Russia-China ties strengthen as global recession looms

The much-vaunted economic recovery from the Covid-19 pandemic was short-lived. The global economy is now once more in the midst of a slowdown – the sharpest after any post-recession recovery since 1970.

In this context, there is a growing recognition in Europe that the burgeoning Chinese economy can be seen from two angles.

From a political perspective, it can be seen as a threat because of its widening influence and continued engagement with Russia. Ironically, though, a purely economic approach to China’s continued growth ends up with precisely the opposite conclusion: China’s economy – and the boost it gets from Russian supply – can be seen as something of a lifeline for Europe.

In the US, the Federal Reserve is ratcheting up interest rates at the fastest pace since the 1980s, and the resultant strengthening of the dollar has caused global shares to drop some 25% in dollar terms in their worst year since 1949.

In Europe, the supply-side shocks resulting from sanctions have unleashed rampant inflation and wiped out growth forecasts for the coming years. Berlin’s recent announcement of a €200 billion gas price relief scheme has driven a wedge between Germany and its poorer neighbors, casting doubt on the possibility of a collaborative European response to the coming turbulence.

Cuts in oil production that were recently agreed by OPEC+ members will also soon translate into squeezed production dynamics in the wider market. Members say that the cuts, which have angered Washington, are an attempt to balance oil markets in anticipation of future contractions.

While growth is also slowing in China, it is still projected to be in the black this year. As the largest goods exporter and a huge contributor to commodity demand, the world’s second-largest economy remains one of the most powerful engines keeping the wheels of international trade turning.

In part, China’s continued growth comes down to its readiness to buy Russian goods on favorable terms for its own market. Its neighbor to the north provides a steady flow of hydrocarbons, metals, fertilizers, and value-added products, including from the petrochemical and forestry industries.

Friendship without limits

Whatever the political ramifications of the partnership, there is no denying that Sino-Russian economic cooperation is booming. Russia expects bilateral trade with China to reach a historical maximum of US$200 billion by 2024.

China’s imports of Russian coal and natural gas, meanwhile, already reached an all-time peak this August, according to data provided by the Russian Embassy in China.

For some Russian companies, this pivot toward China began long before February 2022. Petrochemicals manufacturer Sibur, for example, has been in the Chinese market for more than 10 years, supplying base polymers and rubbers.

Former chief executive officer Dmitry Konov, who left the company this year after Western sanctions were imposed against Russian businessmen, set this Asian direction in motion. Looking beyond the Russian market’s prevailing norms, he cultivated close ties with China, spotting the Asian market’s potential early.

As a result, Sibur became the first foreign company with which China’s state-owned oil and gas conglomerate Sinopec cooperated on petrochemistry, creating a joint venture in 2013 in the form of a synthetic-rubber plant in the Siberian city of Krasnoyarsk.

In 2015, Sinopec became a minority shareholder in Sibur, and the two companies have since launched various joint projects.

Sibur now has plans to increase exports to China by a further 40% in the next five years, targeting particular growth in sales of liquid chemical products and expanding its product line.

Cooperation between the Chinese and Russian markets is not a particularly new phenomenon, then. But the current geopolitical situation has certainly provided both countries with an urgent impetus to accelerate the strengthening of economic ties.

If you build it …

One significant hurdle remains in the Russian pivot toward China: infrastructure. Russia deals mostly in commodities, and getting them from source to foreign markets requires a huge network of railways, ports, airports, roads and pipelines.

While some of these arteries are already in place, many fall short both in capacity and in number.

The gas sector provides a fitting example. The Power of Siberia Pipeline was launched in 2019 to connect Russian gas fields to Chinese markets, and is expected to carry 38 billion cubic meters of gas per year when it reaches full capacity. Even then, the annual amount of gas flowing to China through the Power of Siberia will still only total around a fifth of what Europe was buying before February.

The recently announced Power of Siberia 2 pipeline is unlikely to add to the capacity of gas heading toward China any time soon. The project is not expected to go online until 2030, according to The Moscow Times.

Yet the demand for more Russian gas is clearly there. Two Chinese distributors, ENN and Zhejiang Energy, recently signed contracts with Russia’s largest gas producer Novatek for increased supply of liquefied natural gas. Novatek will provide them with 600,000 metric tons a year from its upcoming Arctic 2 project for the next 11 years. In 2021, Novatek committed to sending China’s Shenergy more than 3 million metric tons of LNG per year for 15 years.

These new contracts will necessitate a surge in maritime traffic between the two countries, and Novatek has already commissioned Russian shipbuilder Zvezda to build 15 new ice-class LNG carriers. But creating the infrastructure to increase Chinese shipments to match the level of the European market will be a significant logistical challenge for Russian gas producers.

As well as more physical infrastructure, increased Sino-Russian cooperation will mean more shared financial infrastructure. Here too, the two countries seem to have been laying the groundwork for the past decade. The share of bilateral settlements between Russia and China using the yuan rose from 3% in 2014 to almost 18% in 2020. In the Russian National Wealth Fund, meanwhile, the yuan occupies a 30% share of the overall currency structure.

Last month, Russian state-owned gas giant Gazprom signed an agreement to start switching payments for Chinese gas deliveries to yuan and rubles instead of US dollars. Other major Russian manufacturers, including Sibur, have also begun switching to the yuan for Chinese exports, while Novatek is taking Chinese loans in the national currency.

The result is that China’s otherwise anemic demand is being shored up in large part by booming imports from Russia. In the first eight months of this year, bilateral trade between the two countries jumped by 31% to a total of $117.2 billion.

The appetite for closer economic relations between the two countries seems as fierce as ever, and it comes at a time when many Western policymakers are nervous about China’s growing economic heft.

A paper prepared by the European Union’s foreign service and presented to ministers on Monday reportedly says that “China has become an even stronger global competitor for the EU, the US and other like-minded partners,” paving the way for a recalibration of Sino-European relations from limited engagement to all-out competition.

But while Europe’s largest economies grind to a halt, the increasing trade between Russia and China is one of the factors helping to keep the global economy buoyant.

Of course, recognizing this uncomfortable economic reality would mean relegating some sizable political questions to the margins. But sooner or later European politicians will have to hold a more nuanced discussion about the Sino-Russian partnership.