% over the next decade. China still continues to import hydrocarbons and commodities, but a shift to clean energy is taking place as there is increasing public and political awareness of environmental issues. China continues to suffer from huge overcapacity in the industrial sector, particularly in infrastructure industries. Beijing adopts a pragmatic stance and maintains a stable relationship with the US, Japan and ASEAN countries despite some tensions and a growing arms race in the region.

Having outlined existing conditions and trends that may shape the future of Sino- Russian relations, we need to look at the fundamentals of the relationship - the factors which have a significant and lasting effect on decision-making on both sides.

Closer ...

There are two sets of factors which push China and Russia closer together - the first being economic, and the second political in nature.

The Russian and Chinese economies are complementary, just as Russia’s economy is complementary to that of the EU. Russia, despite all its industrial capacity, dynamic IT sector and educated workforce, is by and large a commodity-based economy. Russia’s principal exports are hydrocarbons, metals, timber and chemicals. At the same time China imports large volumes of commodities and is heavily reliant on imported hydrocarbons, metals and food crops. Physical proximity and ability to build secure land-based supply routes mean that there is potential for a natural synergy between the Russian and Chinese economies. For a long time Russia was reluctant to allow massive Chinese (and other Asian) investment in developing its Siberian and Far Eastern resources, but after Ukraine the policy is starting to change. As China moves from an investment-led to a consumption-led growth model, Russia still has many things to offer: inexpensive food products for the Chinese middle class concerned about food safety; natural gas for cities in Northern and Central China where air pollution is becoming a social problem; Russia’s cold climate (reducing costs for cooling servers) and inexpensive electricity mean that it is an attractive location for data storage facilities to cater for China’s growing online population.

China has many other things to offer to Russia besides its huge market. Chinese companies have strong expertise in building infrastructure, which is badly needed in the vast and underdeveloped territories of Siberia. China has developed advanced industrial technologies and could be a key source of high-tech imports if Russia were to become serious about modernisation. Beijing presides over a huge stockpile of cash, and private companies are increasingly looking for opportunities to diversify their investments. In recent years the Hong Kong Stock Exchange has attracted a large number of mining and natural resource company listings and could become one of the platforms for Russian companies to raise capital. The Shanghai and Shenzhen stock exchanges are also likely to catch up in terms of regulatory standards and a diverse range of investors.

Politically Russia and China are likely to remain non-democratic regimes, suspicious both about the activities and allegiances of their own citizens and about the intentions of the West. This reality is likely to drive them closer on many issues, including key questions of global governance. Moscow and Beijing will continue to proclaim their support for reform of the United Nations Security Council (UNSC), while at the same time trying to maintain their privileged position as permanent members. They will continue to call for the redistribution of votes inside Bretton Woods institutions like the International Monetary Fund (IMF) and the World Bank, and will be active in promoting interest-based clubs like BRICS. Moscow and Beijing will seek to jointly promote ‘cyber-sovereignty’ in internet governance. Both countries will continue to be vocal critics of ‘Arab spring’-style popular uprisings and will continue to object to the ousting of dictatorships by force.

Central Asia will be a region where Russia and China will engage in increased cooperation. The interests of the two powers in this region overlap to a significant degree: maintaining political stability, supporting local secular rulers and regimes, combating jihadists who pose a threat to the Xinjiang-Uighur region in PRC and Muslim-populated Volga regions in the Russian Federation (RF), and ensuring that the US cannot establish a military presence in the area. As China’s economic clout in the region grows, fuelled by commodities imports and increased infrastructure investment, and Russia’s economic power diminishes vis-a-vis China, Moscow will realise that it does not have the resources to compete with Beijing in Central Asia on the trade and investment front. Thus the two countries may strike a deal. China will be the major spender and engine of economic growth in Central Asia, while Russia will remain the major provider of hard security. Local states seek to balance between the two bigger players and are uncomfortable about China’s strong military presence in the region, so an eventual division of labour between Moscow and Beijing can accommodate everybody’s interests and receive local elites’ and peoples’ support.

... but still apart

At the same time there are still limits to the Sino-Russian partnership which will prevent it from evolving into a fully-fledged alliance. The major barrier is the different political philosophies of the two countries. Beijing’s foreign policy is still driven by a strategy of securing a peaceful and supportive external environment in order to address mounting domestic challenges. Despite the fact that Deng Xiaoping’s formula of taoguang yang- hui (‘hiding our capacities and biding our time’) is often questioned in China, as the world’s second-largest economy and one of the largest military powers can hardly hide its extensive capacities, Beijing still tries to avoid direct claims for global leadership or confrontation with major powers. Its foreign policy priorities are good relations with countries that can provide investment and technology to China, serve as markets for Chinese exports or as sources of commodities vital for economic growth.

