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Moscow and Beijing Likely to Become Closer

Tags: Putin , Russia , Xi Jinping , Obama , Natural Gas

Saunders, Paul J.

May 01, 2014

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Russian President Putin will be visiting China in late May at a time when Russia increasingly finds itself isolated following its annexation of Crimea. Western sanctions are driving Moscow and Beijing closer together, and this could prove awkward for Japan, Paul Saunders notes, which seeks Russian gas but is also receiving signs from Washington to limit commercial ties with Russia.

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Despite some disappointment that the United States and Japan did not reach an understanding on the Trans-Pacific Partnership trade agreement, President Barack Obama’s recent trip to East Asia has apparently helped to reassure US allies and partners and produced some modest accomplishments, such as a new defense cooperation agreement with the Philippines. Nevertheless, Obama’s personal diplomacy is one effort among many in the region—and it may soon be overshadowed by another leader’s visit, when Russian President Vladimir Putin arrives in Beijing for talks with China’s Xi Jinping, now expected on May 20–21.

Putin’s trip comes at a tense time in East Asia. But, of course, everything seems to be coming “at a tense time in East Asia,” and it is far from clear when this “tense time” will end because it is far from clear whether, when, or how the two main drivers of the region’s uncertainty—China and North Korea—will alter their conduct.

With this in mind, it may actually be more important that Putin’s meeting with Xi comes at a tense time in Europe, where many believed that the arrival of the twenty-first century had put an end to such problems. Russia’s annexation of Crimea has forced an unwelcome change in this thinking.

Deepening Standoff

This matters in Asia because the confrontation between the United States, Europe, and Russia over Ukraine continues to escalate with no obvious resolution. The April 17 Geneva agreement on de-escalating the crisis offered brief hope but now appears to have collapsed due to a combination of Moscow’s unwillingness or inability to influence Russian-speaking groups occupying government buildings in eastern Ukraine and the Kiev government’s creative legal maneuvers, such as incorporating right-wing militias into a new National Guard so that they are no longer “illegal armed groups” and need not be disarmed under the deal.

The United States and the European Union have responded to this with new sanctions on Russian officials, legislators, and others; Washington has also sanctioned many new banks that US officials allege are connected to Putin associate Gennady Timchenko. American and Russian officials don’t appear to be communicating effectively with one another, and expanding violence in Donetsk and other cities in the country’s eastern regions could spiral beyond anyone’s control.

The deepening standoff—especially between Washington and Moscow, as European governments are more reluctant to risk a conflict—is putting heavy pressure on Russia’s weak economy, producing massive capital flight, a softening stock market, and a sliding ruble. Russia’s economic officials have also acknowledged negative GDP growth in the first quarter of 2014.

In practical terms, this likely has less to do with sanctions against Russia than it does with Russia’s conduct and the uncertain endpoint of the crisis, both of which deter foreign investors even as they encourage Russia’s wealthy to seek safe havens for their money, ideally beyond the reach of both Western and Russian officials.

New Gas Deliveries to China?

Worse from the Kremlin’s perspective are US threats of so-called “sectoral sanctions” that could target Russia’s energy and/or banking sectors. When combined with growing EU resolve to cut energy imports from Russia by exploring options for new domestic production and expanding imports from alternative suppliers, this could send Russia’s federal budget—in which over half of revenues come from oil and gas taxes—into deficit.

Before the crisis, the Russian government already faced some unpleasant decisions in the oil sector, where excessive tax rates are discouraging new production to replace disappearing output from aging oil wells. Moscow’s problem is that the deep cuts in tax rates necessary to boost investment would sharply reduce revenues at a time when the Kremlin’s budget commitments to social spending are only increasing.

© ruben van eijk (CC BY 2.0)
© ruben van eijk (CC BY 2.0)
As a result, top Russian energy experts told me in Moscow last week that Gazprom is virtually certain to make significant price concessions so that Russia and China can finally sign a long-awaited natural gas deal under their existing framework agreement when Vladimir Putin visits Beijing later this month. Gazprom’s deputy chief executive Alexander Medvedev has since then publicly stated that he expects to sign the agreement. Executives at Novatek, Russia’s second-largest gas producer, also expect to sign a contract for liquified natural gas deliveries to China.

Russian officials increasingly appear to believe that growth in the Russia-China economic relationship may offset any damage to Moscow’s trade ties with Western countries. Russia is prepared to conduct this trade in Chinese yuan, if necessary, to stay beyond the reach of dollar-oriented financial policy measures.

Russia’s efforts to expand its non-US and non-European markets is likely to put Japan in an especially awkward position, with strong economic imperatives arguing in favor of expanded energy relations—especially if Russia’s energy companies are somewhat more flexible on pricing—and equally strong political signals from Washington to limit commercial ties to the country. In addition to the narrow issue of new sales for Russia’s firms and new taxes for its government, US officials are also concerned about Moscow’s access to key technologies.

Russian experts believe their country’s energy sector can get most of the technology it needs from China but acknowledge that only the United States and Japan can provide some LNG equipment.

A broader question is how far this new Russia-China cooperation may extend beyond energy exports. Of perhaps greatest importance to the United States and its allies in Asia is that Russia’s arms exports to China have slowed significantly in recent years, in part due to Moscow’s intellectual property concerns. Renewed high-tech arms exports could contribute substantially to China’s military modernization.

Though Russia itself may have reservations about stepping onto this path, a worsening confrontation over Ukraine may lead them to conclude that they are already on it—whether they want to be or not.

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