Stratfor describes the growing Russia-China alliance, allies against us

Summary: Hegemons push rival great nations into alliances against them, just as Russia and China are moving together. They’re developing deeper commercial ties, and perhaps even strategic relationships. It’s inevitable given our aggressive foreign policy, putting pressure on China and Russia. Here Stratfor explains their early steps to what might become one of the core alliances of the 21st century.

Putin In Beijing
New B.F.F. — Putin shakes hands with Xi Jinping. Photo by Greg Baker – AFP/Getty Image.

Russia’s Relationship With China Grows Slowly

Stratfor, 3 September 2015

Forecast

  • Russia and China will sign 20-30 large deals worth tens of billions of dollars this week, but the two countries will continue to disagree on many issues, such as the natural gas supply deal. Therefore, substantial deals of the magnitude seen last May are not likely.
  • With Russia and China both experiencing economic slowdowns, China will continue to stall on financing many of these large projects until it can get more favorable terms.
  • In the long term, China will become one of Russia’s major partners, but not as quickly or on as large a scale as Moscow would like.

Analysis

Russia has been touting its “pivot to the east” since the West’s efforts to isolate Moscow in the wake of the government change in Ukraine. Russian President Vladimir Putin said Sept. 1 that Russia and China were making consistent progress toward the creation of a strategic alliance that will play a significant role in international economic relations. Putin is in China from Sept. 2 to Sept. 3 for the country’s commemorations of the end of World War II — a reciprocal visit after Chinese President Xi Jinping visited Russia for its celebrations in May. During Putin’s visit, China and Russia are expected to sign some 20-30 so-called mega-deals, agreements with either high price tags or great strategic importance to either country.

Russia’s turn toward China has been evident in recent years; Chinese foreign direct investment {FDI} into Russia nearly tripled in 2014 from the previous year, to $1.27 billion, making China the second-largest foreign investor in Russia (behind France). This may seem like a small amount, but with FDI into Russia falling to $21 billion in 2014 from nearly $70 billion the previous year, Russia is looking for investment from anywhere.

Moreover, according to the Russian central bank, China was the second-largest source of foreign financing for the non-financial sectors in Russia’s economy in 2014. Chinese lenders let Russians and Russian businesses borrow $13.6 billion. The only country that provided more financing was Cyprus, where Russian-affiliated parties likely provided the loans.

Stratfor: Russia-China foreign direct investment

In May, Moscow and Beijing said trade between the countries would rise from $95.3 billion in 2014 to $200 billion by 2020. But in the first half of 2015, trade between the two fell by 30% compared with the first half of the previous year. In addition, China and Russia have discussed dozens of large projects that Beijing would either invest in or finance. The deals discussed and preliminarily signed amount to hundreds of billions of dollars in investments in Russia. However, Chinese money is starting to flow into very few of those projects.

Stratfor: Russia-China foreign direct investment deals

It is not unusual for China to sign a deal and then take years to sort out the details before starting to finance or pay for the projects — it does this throughout the world. However, the economic conditions in Russia and China are changing. China’s slowing economy leads to lower demand, which means that China’s motivation to make large deals with Russia, particularly for energy, is not as strong.

The Chinese commerce ministry’s director for Eurasia, Ling Ji, said in August that weak oil prices and Russian currency volatility were adding extra risks to Russo-Chinese cooperation. Moreover, while Russia’s commodity prices stay low and Moscow remains isolated from the West, China knows that Russia’s need for investment is becoming more urgent. Thus, Beijing can wait to invest until it can secure the best terms.

An example of this is the large natural gas deal that China National Petroleum Corp. and Gazprom struck in May 2014. The agreement involves building the Power of Siberia pipelines between the countries. Though both countries have begun construction, China has not started giving Gazprom financing for the project. The two sides are still negotiating prices and terms for the natural gas supplies. Russia and China are expected to sign yet another agreement on this deal during Putin’s visit, though it will not be a final agreement on the unresolved issues.

Another critical stalled payment is between China and Russian oil giant Rosneft. In June 2013, Rosneft signed a deal with China to supply $270 billion worth of oil. As part of the deal, China was to pre-pay Rosneft and Russian pipeline company Transneft some $60 billion to $70 billion. Rosneft chief Igor Sechin has said that his company has not received any payments and that it needs the funds to help cover its next round of debt payments before the end of the year. Sechin is in China as part of the delegation accompanying Putin and will try to get the financing moving.

Yet another example is China’s involvement in the Yamal liquefied natural gas project with France’s Total and Russia’s Novatek. The China National Petroleum Corp. was set to lend the project $20 billion of the total $27 billion needed in 2014, but according to Novatek’s majority shareholder, Gennady Timchenko, China has yet to give any funding. With the Yamal LNG facility already under construction, Timchenko has also joined Putin on his trip to China to talk to his counterparts.

Though most of the delays have been in the energy agreements, a few other deals have been stalled. Russian Technologies and China’s Shenhua Group were expected to start construction on a port in Primorsky earlier this year as part of a $10 billion deal to increase coal mining and exports. Construction has yet to begin, though it is unclear why.

This is not to say China is stalling on all the deals it has struck with Russia. China has invested $425 million in the Amur Rail Bridge and $830 million in a timber plant in Tomsk. However, the so-called mega-deals have yet to come to fruition. China will continue to be one of Russia’s more important partners, just not on the timetable and breadth Moscow wants.

