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OPINION

That's what Xi said: Why Russia is too weak a partner to satisfy China

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Although Russian propaganda provided grandiose coverage of Xi Jinping's visit to Moscow, it lacked substance. The communiqué merely repeated what had already been stated numerous times, consisting of signed declarative papers. As a finale to the Kremlin's efforts to portray its relations with China as more successful than they truly are, Vladimir Putin announced the “impending conclusion” of a new gas supply contract under the Siberian Power-2, without any supporting evidence. No joint documents mentioned it, and the Chinese side remained silent on the matter.

Russia has a comical history of fabricating information about the Siberian Power-2 in an attempt to prove that the initial gas contract was not merely a de facto transfer of two Eastern Siberian fields to China but the commencement of a global gas shift to the East. However, the “U-turn” did not go as planned. In May 2015, eight years ago and following the first and only significant gas contract with China, Gazprom declared the signing of a “heads of agreement” for supplying 30 billion cubic meters of gas via the western Altai route (later known as the “Siberian Power-2”) with China's CNPC.

During that time, the head of Gazprom, Miller, boasted that the purportedly signed agreement comprised “more than a dozen legally binding articles.” He also claimed that the terms of pipeline construction, minimum annual contract quantities, daily contract quantities, main parameters of quality specifications of gas supplies to China, and the location of the point where the gas pipeline would cross the Russian-Chinese border had all been determined.

A year later, a significant embarrassment arose regarding this “heads of agreement” when CNPC head Wang Yilin revealed on Russia 24 that he only became aware of the agreement's details through the media. Today, it has become evident that Gazprom's assertions about agreeing on numerous details regarding gas supplies through Altai were a trivial falsehood all these years. This is because there are no plans to construct a gas pipeline through Altai at all, and Putin and Gazprom are now discussing an entirely different route - through Mongolia (which the Chinese side has never confirmed).

With this in mind, there is no credibility to Russian statements about “advancing” the negotiations on the Siberian Power-2. China simply does not need so much additional gas from Russia - it has practically covered all of its own needs for decades to come with its own production, LNG imports, and pipeline gas from Central Asia and Myanmar.

Besides gas, Putin doesn't have much in his portfolio. It's worth noting that since the war began 13 months ago, no Chinese investors have announced their entry into significant projects in Russia, which is an essential point that isn't discussed much. We were promised that Chinese companies would replace Western companies that were withdrawing, but that hasn't happened. There are various reasons for this, including the risk of secondary sanctions, the depressed Russian domestic market making it challenging to earn profits, and new strict military regulations on capital movement, such as restrictions on currency operations and the need to obtain special permits for buying and selling Russian assets, causing headaches but little benefit.

Another fundamental problem is that unlike the West, which Russia tends to demonize, Asian countries, particularly China, have no interest in becoming donors to Russia's development on the same scale as Western countries have been for the last three decades. Despite how much Russia portrays the West as a deceitful adversary, all of Russia's development and modernization since the 1980s have been achieved through Western capital, technology, and knowledge. However, Asia is definitely not prepared to become a donor for Russia's modernization on the same scale. Make no mistake, none of the Asian countries are interested in Russia’s emergence as a new and powerful competitor in the production sector.

Asia is definitely not prepared to become a donor for Russia's modernization on the same scale

One of the most remarkable examples of this problem is the joint high-tech project with China to create a new wide-body aircraft, the CR929. When this project emerged 11 years ago, it was promised that the collaboration of Russia and China would create a competitor to Boeing and Airbus. However, what happened in the end was that the Russians were told that they would not be allowed to participate in the marketing of the aircraft in China. This made it unclear what the purpose of Russian participation in the project would be. Last year, Deputy Prime Minister Yuri Borisov acknowledged that the Chinese were gradually withdrawing from cooperation with Russia in this project, and that “the project is not progressing in a way that suits us. China is becoming less interested in our services… our participation keeps decreasing.” Recently, Deputy Prime Minister Denis Manturov announced that Russia is downgrading its status in the project from a full partner to a supplier of units and components. This means that the airplane will be built, but without Russia.

In fact, Russia's main role in its economic relations with China seems to be that of a supplier of raw materials at throwaway prices. Based on the known volumes of pipeline deliveries through the Siberian Power pipeline (15.5 billion cubic meters) and revenues ($4 billion), the price of gas supplies to China through pipelines is estimated to be around $260 per 1,000 cubic meters, which is significantly lower than the prices of LNG in Asia (about $1200 per 1,000 cubic meters) and Europe (in excess of $1300 on average, TTF Hub). Coal is also sold at huge discounts: according to Maxim Basov, SUEK's General Manager, in Asian markets, including China, “our discount may reach 50% or more compared to similar products from Australia.”

The economic cooperation between Russia and China is largely one-sided, with Russia mainly exporting cheap raw materials to China and importing consumer goods and industrial products of inferior quality, in large part because logistics costs make goods from China more expensive than those from traditional European suppliers located closer to the western part of Russia where the main economic activity is concentrated.

Can China assist Putin in bypassing Western sanctions? While some efforts have been made, there are limitations to this approach. Recent complaints from Russian officials and businessmen complain that working with Chinese counterparts has become increasingly challenging. This is due, in part, to the fact that Chinese banks are closely connected to the global financial system. For instance, if a Russian bank is cut off from SWIFT, Chinese banks are likely to refuse to work with it.

The noticeable lack of progress and tangible results after Xi Jinping's visit to Russia indicates that the potential for reorienting economic flows to China has reached its limit. Russia has attempted to develop economic ties with China by increasing the volume of raw material exports, but this strategy is ineffective as prices in this market are often unfavorable, and it will do nothing for the Russian economy and the budget. Furthermore, even though gas supplies via the Siberian Power are exempt from taxes, this does not address the growing budget deficit.

A key message from China to Russia is that it does not intend to provide the same level of support for Russia's development as the West did. China has made it clear that it will only provide minimal assistance to keep Russia afloat and should not expect any donations from China. Nor does China does want to ever see Russia as a competitor in the high-tech market.

This does not mean that China is unwilling to cooperate with Russia - Xi Jinping still needs Putin as a “bad cop” to confront the West, which China is not willing to do directly. Putin's aggressive stance against Western democracies provides China with a certain advantage in international politics, as it allows China to maintain a good image while Russia takes the blame for aggressive actions. This strategy is often referred to as “if you do not agree to my terms, I will call the gang,” with Putin and his circle playing the role of the gangsters. China benefits from Putin's ongoing conflict with the West over Russia’s aggression in Ukraine, as it strains Western resources.

China benefits from Putin's ongoing conflict with the West over Russia’s aggression in Ukraine, as it strains Western resources

On the flip side, the Chinese partners are highly practical and have no intention of bearing the entire burden of rescuing Putin's system, which is both inefficient and ineffective. It cannot fight competently or manage the economy and has already destroyed and ruined practically everything. The same holds true for the proposed Chinese weapons supplies to Russia, which would seriously damage China's international reputation without helping Putin to win the war. At least China will be hesitant until it has full control over the situation, but as we know, Putin insists on controlling the course of the war himself.

As a result, Xi Jinping's recent visit to Moscow appears to have been unproductive. It is likely that he wanted to hear Putin's plan for getting out of the difficult situation he has created. However, judging by the weak final statement, Putin failed to convince his Chinese counterpart. China will likely continue to offer minimal support to Russia as a useful ally against the West, but it is not interested in saving or promoting the prosperity of Putin's inefficient system.

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