On 14 October, Russian Prime Minister Vladimir Putin wrapped up his two-day tour to China where he met with Chinese President Hu Jintao and his counterpart Wen Jiabao. Putin had embarked on the Chinese trip with the aim of attracting as many trade deals as possible from China. The Russian Prime Minister achieved his goal by securing around 40 agreements worth US$3.5 billion.

Gas Deal

The framework agreement on gas supplies between Gazprom and CNPC, which builds on an earlier pipeline deal from 2006, is the centrepiece of the deals announced this week. The move allows Russia to continue diversifying its energy exports away from its traditional markets in Europe, and will help China to sustain its dizzying economic growth. Currently China imports no gas from Gazprom, but now it is hoped deliveries will commence in 2014-15, reaching China either by new pipelines or in liquefied natural gas form aboard tankers. The pricing formula still needs to be agreed; Russia would like it to mimic those with Europe that peg the price of gas to that of crude oil. Gas is by no means the only Russian energy export to China. It agreed earlier this year to a 20-year oil supply deal in return for US$25 billion in credit for state oil company Rosneft and state oil pipeline monopoly Transneft.

Other Agreements

The package of the agreements includes, amongst others:

• Chinese Development Bank extends a US$500-million credit line to Russia's Vnesheconom Bank (VEB), while the Agricultural Bank of China refinances the Russian VTB bank with another US$500 million. Securing the credit line is significant for the cash strapped Russian banks severely hit by the global economic crisis.
• A joint Russian–Chinese venture for production of high-speed train locomotives that will eventually boost the construction of railroads across vast swathes of China and Siberia. The details of this deal have yet to be clarified.
• Chinese construction company Gu&Lun together with Russian Central Trade Company will invest US$630 million in building a Trade and Exhibition centre in Yekaterinburg, Russia.
• A VEB–Chinese Export-Import Bank deal to invest US$52.34 million in developing a cement plan in the central Russian region of Penza

Outlook and Implications

For decades Russia has had rocky relations with its powerful eastern neighbour, but now Russian strongman Putin has decided to set these aside and embrace closer economic co-operation. There are many reasons behind the change of heart but perhaps the most obvious is that Russia has what China lacks and vice-versa. Russia needs manpower, finance and technologies to develop the scarcely-populated but resource-rich Siberia, while China is thirsty for more raw input into its economy.

The deals have not escaped controversy, however. Russian critics of the deals say they are effectively selling Russian Siberia to China. The reason behind this criticism is that 90% of the deals hinge on the export of Russian gas, wood, fish and other natural products. The Chinese are hard to bargain with on price and most of the technologically advanced work will be done in China. While no details on pricing have been released yet, it can be expected that China will get the energy at preferential prices, something that Russia may have to accept with demand from Europe having declined over the past year.

The economic context for the deals is starkly different in the two countries; while Russia's economy is set to shrink by up to 8% this year, China's economy has emerged as one of the most stable in the global economic downturn, and could be set to grow by the same amount.

Political Overtones

As already indicated, the Sino-Russian trade deals are significant not only commercially, but also politically. They underline both countries' desire to diversify their economies away from reliance on the West, with all this entails for global diplomacy. For China's part, this priority is also seen in its warming relations with Japan and South Korea (cemented in the recent landmark trilateral summit where the countries pledged to work towards a closely integrated East Asian community). Closer economic relations are likely to go hand-in-hand with closer diplomatic co-operation. Both China and Russia are already permanent members of the UN Security Council, but are keen to increase their global influence further. Warming relations between Russia and China are seen in the West both as a danger and an asset for global political and economic stability. However, by and large it should be noted that the Sino-Russian relationship remains one based on pragmatism and self-interest. There remains mistrust and it will take longer for strong mutual trust to be established.

Global Insight (Reino Unido)