Russia’s Relationship With China Grows Slowly
is republished with permission of Stratfor.

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11 thoughts on “Stratfor describes the growing Russia-China alliance, allies against us

  1. Some – maybe useful – background. Take a look at slide #37 of the following presentation I gave some 9 months ago.

    The message: An anomaly is coming to an end. The consequences of the onslaught by colonial powers onto China and India are a thing of the past. These countries are in the process of retaking their historic positions. Against this background one should not be surprised that Russia (and also Iran?) will orient themselves more towards China and India, and less towards the western countries.

    Moreover: Hostility between Russia (and also Iran?) and the western countries – for whatever reason … – will only accelerate this process.

    Mazzel & broge / kind regards, Evert Wesker

    1. Evert,

      That is a compelling historical context for predictions about China and India. The flip side of the coin is the existance of the “middle income trap”. See a brief explanation at The Economist, and a detailed explanation in this IMF paper.

      Shifting to a shorter-term perspective, forecasts about China tend to depend on two factors: opinions about the drivers of growth, and the nature of China’s leaders. If you think markets and freedoms are the keys to breaking out of the middle income trap, and that China’s leaders will not take this last step to follow the West — then you probably believe China will not get rich. If otherwise, then you probably believe it will.

      China has other challenges, such as pollution and demographics. But nations often overcome such things, depending on their choices on the big questions.

      My guess: I don’t know.

  2. Totally trivial but I keep being amazed at how short Putin is. He probably avoids photo ops with Obama although Putin’s muscular build would help some. I wonder what will happen to Russia when he dies or retires.

    1. Great picture, FM, but there is a small but measurable chance that Photoshop was involved at some point in the production process :)

      On a more serious note, the picture is an exaggerated but accurate metaphor for the current state of journalism in the world. Give us something that makes us smile and reaffirms our tribal view of the world and we will overlook certain issues with reality and logic. That one picture summarizes the entire Fox News business model that is now being emulated (with varying degrees of skill) by nearly all TV news sources.

      It is an especially nice metaphor in that it can be interpreted in so many ways:
      1) The obvious (to us) photoshopped image that is ridiculous
      2) Putin astride the resurgent Russian bear, giving it focus and direction
      3) Putin not watching where the bear is going but protecting it from external threats
      4) Putin not watching where the bear is going and losing focus at a critical moment
      5) Somebody in the Pentagon deciding that, yes, Putin rides bears in his spare time and we need to start a research program to match the Russians in this key area
      6) Putin, like so many previous leaders, claims to be more than human and SHOULD rule all of humanity

      This was all I could think of after 2 minutes but I am sure that a skilled PR man could easily extract double my meager thoughts.

    2. Pluto,

      You are overthinking this. The photos of Putin are demonstrations of his alphaness: playful, contemptuous of the conventions, arrogant, and regarding as a joke the norms that the rank-and-file must live by. that he can do this shows his power over the system. Betas men cheer, enjoying the vicarious wish fulfillment. Women, see and cheer the alpha male.

      Note about “alpha males” — it’s a description about pack animals, but a false metaphor. In fact it applies best to human packs, and best to humans — hence its intuitive appeal. It’s a key concept to understanding dynamics almost everywhere — bars to cube farms of corporations. For example, what distinguishes sexual harassment from playful advances? If the women appreciates the man’s behavior, which is often linked to his status as alpha or lesser males.

  3. I forgot your 2012 article, FM. Nice prediction, as usual.

    I’m sorry, but I have to disagree with your thesis on the alpha male. I agree that Putin shows all of the hallmarks of an alpha male and I agree with your comments about his pride and ability to ignore norms. Undoubtedly a subset of women will be attracted to him; humans are capable of an amazing range of behaviors, and a lot of those behaviors are stupid.

    Over the short run the alpha male CAN defy gravity but over the longer run they always fail, usually bringing down ruin and destruction on their followers. Yes, the alpha male can leave his mark on the world (the Napoleonic code of justice, for example) but they are outsmarted by other men or by circumstances beyond their control.

    On the subject of women being attracted to people, I find myself agreeing with Lisa (aka OldSkeptic). Women who are natural followers, who do not believe themselves capable of adding value other than by cleaning and raising children are attracted to the alpha male. Personally I believe, this lack of self-worth in a mate is part of why alpha males fall.

    Women who want a partnership, not a dictatorship, who want to be in charge of their lives and futures to one degree or another are attracted to a totally different breed of man. These men are smart, humble, flexible, have a good sense of humor and look to others for advice and guidance. The combined family unit is a better partnership than that of the alpha male and is far more likely to survive turbulent times and to raise children who are fit to deal with the future.

    Donald Trump is an alpha male. Is he, in your opinion, a good husband or parent?

    Stepping back a bit and taking a wider view, if the country is about to hit another major slowdown (which seems quite possible at the moment), Donald Trump is going to be very well placed to win the Presidency. Do you think he will be a good President?

    1. Pluto,

      I have no idea to what you are responding to, as I said nothing remotely like most of your comment. So you are not “disagreeing” with me. I said only that Putin was acting like an alpha male. And that many women often like advances from alpha males.

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