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Putin Statements Belie China Problem

Chinese Premier Li Keqiang (right) meets with Russian President Vladimir Putin in Beijing on September 2.
Chinese Premier Li Keqiang (right) meets with Russian President Vladimir Putin in Beijing on September 2.

President Vladimir Putin likes to paint a rosy picture of Moscow's trade relations with Beijing when he claims China is Russia's antidote to Western economic sanctions.

But to make the argument, he has to be selective with his statistics.

Ahead of his two-day visit to Beijing that began on September 2, the Russian leader told media the sanctions over Ukraine had spurred a shift to China for Russian businesses and that "Russian-Chinese ties have reached probably their highest level in history and continue to develop."

He said in a September 1 interview with TASS and Xinhua that in 2014, "despite unfavorable trends in the global economy we managed to maintain our trade turnover, which reached around $ 88.4 billion."

What he failed to say was that mutual trade fell 29 percent in the first half of this year. Nor did he note that the drop means there is almost no possibility that the two countries will reach their previously stated goal of growing their trade turnover to $100 billion this year.

One reason for not mentioning the drop in trade might be that the almost 30 percent plunge down to $30.6 billion is a sobering measure of how much current global economic conditions limit the prospects of China becoming a counterbalance to Russia's worsening relations with the West.

Trade Unrequited: Top Russian, Chinese Trading Partners Compared

Commodities Glut, Shaky Ruble

Aleksandr Gabuyev, head of the Russia in the Asia-Pacific region program at the Moscow Carnegie Center, says the biggest problem is low global commodities prices, for everything from oil -- Russia's main export -- to other raw materials like steel. The prices of all have fallen dramatically over recent months due to oversupply and fears of an economic slowdown in China, the world's largest commodity importer.

"More than 70 percent of Russia's exports to China are commodities and that is definitely reflected" in the drop in the value of the trade turnover, Gabuyev notes.

At the same time, the drop in commodity prices has caused Russia's ruble to fall repeatedly since last year, with its current value of almost 69 to the dollar its worst in months. That has eroded Russia's purchasing power for Chinese goods, adding to the drop in Russian-Chinese turnover.

The ruble's roller-coaster ride has also complicated Moscow's hopes that China's financial sector could provide a substitute for Russia being cut off from Western financial markets over its actions in Ukraine.

"The volatility of the ruble worries Chinese investors because they cannot calculate any reasonable financial models for different projects' costs in rubles" so long as the currency's exchange rate remains so unstable, Gabuyev says.

Equally important is the chilling effect of the Western sanctions on Chinese investors who are tied into Western financial systems.

"China does not recognize the sanctions but many state-owned banks, not to mention private funds and private companies, are using the U.S. financial system, have their presence in the U.S. market, and probably won't offend the U.S. regulators," Gabuyev notes.

"So all the new credit agreements that we see between Russia and China are going through Chinese policy banks -- the Ex-Im [Export-Import] Bank and the Chinese Bank of Development -- which pretty much shows the state of trade investment relations."

China's Export-Import Bank and Bank of Development are state banks whose activities reflect Chinese foreign policy, not market dynamics.

However, there are some bright spots in the Russian-Chinese trade picture that help Moscow present its turn to China as welcome news despite the sobering larger picture.

Those bright spots focus on flagship projects between the two governments, such as the recently launched construction of a pipeline to carry natural gas from Russia's Far East to China. During Putin's visit to China in May 2014, Russia's Gazprom signed a $400 billion contract for gas delivery to China over the next 30 years, a deal Putin says will help turn Russia's eastern region into the world's largest construction site. China began constructing a portion of the pipeline on its territory in June.

Another flagship project is a planned high-speed-rail link inside Russia, running from Moscow to Kazan.

Before the sanctions over Ukraine, Russian officials had hoped to attract European investment for the project. In June, they obtained Chinese partners instead and Putin has said both countries are ready to invest a total of 1 trillion rubles ($15 million)

But the project could end up as a more of a showcase of China's economic muscle than of Russian capabilities.

Gabuyev says a Chinese company has won the design contract and "it is clear the Chinese are going to build this railway and they are going to finance it."

That fits Chinese interests because it offers Beijing a new market for one of its key exports: infrastructure projects abroad that help to keep employees of its own oversized infrastructure-construction sector employed and also generate a return on investment.

But for Moscow, the project appears to have more finite goals. It offers Russian companies a role as subcontractors and, once complete, will generate tax and other revenues.

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