Only recently has China started experimenting with Beijing-led institutions emulating global formats like the Asian Infrastructure Investment Bank - modelled on the World Bank - and embarked on massive albeit somewhat ambiguous projects like the ‘One Belt One Road’ initiative. Even the recent tensions in the South China Sea can be viewed as an attempt to channel domestic nationalist sentiment and at the same time create more options for addressing the ‘Malacca Dilemma’. The level of provocations is carefully managed by leaders in Beijing, who do not want to cross a certain threshold that would activate the US alliance system in the Asia-Pacific.

Russia is pursuing an entirely different strategy. Moscow’s foreign policy is driven by a quest for geopolitical security and international respect as a global powerhouse. Creating ‘spheres of influence’ in Russia’s neighborhood is serving these two objectives. For Moscow its ‘equal’ relationship status vis-a-vis the West is a goal in itself, while China is more pragmatic and opportunistic. Russia is ready to sacrifice economic benefits of trade and investment if this is the necessary price to pay for national prestige. Undermining Western dominance and creating a multipolar world through multilateral fora like BRICS is a much more important task for Russian foreign policy than it is for Beijing. This gap between the two foreign policy strategies makes it impossible to create a real alliance between Russia and China. Beijing does not want to be constrained by collective defence mechanisms along the lines of NATO’s Article 5 principles, particularly if that implies the possibility of entering into a conflict with the US over something as irrelevant for China as Crimea. Beijing’s natural inclination to prioritise a harmonious relationship with the West over taking sides with ‘strategic partners’ in conflicts where China’s core national in¬terests are not affected has been demonstrated in the past (notably in its non-recognition of Abkhazia and South Ossetia and non-recognition of Crimea) and is unlikely to change in the next decade. At the same time Russia is not willing to be dragged into potential conflicts over issues it deems irrelevant for its strategic interests like the Senkaku/Diaoyu islands or the South China Sea. It is thus more likely that while moving closer on the international stage and trying to establish cooperation on Central Asia, Russia and China will still look for options to diversify their partners in Asia and Eurasia.

The second barrier is essentially cultural. Despite all the hostile rhetoric and the Kremlin’s widely touted notion of a ‘declining West’, Russia still remains rooted in European civilisation and values. The spending patterns and aspirations of the elite and the mid¬dle class still connect it to Europe and the West more than to China and Asia, which influences pragmatic choices such as venues for raising capital (most Russian business leaders would prefer London over Hong Kong), education of children (Switzerland rather than Singapore) and travel (Turkey and Sardinia rather than Hainan island). The physical and cultural proximity of Europe make it unlikely that this link, which has been cultivated over several centuries, will vanish in the space of a decade. This deep- seated cultural barrier has constrained Russia’s cooperation with China as few Kremlin decision-makers have a genuine interest in Asia, and this relative indifference has had a lasting legacy. At the same time, from China’s perspective, Russia is a ‘declining power’, no longer an inspirational role model or potential soulmate. The aspirations of the Chinese elite are either nationalistic, or are oriented towards closer association with the West (or both at the same time).

The third barrier is an intellectual one. Despite having invested in research expertise on Russia driven by the CPC’s interest in the collapse of the USSR, China’s understanding of Russia is still limited. This is likely to change in the upcoming decade as more Chinese companies may establish a presence in Russia, but the transition will take time. This is even more true for Russia. 25 years after the breakup of the USSR, its school of China watchers, including independent experts as well as officials and analysts in the corporate sector, has shrunk dramatically. The crisis over Ukraine and ‘pivot to China’ have not generated a momentum for the state and corporate sector to invest in ‘China watching’. Given the harsh economic constraints Russia is likely to face in the coming decade, it is even more unrealistic to expect that the country will invest resources in rebuilding the necessary capacity. These developments may add to the growing imbalance in the relationship: ultimately China will understand Russia much better than Russia understands China.

Asymmetric interdependence

The most likely outcome of the interplay between the various factors and dynamics described in this chapter will be Russia’s growing dependency on China. The process will be slow and gradual, but steady. As economic conditions worsen and international investors are less attracted by what Russia has to offer, the Russian political and economic elites will become more responsive to Chinese demands. The crucial goal for Moscow will be to guarantee the survival of the regime by securing sufficient cash flow to keep the country afloat. This will mean reaching out to markets for commodities, and seeking alternative sources of capital and technology. China will provide Russia with an economic lifeline, but will not put significant effort into modernising the Russian economy and making it successful. At the same time the volume of Chinese investment in Russia and China’s exposure to the vagaries of the Russian economy will be limited: Beijing will not want to overly annoy the US and also will not risk putting too many eggs in the Russian basket.

