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Economy

Slim pickings so far from closer Sino-Russian ties

Economic gains from planned regional links may be many years away

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Russian President Vladimir Putin, right, shakes hands with his Chinese counterpart Xi Jinping after making a statement following their talks at the Kremlin in Moscow on July 14.   © Reuters

During President Xi Jinping's sixth official visit to Russia in July -- his third this year -- he reaffirmed the special friendship between the two countries. Russian President Vladimir Putin's foreign affairs adviser, Yuri Ushakov, portrayed Russia-China relations as "the best in history."

Xi also reiterated the Chinese government's commitment to the integration of the Russia-led Eurasian Economic Union and China's flagship Belt and Road Initiative -- a proposal unveiled in May 2015.

Political ties between the two countries are warm, they respect each other's core national interests, there is good personal chemistry between Putin and Xi, and China has been Russia's largest trade partner for the past six years. Despite this, progress in linking Russian and Chinese regional economic projects has been slow. Economic gains, particularly for the private sector, are likely to be years away. Why?

The Eurasian Economic Union, established in January 2015, has an "exclusive architecture" -- membership is limited to former Soviet republics. Yet just months after its establishment Moscow linked the union with the BRI, an economic endeavor launched in 2013 that has a global and very inclusive architecture.

China has invited all states in all continents to participate in what Xi has called "the project of the century," and portrays its unfolding project as a platform for better and increased international economic and financial cooperation, and corresponding policy coordination.

Thus far the Chinese-led plan, technically still in its design and planning stage, has focused on filling the critical infrastructure vacuum that persists throughout the Eurasian continent and beyond. For instance, in Pakistan there is much emphasis on developing a functional nationwide electricity grid so that industry can take off.

Bolstering trade

More than 60 states, large and small, have already committed to participate in the Chinese initiative, or indicated strong interest. In contrast, the Eurasian union has five member states: Russia, Kazakhstan, Belarus, Armenia and Kyrgyzstan. Among other objectives, it concentrates on strengthening its internal market by bolstering trade -- including through tariffs on imports from non-members -- and so far looks very much like a customs union.

Members also anticipate that the bloc will give them larger sway over world economic affairs than they would be able to achieve individually. Concurrently, the union supports Russia in reassembling former Soviet states around itself in closer economic union.

Since the two initiatives were linked there has been little progress on the ground. Few projects have materialized. Those that have are often large politically-driven transnational projects in energy and infrastructure -- such as the eastern route of the China-Russia natural gas pipeline -- that would probably have happened anyway. The Russian and Chinese private sectors have yet to see increased investment and exports. So far, the linkage is largely symbolic.

The two initiatives are both young, which could be an advantage in the integration process. However, they are different in character -- the EEU is much more institutionalized than the BRI, for example. How does one successfully match two such contrasting developing economic endeavors?

Policy advisers and analysts on both sides cautioned from the outset that integration would require many years of research, and negotiations on particulars -- especially the regulatory framework for trade and investment. An agreement on an anticipated preferential trade zone might take 10 to 20 years, and expectations of short-term progress should be moderate.

China has even been pushing for a preferential trade zone among Shanghai Cooperation Organization members, which include Russia and four other former Soviet republics, and, as of this year, India and Pakistan. But it may have underestimated the political and economic disincentives for Russia to sign up. Moscow would prefer the fledgling Eurasian union to flourish, and does not wish to see it eroded by an alternative scheme. Ties with the more flexible BRI permit Russia more leeway to shape cooperation.

But why did Russia decide to tie its scheme to China's in the first place?

Among a host of other drivers, the fallout from the Ukraine crisis -- in which sanctions have limited Russia's economic options with the West and its allies -- acted as a catalyst for Moscow. Russia was already excluded from economic blocs such as the European Union, the Trans-Pacific Partnership (abandoned by the U.S. in January), and the pending Transatlantic Trade and Investment Partnership. The BRI, in contrast, welcomed Russia.

Lost face

The Eurasian union was also rebuffed by most global major economies, and Moscow subsequently lost face. Linking it with the Chinese-led plan grants it much-needed international esteem.

The aggregate nominal gross domestic product of the five economies of the Eurasian union represents only 2% of global GDP, and their largest export product by value is hydrocarbons. The only notable economies among the five are Russia and Kazakhstan. Russia's share of the union's GDP is 87%, yet it has no more than 20% of its total voting power. Apart from Russia, all other members are landlocked.

The BRI's scale and multi-decade timeframe makes it too large to avoid: It has become the organizing principle of China's entire foreign policy. Through it, Eurasian union members may receive much-needed Chinese investment capital, although this is already happening in Belarus and Kyrgyzstan, for example, independently of the linkup.

These capital transfers may foster some of the objectives of the union by boosting the fledgling economies and contributing to local job creation. This in turn could help fend off the threat of Islamic extremism and the dangers of turmoil akin to the so-called color revolutions, which swept through the former Soviet Union and the Balkans in the early 2000s. It also lessens Russian institutional and trade dependence on the West.

For China the link does not necessarily provide big advantages, or drawbacks. China needs Russian and Central Asian territory for the land corridors of the Silk Road Economic Belt, a component of the BRI, to traverse the Eurasian continent and reach European markets. Alternative corridors would need to run through the unstable Middle East and are a perilous alternative.

The rationale for the linkup is comprehensible, as is endorsement from the highest political echelons in Moscow and Beijing. When Putin attended the first BRI Forum in May as a special guest, he reiterated the importance of greater Eurasian integration and of the Sino-Russian strategic friendship.

While political support for closer relations is strong, it remains unclear whether these two frameworks will ultimately supplement one another and strike a mutually beneficial balance between regionalism and globalism.

Yet even if these ties have not created much economic buzz so far, they have contributed to a Eurasian spirit of cooperation led by two key states. That is itself a major achievement.

Richard Ghiasy is a researcher in the Stockholm International Peace Research Institute's China and Global Security Program.

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