Leering bear, rising dragon

Two months ago, the
BRIC countries – Brazil, Russia, India
and China – came together in
the Russian town of Yekaterinburg to challenge
the global dominance of the United
States. At the core of this new grouping
lies a G2. Not the putative link between China
and the US,
but an “eastern G2”, a Sino-Russian alliance. Yet like the Sino-Soviet link of
old, this new relationship will end in tears for Russia. 

The basis for the
Russia-China rapprochement was already laid by Mikhail Gorbachev in the latter
part of the 1980s and built upon by Boris Yeltsin during the 1990s. But under
Vladimir Putin the link has taken off, underpinned by a shared weltanschauung, defined largely by
rejection of US
dominance and support for the principle of non-interference in the
internal matters of all states.

But there are other reasons for Moscow
and Beijing,
who share a 2,640-mile frontier, to cooperate. Trade is one. In 2006,
commercial ties hit a record 33.4 billion U.S. dollars, up 15 percent from the
previous year. Russia is now
China’s eighth largest trade
partner and China is Russia’s fourth
largest trade partner.

Energy
links represents a particularly important item on the Russian-Chinese agenda.
As a result of China’s
surging economy, Beijing
has become one of the world’s largest purchasers of oil, natural gas, and
nuclear technologies.

In early 2009, China
agreed to lend $25 billion to Russian oil and pipeline companies in exchange
for oil deliveries. Under the agreement, Russia’s state-owned Rosneft will
get $15 billion in loans from the China Development Bank to supply 15 million
tons of oil per year. Another $10 billion will go to Russia’s
Transneft pipeline company, which is building a new oil line to the Chinese
border from East Siberia.

Then there is defense industrial cooperation. For over a decade,
Russian military exports to China
have constituted the most important dimension of the two countries’ security
relationship. Russian firms have derived substantial revenue from the sales, which
also helped sustain Russia’s
military industrial complex during the lean years of the 1990s. China’s
People’s Liberation Army was, in turn, able to acquire advanced conventional
weapons that Chinese firms could not yet manufacture.

Military-to-military links have also increased. In late July,
Russian and Chinese militaries took part in a five-day joint exercise involving
3,000 army soldiers, 300 armored vehicles and 45 aircraft.

But despite these points of convergence, the Sino-Russian relationship
is destined to falter. The signs are already apparent. Though China’s
loans-for-oil deal is seen as a breakthrough, it took nearly eight years to
negotiate after an agreement on the pipeline was initially signed in July 2001.
Russia
only agreed to the deal under pressure of the worldwide economic crisis. And even
then, Moscow
has kept Chinese oil companies at arms’ length. China
has largely been barred from establishing a presence in Russia’s
oilfields.

The military dimension is also fraying. Like all other
exporters, Russia fears that
China
will produce cheap knock-offs. So far, Moscow
has balked at selling its SU-33 carrier-based fighter jets for this reason
while China has already
copied Russia’s
SU-27K fighter in violation of previous agreements. The Chinese defense
industry can now produce its own sophisticated armaments and will account for
less and less of Russia’s
weapons exports.

Soviet
premier Nikita Khrushchev may have promised to bury the
West, but economically China is
likely to bury Russia.
In
the next ten years, China’s
economy is likely to increase at a rate 7% – 8%, despite the economic crisis. Russia meanwhile
is propped up by its large, energy reserves – thus making it vulnerable to
world prices — and has struggled to diversify its economy.

Illegal Chinese
immigration will also grow, gradually extending Beijing’s
reach into Russia’s
demographically and economically stagnant eastern regions. Today, 6.7 million Russians
face over 100 million Chinese who live in the border provinces of Heilongjiang, Jilin, and
Liaoning. Cut
down by the economic crisis, Russia
is struggling to promote economic development in these regions and provide
attractive incentives for internal migration.

Even on energy
cooperation, Chinese decision-makers are taking an increasingly hostile view of
Russia.
Moscow’s consistent delays in shipments,
foot-dragging on the issue of pipeline construction, and attempts to play
Chinese, Asian, and European companies against each other have bred suspicion
in Beijing.

Though Russia has fought long and hard to keep the America out of the Caucasus, here too the real
threat is from China.
China-bound oil and gas pipeline projects in Central Asia are already competing
against Moscow’s
projects to tie Central Asian petroleum and power supplies to the Russian
system.

But this is only
one part of the region’s eastward re-direction. Chinese companies are grabbing
more of the region’s business while state-owned investment vehicles are thickening
ties. China’s Export-Import
Bank is lending the Development Bank of Kazakhstan
$5 billion, and CNPC is lending Kazmunaigaz National Co., Kazakhstan’s state-run gas giant,
another $5 billion. China
is now controls over about 15 percent of Kazakhsan’s total oil output. Apart from lending Kazakhstan
money, China is also
building power plants in Tajikistan
and Kyrgyzstan and pipelines
in Turkmenistan.
 

Economic ties
between China and the Caucasus have grown across a range of sectors. From
having virtually no trade links in 1991, the volume of trade from Caucasus to China is comparable with that of Russia. In 2006,
the volume of trade between Russia
and Central Asia was of the order of $14.9 billion, while that between China and Central Asia
was $10.8 billion.

Future trends will
push Russia and China further
apart. Though a split will take a few years to emerge, it will be driven by
divergent economic and strategic interests. Enmity of the US may keep Moscow
and Beijing
close today, but in future this glue will be insufficient. Expect cracks in the
alliance to become visible in 2011, fifty years after the original Sino-Soviet
split.