China cashes in on Russia's shrinking economic options

The economic synergies between energy-rich Russia and resource-hungry China may appear obvious, but mutual suspicions have long kept them apart.

But now, amid Western sanctions blocking Russian access to European and US capital markets, Russia and China have agreed to new deals that go beyond traditional energy and arms sales – giving Moscow some economic relief at a sweetheart deal for Beijing.

During a three day visit to Moscow that ended Tuesday, Chinese Premier Li Keqiang signed 38 new deals with Russia, including a big expansion in Russian gas sales to China. Russian President Vladimir Putin sealed a huge $400 billion gas contract with China in May, but the fresh deal would reportedly double that. Moscow also reportedly agreed to sell some of its most advanced weaponry to Beijing.

China-Russia trade has grown from around $40 billion to $90 billion in the past six years, but Mr. Putin said Tuesday that it's set to jump to $100 billion next year and $200 billion by 2020. By comparison, Russia's trade with the European Union in 2012 totaled around $340 billion. 

It's a golden opportunity for China to leverage Russia's political problems with the West and nail down long-term oil and gas contracts at knock-down prices, say experts. "The fact is that China needs energy, and we have it. Russian negotiators are not fools, they know what the bottom line means," says Alexander Salitsky, a China expert with the official Institute of World Economy and International Relations in Moscow. "What we see is a long-term mutually complementary relationship taking place here, at an accelerated pace."

In addition, the Chinese are taking advantage of Russia's limited access to Western capital. New Chinese projects include a reported $10 billion commitment to upgrade Russia's railroads, a "strategic partnership" between Russia's state oil company Rosneft and China's CNPC, and a proposed joint development of a long-haul passenger jet.

Sanctioned Russian state companies may also find some relief, though it's not clear that Chinese banks can compensate for their loss of Western capital markets. China's Export-Import Bank agreed to provide extensive credit lines to two heavily sanctioned Russian banks to buy Chinese products.

In the most politically charged deal, the two countries have agreed to a $24 billion yuan-ruble currency swap between their central banks, which will be used to finance bilateral trade using local currencies rather than US dollars.

Russia's immediate political need is allowing China to "realize its ambitions on the world stage," says Fyodor Lukyanov, editor of Russia in Global Affairs, a leading Moscow foreign policy journal. "China is not interested in allying with Russia against the West. But Chinese strategic concerns are growing rapidly," he says. "They don't care about Ukraine, but they are learning that military and political power counts as well as economic might." 

And while China remains on the sidelines in Ukraine, the deal with Moscow allows Beijing to signal its sharp disapproval of Western sanctions as a political tool to force Russia to change its policies.

"The Chinese have always been against sanctions on principle. They perceive that if the West can use this method to successfully pressure such a big country as Russia, then might not China be next?" says Mr. Salitsky. "So, they're happy to join with Moscow to expand business in defiance of Washington."