Russian President Vladimir Putin completed his fourth state visit to China last weekend, following the Shanghai Cooperation Organization (SCO) summit in Tashkent. At the conclusion of his visit, the two countries announced that 56 economic deals had been signed, totaling $50 billion in investment. More than 60 percent of those agreements – $30 billion in projects — are either already underway or near start-up. Russia has invited Chinese state owned enterprises (SOEs) to take a minority stake in Rosneft, the Russian oil giant, and they are expected to accept the offer, which will focus on expanded Rosneft infrastructure in the Russian far east, to service the growing energy needs of Asian nations, led by China.
During the June St. Petersburg International Economic Forum, President Putin made clear that Russia is negotiating free trade agreements with 40 countries, and there will be a larger economic and financial integration agreement negotiated between China and the Eurasian Economic Union (EAEU), comprised of Russia, Belarus and several Central Asian nations. In Beijing, Putin and Xi Jinping agreed to create a clearinghouse for trade between the two nations in their own currencies — the yuan and the ruble.
One of the flagship joint projects that progressed during Putin’s visit to China is the Moscow-to-Kazan high-speed rail project, which is part of a larger long-term plan for uninterrupted high-speed rail links between St. Petersburg, Moscow, and Beijing.
Since Xi Jinping took power in 2013, China has placed great emphasis on the “One Belt-One Road” (OBOR) project for Eurasian integration, through a series of high-speed rail links extending from central China to Atlantic Ocean ports in Western Europe; and through maritime routes extending from the South China Sea through the Indian Ocean, up the Suez Canal into the Mediterranean. China has already invested heavily in the Greek port of Piraeus, which is now being expanded by the Chinese firm COSCO (China Overseas Shipping Company). During his June visit to Central Europe, President Xi Jinping signed agreements with Serbia to build up a Danube River port near Belgrade, which will link to Pireaus via new rail projects.
These Chinese investments are part of an institutional structure that has been established since the July 2014 BRICS heads of state summit in Brazil, where the five BRICS countries (Brazil, Russia, India, China, and South Africa) created a New Development Bank (NDB) to finance infrastructure projects among those nations and beyond. Since then, China has launched the Asia Infrastructure Investment Bank (AIIB), which has 70 member nations, and has also announced its first infrastructure loans. These infrastructure banks promise to live up to International Monetary Fund and World Bank standards of lending and transparency, and begin to fill a serious vacuum in large-scale infrastructure investment worldwide. Some Western circles caution that the NDB, AIIB, and related new banks could form the nucleus of a new system, in which the post-World War II Bretton Woods institutions are either replaced or put at a severe competitive disadvantage.
Since May, Russia has replaced Saudi Arabia as the number one oil supplier to China, and this relationship is likely to flourish, with the new pipeline and refinery infrastructure planned for Eastern Siberia and the Russian far east.
All of these developments are suggestive of a real opportunity for Russia to become a major player in Eurasian developments that can be driven by China’s nearly $5 trillion in hard currency reserves. Xi Jinping has announced that China will invest $3.5 trillion in the coming six years in these Eurasian infrastructure programs, many of which run through Russia.
At the same time, however, Russia is facing some serious hurdles before it can fully take advantage of the opportunities presented by the Chinese-led efforts to establish the Eurasian land-bridge of transit and development corridors. China has already established major freight rail connections to Iran, Germany, and other European destinations, with transit routes south of Russia.
Russia has been badly damaged by the double-trouble of the collapse in oil prices and the Western sanctions imposed following the Ukraine crisis of 2013-2014. One set of sanctions were imposed after Russia absorbed Crimea, and another more serious set of sanctions were imposed over the Russian backing for separatists in the Donbas region of southeastern Ukraine. The latter sanctions are subject to a six month extension in the coming weeks, and the Crimea sanctions have already been extended through June 2017.
Following the Brexit vote in Britain on June 23, support for continuing anti-Russian sanctions in Europe is declining (the Cameron government in Britain had been one of the strongest boosters of the anti-Russian sanctions by the European Union, which they have now voted to leave), and could end altogether by the end of the year, especially if Russia plays a productive role in implementing the Minsk II Accords to end the Donbas standoff.
But Russian structural economic problems run much deeper. With the brief exception of the Yevgeny Primakov government in the late 1990s, Russia has focused on its energy and strategic mineral exports, at the expense of investment in high-tech industry and internal infrastructure. The crash of oil prices forced further austerity measures, and drove Russia to ever greater dependency on its petroleum and mineral export revenues.
In March, over 1,500 economists and politicians attended the Moscow Economic Forum, organized by the Russian Chamber of Commerce and Industry, which demanded an overhaul of Russian economic policies, placing greater emphasis on industry. Based on the economic downturn in recent years (the IMF recently forecasted that the Russian economy will shrink by 1.5 percent this year), Putin may be facing a more serious challenge in the Duma elections, which will be held in September.
In response to the NATO buildup along Russia’s western borders in the Baltic and Black Sea regions, Russia has vastly expanded its military budget, diverting resources to strategic rocket and nuclear weapons modernization, armed forces personnel expansion, and frequent large-scale maneuvers. There are clear parallels between the NATO vs. Warsaw Pact arms race of the Ronald Reagan era of the 1980s and the present “New Cold War” evolving arms race. Russia cannot sustain such a competitive draining of resources on military buildup — even if direct military conflict is avoided.
And despite the growing strategic partnership between Moscow and Beijing, there are clearly some geopolitical differences that have yet to be fully overcome. These differences could stand in the way of full Sino-Russian economic integration and growth. At the just-concluded SCO summit, Russia promoted the full membership of Iran in the organization, but China objected, and the issue was put on a slow track. China views Iran’s behavior in the Middle East, particularly in Syria, as destabilizing. They see Iran’s continued arming of Hezbollah as another negative.
China’s stalling of Iran’s full accession to SCO membership may have a geopolitical dimension as well. Russia has been strongly supportive of Indian investment in the Iranian port of Chabahar on the Gulf of Oman, which is part of a larger transport corridor project, running by rail into Afghanistan and on to Central Asia. This project bypasses Pakistan, which is a strong ally of China and an important part of the China Maritime Silk Road component of OBOR. China is building rail and pipeline routes to the Pakistani port of Gwadar on the Indian Ocean, in which it is also investing.
While India, China, Russia, and Pakistan — all SCO members (and, except for Pakistan, BRICS partners) — say that the two port projects at Chabahar and Gwadar are complementary and not competitive, the reality may be a little more complex and frictional.
Russia’s other big problem, which could stand in the way of full Russian integration into the Eurasian development plans is that Russia is still influenced by a Putin loyalist oligarchy, which exerts significant influence on the Kremlin’s economic policies. As the Moscow Economic Forum highlighted, Putin has retained his grip on political power by maintaining a balancing act between those oligarchs and other factions that are pressing for much greater capital investment in the country’s broken infrastructure. This balancing act has had the effect of creating an economic policy paralysis that is now impacting on Putin’s own popularity.