Sep 3, 2015 | 09:15 GMT

5 mins read

Russia's Relationship With China Grows Slowly

Russian President Vladimir Putin (L) shakes hands with Chinese President Xi Jinping.
(GREG BAKER/AFP/Getty Images)
Forecast Highlights

  • 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.

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 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.

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 percent 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.

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.

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