After bargaining hard, Moscow will surrender to Chinese demands and open the Russian economy to wider penetration by the PRC. This will take several forms. The major and most important change will be that all future gas and oil pipelines will be built to China only, denying Russia a diversification option through the Pacific with potential markets in Japan and South Korea. The second major shift will be Moscow’s acceptance of Chinese companies’ ownership of substantial stakes (including joint control with Russian minority stakeholders) in strategic deposits of natural resources. The third step will be joint ventures between Chinese companies and Russian companies close to the Kremlin (like the companies controlled by Gennady Timchenko and Arkady Rotenberg). The Chinese will provide technology and financing, while the Russians will automatically give their seal of approval to these projects. It is likely that over the long run the bulk of industrial equipment in Russia will be manufactured in China.

The partnership will not be as beneficial as it might be under normal market conditions with built-in competition, but it will be a win-win solution for both sides (with China reaping the lion’s share of the benefits). China will become a key source of capital for the Russian economy. This process will be slow and painful, the financing will be expensive and delivered with many conditions attached (including mandatory buying of Chinese equipment etc.), but will be necessary to foster economic growth in Russia. Beijing may start to make inroads into the Russian financial system through rounds of privatisation - minority stakes in strategic banks like Sberbank and VTB or control over smaller banks are likely developments.

Russian scientific knowledge and expertise will be more linked to the Chinese economy and scientific community than before. Informal regulations limiting Chinese players’ access to Russian technological know-how and research capabilities in non-military sectors are likely to be gradually relaxed. At the same time China will be keen to attract talented young people to universities in the PRC and promote the teaching of the Chinese language in Russia through Confucius Institutes and other means.

In terms of politics Russia will become a more loyal supporter of Chinese initiatives globally. Coordination in the UN may become more organised, with Russia not only playing a devious role by defending non-democratic allies of China in the Security Council, but doing so at Beijing’s request. Moscow is unlikely to directly support Beijing in its territorial conflicts, but it will be ready to sell more sophisticated weapons to China such as its new missile defence systems and fighter jets, which will influence the military balance of power in some critical hotspots around Asia (notably Taiwan and the South China Sea). At the same time towards the end of the next decade Moscow may be forced to choose between the large arms market in China and the smaller market in Vietnam and other ASEAN states. The only place where real cooperation may take place is Central Asia, with China playing a more dominant role.

Thus, both countries are likely to depend on each other more than they do now. But this dependence will be asymmetrical as Moscow will play a much weaker hand. This is quite different from Russia’s previous economic dependence on Europe in the 1990s and 2000s. Inside the EU Moscow could reach out to different governments and companies and play individual member states off against each other. China will present much more of a united front in its dealings with Russia. Given the scale of Russia’s needs, it may also impose economic conditions in a more uncompromising way than Europe ever tried to do.

Conclusion

The likely evolution of Sino-Russian ties will be towards a partnership, where one side (Moscow) will be more dependent on the other side (Beijing). In normal circumstances where it would not be subject to intense geopolitical and economic pressure Russia would never accept this kind of relationship. But tensions with the West and negative trends in the commodity markets will force Russia to adopt a more submissive posture. For the Kremlin and the Russian elite the bottom line will no longer be modernisation, but the regime’s - and thus, using the Kremlin’s logic, the country’s - survival. Awareness of its inferior status in the relationship may wound the Kremlin’s feeling of pride. But to sugar this bitter pill, the Chinese leadership is ready to show formal respect towards Russia and recognition for its special interests, thus smoothing over the fact that the two countries are not on an equal footing in this partnership. The Russians are now busy inventing creative formulas themselves, like that describing Russia as an ‘elder sister of China’ - a woman occupying a senior position in the family hierarchy, towards whom a stronger China needs to be protective and respectful. But at the end of the day it will be reality, not polite diplomatic formulas, that matters. For Russia this reality may turn out to be uncomfortably close to the dystopian scenario portrayed in a futuristic novel published in 2006, Day of the Oprichnik by Vladimir Sorokin.

The picture may be very different if the EU-Russia relationship radically improves, but this is unlikely to happen as long as the political system put in place by Putin survives another ten years and the West is not willing to engage Russia through compromises. From the EU’s perspective, a possible Sino-Russian rapprochement in the coming decade will not be a threat. Europe will have less leverage over Russia, but this may be compensated by Russia’s growing irrelevance for Europe. But negative repercussions for the West will include more competitive Chinese companies benefiting from access to Russia’s cheap natural resources and human capital, as well as a more robust posture of the two P5 members on all issues debated in the UN, G20, WTO and all other international fora and organisations. Last but not least will be the growing capabilities of the Chinese armed forces, as sophisticated Russian weaponry may be a gamechanger in conflicts over Taiwan (the new-generation S-500 air defence system covers all the sky over the island and requires more US investment in Taiwan’s defence) and the South China Sea.

This text is an extract from an EUISS publication Russian futures: horizon 2025