3 ways China and Russia are forging much closer economic ties

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When they last met, in February in Beijing during the Winter Olympics, they stated that their friendship knew “no boundaries.” Since then, Russia has sought ever closer ties with China, as Europe and the United States responded wave after wave of sanctions to the invasion.

Beijing has carefully avoided violating Western sanctions or providing direct military support to Moscow. This balancing act, experts say, is a sign that Xi will not sacrifice China’s economic interests to save Putin, who arrived this week at the Shanghai Cooperation Organization summit in Uzbekistan with his army withdrawing from large swaths of Ukrainian territory. .

But the trade relationship is booming, in a lopsided way, while Russia is desperate for new markets and China – an economy ten times its size – is looking for cheap raw materials.

Record trade

China’s spending on Russian goods rose 60% in August from a year ago, to $11.2 billion, according to Chinese customs statistics, more than 49% gain from July.

Shipments to Russia rose 26% to $8 billion in August, also faster than the previous month.

In the first eight months of this year, total trade in goods between China and Russia rose 31 percent to $117.2 billion. That’s already 80% of last year’s total — that stood at a record $147 billion.

“Russia needs China more than China needs Russia,” said Keith Krach, former United States Secretary of State for Economic Growth, Energy and the Environment.

“As the war in Ukraine continues, Putin is quickly losing friends and becoming more and more dependent on China, whose economy is ten times that of Russia,” he added.

For China, Russia now accounts for 2.8% of total trade volume, slightly more than its share of 2.5% at the end of last year. The European Union and the United States have much larger shares.

China was already Russia’s largest trading partner before the war, accounting for 16% of total foreign trade.
But the world’s second-largest economy has taken on much greater significance for Russia, which has been plunged into recession due to Western sanctions.

The Russian central bank stopped publishing detailed trade data when the war in Ukraine started. But Bruegel, a European economic think tank, recently analyzed statistics from Russia’s 34 largest trading partners and estimated that China accounted for about 24% of Russia’s exports in June.

“China-Russia trade is booming as China is taking advantage of the crisis in Ukraine to buy Russian energy at a discount and replace Western companies that have left the market,” said Neil Thomas, senior China analyst at Eurasia Group.

Russia ousted Saudi Arabia as the main oil supplier to China in May. According to the latest Chinese customs data, Moscow has maintained that top spot for three consecutive months through July.
Chinese coal imports from Russia also reached a five-year high of 7.42 million tons in July.
Coal in freight cars for shipment at the Tomusinskaya train station near Mezhdurechensk, Russia, on Monday, July 19, 2021.

Yuan the new dollar in Russia?

The war in Ukraine has also boosted demand for the Chinese yuan in Russia, as Western sanctions largely cut off Moscow from the global financial system and restricted access to the dollar and the euro.
Yuan trading on the Moscow stock exchange amounted to 20% of the total trading volume of the major currencies in July, up from 0.5% in January, according to Russian news media company Kommersant.
Daily trading volumes in the yuan-rouble exchange rate also hit a new record last month, surpassing the ruble-dollar trade for the first time in history, according to Russian state-controlled media RT.
According to statistics published by SWIFT, the messaging system used by financial institutions worldwide to process international payments, Russia was the world’s third largest market for yuan payments outside mainland China in July, after Hong Kong and the United Kingdom. The country was not even on the SWIFT list of 15 yuan markets in February.

Russian companies and banks are also increasingly turning to the yuan for international payments.

What is SWIFT and how is it used against Russia?
Last week, Russia’s Gazprom said it would start billing China in yuan and rubles for natural gas supplies, while Russia’s VTB bank said it would launch money transfers to China in yuan.

For Beijing, it is a boost to its ambitions to make the yuan a global currency.

Russia’s increased use of the yuan is also helping to advance China’s long-term goals of turning the redback into a global currency, isolating itself from Western financial sanctions, and increasing its institutional power in international finance. said Thomas from Eurasia Group.

For Russia, this partnership with China is “born out of desperation,” Krach said.

“Because Russia has been severely weakened, in part by sanctions, Putin is willing to make a deal with a predatory power as long as it gets access to capital,” he added.

Chinese companies fill the vacuum

Chinese companies are also benefiting from the exodus of Western brands from Russia.

Chinese smartphones accounted for two-thirds of all new sales in Russia between April and June, Reuters reported, citing Russia’s largest electronics retailer M.Video-Eldorado. Their total share in Russia has steadily increased from 50% in the first quarter, to 60% in April and then to more than 70% in June, according to M.Video.
Xiaomi was the best-selling smartphone maker in Russia in July, with 42% of the market, according to Russian media Kommersant.
Samsung (SSNLF)once the market leader, had just 8.5% of the market in July. Apple (AAPL) held 7%. The two companies accounted for nearly half of the Russian market before the invasion of Ukraine, but suspended sales of new products in the country after the war started.

Chinese cars have also flooded Russia.

According to the Russian analysis firm Autostat, passenger cars from Chinese manufacturers accounted for almost 26% of the Russian market in August, the highest on record. That compared to just 9.5% in the first quarter.
Major global auto players, including Ford and Toyota, have withdrawn from Russia this year.

Borders in ‘no borders’ partnership

But there are also significant limitations in the China-Russia partnership, analysts say.

China does not provide military, commercial or technological support that would “risk significant US sanctions against China,” Eurasia Group’s Thomas said.

“Beijing will not sacrifice its own economic interests to support Moscow,” he said.

Fearing a backlash from the US, China has so far “steadfastly” refused to violate international sanctions against Russia, forcing Moscow to request military support from North Korea, said Craig Singleton, senior China fellow at the DC-based Foundation for Defense of Democracy.

“Beijing’s refusal to violate US and international sanctions reflects its grudging acceptance that China will remain dependent on Western capital and technology to support its continued development, even though Xi is personally inclined to assist Putin’s war efforts,” he said. .

In addition, China’s rapid economic slowdown this year will further curtail Xi’s willingness to help Putin. The Chinese president does not want to risk anything that further destabilizes the economy just a few weeks before he is poised to secure a historic third term at the Communist Party Congress.

What the future has in store

Future relationships are likely to remain tense, and China will want to keep its options open, analysts said.

“There has always been mistrust between the two regimes, which historically treated each other as rivals,” Krach noted.

The current Sino-Russian partnership is primarily a “defensive one,” bolstered by Beijing and Moscow’s shared view that NATO and the United States pose a “tangible threat to national security,” said Susan Thornton, senior fellow and visiting lecturer at the United Nations. Yale Law School.

“Russia’s war in Ukraine is not in China’s interest, but given the Western hostility, China will not oppose Russia,” she added.



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