by Luke Rodeheffer, analyst at Global Risk Insights
Does the recent gas deal between Russia and China signal a broader geopolitical alliance between the two countries, or is it simply an economic partnership?
The recent announcement of a massive $400 billion gas deal between Russia and China has rightly been taken as part of a Russian pivot eastward, alongside increasing joint military exercises between the two countries and attempts to limit the use of the US dollar in trade.
There are a number of reasons to doubt that the deal signals the economic foundation of a new anti-Western world order, however. Although many of the details remain secret, Beijing clearly had the upper hand: most prominently, the Chinese have been able to use contracts with Turkmenistan as grounds for decreasing the price from Gazprom’s original offers during negotiations.
Although China had the upper hand in the deal, will it still provide a tangible benefit for Russia as it heads toward recession and faces potentially $220 billion in capital flight for the first quarter of 2014? The Moscow Higher School of Economics has estimated that the deal will only increase Russia’s rate of investment by 0.7% between 2014 and 2016, with no observable increase between 2017 and 2020.
The costs for constructing the necessary infrastructure are estimated at $55-60 billion, and likely will be paid mostly or entirely by Russia, as there are fears in the Russian press that China would prove a merciless creditor. Putin has floated a risky plan to recapitalize Gazprom with Forex reserves in order to deal with the costs, and Russia’s finance minister has proposed paying for the project’s enormous costs by using money from the country’s $87.5 billion National Wealth Fund in order for the pipeline infrastructure to be completed in six years.
The gas deal took place amidst not only the Ukraine crisis but also the emergence of Beijing as a major power in Central Asia. China demonstrated its influence in post-Soviet Central Asia in 2008, when it defended the interests of Central Asian states that were resisting Moscow’s pressure and refusing to recognize the independence of the breakaway regions of Georgia that Russia occupied in the aftermath of the Russo-Georgian War.
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The formation of the Eurasian Union, which will include the Customs Union member states of Kazakhstan and Belarus as well as Armenia and Kyrgyzstan, is driven partly by Moscow’s interest in maintaining its “privileged sphere of influence” in Central Asia, which is increasingly feeling China’s rising regional clout and need for raw materials.
Uzbekistan was the only post-Soviet Central Asian state which had a larger trade volume with Russia than with the middle kingdom in 2013, as trade volume between the region and China has increased one hundredfold since the end of the Soviet Union. The increasingly protectionist nature of the Customs Union will likely increase as Russia enters recession, and protectionist measures have already targeted trade between China and Customs Union states, with several anti-dumping investigations already being enacted targeting Chinese imports in 2014 and support being given to Russian manufacturers of goods that are traditionally imported from China.
There are a number of other areas where Russia and China face diverging economic and geopolitical interests. One of the most glaring examples is China’s southern neighbor, Vietnam, which is currently engaged in an increasingly nasty dispute with Beijing over territorial claims in the South China Sea.
Vietnam and Russia established a comprehensive strategic partnership in 2012, and cooperation in many spheres, particularly military, continues: Russia is building a submarine base for the Vietnamese while supplying Hanoi’s military with submarines and fighter jets. India purchased nearly $5 billion in arms from Russia last year. Russia’s desire to remain a vital player in the global arms market will likely continue to collide with China’s geopolitical interests, and may even be challenged as China itself plays an increasingly prominent role in the trade.
This is to say nothing of Russia’s continuing fear of losing its Far East to China’s economic and demographic preponderance. This fear manifests itself in Russian attempts to attract investment from Japan and other schemes to prevent the region from becoming dependent on exports of raw materials to China and investments from the Chinese State Development Bank.
The gas deal with Russia is one of a series of energy deals that China has been pursuing across the post-Soviet sphere, which reached an apex last fall as Chinese President Xi Jinping traveled across Central Asia, meeting with heads of state in order to complete deals worth tens of billions of dollars. Although this deal definitely signals closer cooperation in energy, it does not indicate that an alliance is being formed.
