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The impending era of volatility in the EU and the United States, precipitated by the Brexit referendum and looming U.S. and German elections, is not the best news for Russia, despite the possibility of eased sanctions. In this context, and in the wake of another visit by President Vladimir Putin to Beijing last month, it is important to understand how successful Russia has been in developing its pivot to the East that began two years ago, when Western countries sanctioned Russia following the annexation of Crimea.
The Russian elite is disappointed with the policy. Russian officials and businessmen have discovered that it’s hard to do business with the Chinese and that they shouldn’t expect swift results, and are reluctant to change their long-standing business practices to suit their new partner.
Most importantly, the elite still hasn’t figured out what this new friendship is. Is it just a tactic in Russia’s game against the West, or a separate and rational strategy? The Chinese are also asking themselves whether Moscow is genuinely interested in building serious relations with Beijing or simply using the Chinese card to bargain with the West. Both sides are cautiously watching each other, and the few major deals that they’ve made came mainly as a result of the personal relationship between Putin and his Chinese counterpart Xi Jinping.
The disappointment with the pivot stems from unrealistic expectations. After the spring of 2014, when Russia annexed Crimea, many government officials and oligarchs began out of desperation to believe their own mantras. They convinced themselves that sanctions weren’t a real threat to Russia, especially if it partnered with China. Then they began measuring progress against their expectations, and inevitably, reality fell short.
But there’s no sense in blaming the Chinese for the current situation. For the past fifteen years, Moscow has paid scant attention to Asia and China—except whenever it had problems with the West.
This sporadic interest in the East, as well as the unwavering conviction that the mighty Russia shouldn’t be reduced to the role of a mere supplier of raw materials to Asia, has hampered the development of a coherent strategy. Meanwhile, more pragmatic players, from Australia to Kazakhstan, have occupied potential Russian export niches on Asian markets.
The pivot to Asia didn’t just come too late. It came amid the perfect storm. A drop in raw material prices, as well as China’s economic slowdown, substantially cooled Chinese interest in Russian resources. Sanctions discouraged Chinese banks from entering into transactions with their Russian counterparts. President Xi’s anti-corruption campaign stupefied the Chinese government apparatus and the management of state-run companies.
Russia’s constant policy changes (take the discussion about more taxes on the oil industry, for example) and unfavorable investment climate don’t help to attract outside investors. Chinese investment in Russia totaled $560 million in 2015: less than 0.5 percent of China’s foreign investments.
But despite these catastrophic conditions, the pivot to China is indeed happening, just not on the unrealistic scale that Russian propagandists expected. China’s share in Russian trade has been growing, although the total trade volume fell 28.6 percent last year. According to Russia’s central bank, China lent $18 billion to Russian businesses in 2015, making it their second biggest creditor after Cyprus, whose loans to Russian companies mostly originate in Russia anyway.
In 2015, Russia became China’s second-biggest oil supplier after Saudi Arabia, and in the last three months it moved into first place. Russia and China are growing more dependent on each other, though this dependence is not yet that significant and could be reversed.
But if current trends (low raw material prices, sanctions, and no structural reforms) continue in the medium term, the dependence will not only grow, it will become asymmetrical: Russia will need China much more than China needs Russia. Moscow will increasingly become Beijing’s “little brother.”
Judging by how often Russian officials and experts repeat that Russia is not China’s “little brother,” this idea really worries them. Creative references to Russia as a “big sister” only reveal their concern even more: an older sister is weaker physically, but is an important woman in the family hierarchy who must be looked after.
Russian foreign policy is so fixated on the idea of equal partnership that it has lost sight of the pragmatic tasks of how to benefit from the partnership most effectively and with minimal risks. That’s how the Chinese leaders framed the question in the 1970s, at the outset of their country’s rapprochement with the United States. If Beijing had devoted its energy to thinking about how not to end up as the “little brother” of the United States instead of integrating into the global economy, there would have been no Chinese economic miracle.
The notion of being China’s “little brother” is merely an emotional label that has no practical meaning. It is not the problem. The real problem is that unless the Russian government and business community make a conscious effort, the partnership will increasingly favor Beijing.
The Chinese understand a win-win idea differently from the Russians. For them, it’s not a roughly 50/50 deal; it’s any deal ranging from 99/1 to 1/99, where the specific ratio depends on the negotiations. The only alternative is not to make a deal and make no money at all. As Russia grows more and more dependent on China, that ratio will be shifting closer to 1/99 in China’s favor.
To bring the numbers closer to the prized 50/50, Russia will have to do some homework. First of all, without structural reform and improvement in the investment climate, no deal with China or any other external player will be possible.
Secondly, sanctions will be a conspicuous obstacle to enhancing ties with an increasingly global Asia, as will choosing to remain outside integration projects such as the Trans-Pacific Partnership trade agreement, which China itself has not ruled out joining. Any barriers to Russia’s integration with the rest of the world should be gradually lifted, within reason.
Finally, success in the global world is impossible without a wealth of knowledge. Without developing its expertise—and not only with regard to China—Russia will not succeed.
This article originally appeared in Russian in Vedomosti.
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