November 19th, 2014
11:24 AM ET

Is Russia cozying up to China?

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By Global Public Square staff

Everyone was talking about the moment at last week's APEC Summit in Beijing when Russian President Vladimir Putin draped a shawl over the shoulders of China's First Lady. Many claimed he was flirting. Who knows if he was, but there's no question that Putin IS trying to woo the Chinese.

Last Sunday, Moscow and Beijing signed an accord to develop a second gas route to supply China with Russian gas. And, just 6 months ago, the two nations struck another energy deal – this one a 30-year blockbuster, worth $400 billion.

The Russians reportedly hope that soon China will become their biggest gas consumer. Are we seeing the consolidation of a Russia-China axis?

Well, not quite.

For China, the mega gas deals would help officials diversify away from coal, which would lower pollution levels, which have caused significant public concern in the country. But for Russia, the situation seems more desperate. Remember oil and gas not only accounted for 70 percent of Russia's exports in 2012, but also for more than half of its federal budget income, according to the U.S. Energy Department, which cites PFC Energy Research.

And thanks in part (but only in part) to falling oil and gas prices, Russia's economic outlook is bleak. Western sanctions have crippled the Ruble, which so far this year has tumbled by about 30 percent against the dollar, according to FactSet data. Russia's inflation rate reached 8.3% in October.

The Central Bank has had to raise interest rates to 9.5 percent, and still not much capital is flowing into the country. Don't forget, European nations are Russia's biggest crude oil and gas importers. And many of them have, of course, been looking for ways to curb their dependence on Russian energy in the wake of the Ukraine crisis.

So, Russia is right now contending with falling gas prices and the potential winnowing away of its main market for that gas. To us, the proposed deal with China seems to speak more to Russia's desperation than to Putin's powers of persuasion: He needed a deal…and fast.

And it seems in his haste, he left some things on the table. The Moscow Times reported that China has gotten the "upper hand" in the gas deal. The paper quoted a Moscow think tank director, who says that for Russia "[t]he profit margin for the Chinese contracts would be close to zero."

Beijing got a great economic deal because it's saving the Kremlin from its increasing isolation. After all, this is a very unequal partnership. Russia imports more goods from China than anywhere else in the world. But look at this list of China's top import markets. Russia ranks 10th on that list, according to MIT's Observatory of Economic Complexity. And remember that the Chinese economy today is ALMOST five times the size of Russia's and that gap is likely to grow over time.

There's no doubt that for now, the deal helps Russia enormously and China likes having a partner that is large, global, influential and like Beijing, wants to distance itself from the U.S. and its influence. But over time, don't be surprised if this marriage turns out to be a troubled affair, one of convenience more than true love.


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