Wednesday, October 19, 2016

Russia, China and Eurasian integration

In the last three years, Russia under Vladmir Putin has surprised us by actions in Crimea and Ukraine, and then,  more recently, in Syria. All three have been wildly welcomed in Russia  and, in their own way, successful, and have brought observers to wonder whether Russia is now once agan a geopolitical player, if not the globe, then in Eurasia. Adding to this has been the growing proximity between Russia and China.  Ever since Russia’s estrangement with the West over Ukraine, ties between the two countries have developed in three areas—energy, finance and infrastructure—and now they are reviving in defence

Putin’s first two Presidential terms were from 2000-2008 and seen as political stabilisation and economic growth. The third from 2012 has not quite brought either. Putin began with a three-point plan—prosperity, the rule of law and westward integration. But all three are now in doubt.
The rise in oil prices after 2000 gave Russia a windfall of $1.1 trillion, but today the prices are down three quarters from their peak. According to The Economist average salaries which were $ 850 per month in 2014, were just $ 450 in 2015.
Corruption, western sanctions and low oil price for oil and gas have affected the Russian economy. It has cut Russia off from western capital markets and FDI fell a massive 92 per cent in 2015.  In 2015, its GDP shrank by 4 per cent.
Many people have praised the management of the Central Bank of Russia  which has allowed the rouble to drop in value and channeled dollars to its energy companies and banks to repay debt. Now, with the price stabilising, the CBR reserves are again growing. The rouble’s fall has stoked inflation which in turn has led to real wages falling 10 per cent since 2014 (but they are still triple of what they were when Putin took office in 2000).

 We should not forget the protests of 2011-2012. Following the elections when a majority voted against United Russia party, the Kremlin manipulated the results leading to widespread protests. Putin’s power appeared fragile.

Critics say that it was after the 2011-2012 protests, claiming that the ruling United Russia party had manipulated the results, that Putin began to stage dramatic foreign policy ventures such as the annexation of Crimea to show the public that Russia was still great. In great measure this was based on a massive $ 720 billion programme of arms modernisation that the oil windfall had provided.

Russian support for Putin is based on the same principles as the support for the CPC in China—you deliver economic growth and we will back you and not ask too many questions. However, today with the Opposition cowed down, Putin does not need to coerce the voters, they are apathetic and Putin’s support in Russia remains very high.

The return of a great power

Putin has garnered a great deal of support because of his actions in Crimea, Ukraine and Syria. For Russia and many Russians, the dream of being a great power is a powerful one. Dealings with China, the American willingness to collaborate with Russia on Syria seem to signal that Russia is an equal and once again rival of the US. Putin seems to want to take Russia back to the world where the Soviet Union, US and UK decide the fate of the world and many Russians, too yearn for that past.
Americans may have their exceptionalism, but so do the Russians.

Putin’s action in intervening in Syria in September 2015 were not aimed at merely shoring up an ally or to resolve a huge humanitarian crisis. It was to signal to the US and EU that it was a global power.
The Russian actions have been carefully caliberated. They are not in the American mode to do nation building. Their moves have been surgical and strategic. The bulk of the fighting in Syria has been done by Assad forces and in Ukraine by pro-Russian elements.
Having secured a nominal ceasefire in February, the Russians declared victory and announced a withdrawal from Syria.  In the process, he showed the US to be ineffective and dithering and sidelined Turkey. 

Aggrieved nationalism plays well in China, so does it in Russia. The Kremlin portray the annexation of Crimea and bombing of Syria as defensive actions against the US which in their view had staged a coup in Ukraine. Putin’s latest avatar is as the leader  of a resurgent nation by which he is able to paper over the fact that his country is going through one of the worst economic crises in recent Russian history.

Yet the Syrian action has got Russia and US working together. After the February accord, the two sides have coordinated action and currently seeking to work out a new agreement to make more durable arrangements for a ceasefire as well as to cooperate to defeat the IS.

Sino-Russian entente

 The western embargo of Russia post Crimea and Ukraine has led to Russia turning eastwards towards China. A measure of this is the sharp increase in Russian oil supplies to China. In 2013 the two sides signed the massive  $270 billion  deal  to supply oil over the next 25 years and the following year, another $85 billion pre-paid deal to supply 200,000 bpd of oil. Russia is aiming to supply 1 million barrels per day to China (currently it is around 300,000).
Rosenft and CNPC have also formed a joint venture for exploration and production  in Siberia. This was topped by a $ 400 billion deal to supply gas from western Siberia to China over 30 years.  Once the deliveries began probably in 2018, China would supplant Germany as the primary destination of Russian gas. Of course when the deals were struck, oil prices were above $100 a barrel and now they are $30-40 and the Chinese economy has also slowed down significantly, there are question marks about the pricing of the gas as well. This will reduce both the oil and gas flows, but this  cannot remove the strategic nature of the relationship emerging.

Another area in which the Russians have turned to China because of the western embargo is in the area of finance. According to the Bank of Russia, Chinese foreign direct investment into Russia increased by a factor of five from 2009 to 2014.

Political relations between the two countries are today excellent. The Sino-Soviet border agreement of 1991 removed the one major irritant that could have stalled the process. The 2001 China-Russia Treaty of Friendship needs to be looked at  carefully considering Jiang Zemin signed it with Putin.

It talked about peaceful relations, economic cooperation etc. and Article 16 spoke of  cooperation in   “ economy and trade, military know-how, science and technology, energy resources, transport, nuclear energy, finance, aerospace and aviation, information technology and other areas of common interest.”

But article 9 of the treaty can also ben seen as an implicit defence pact its language is remarkably similar to the one that was their in Article 9 of the Indo-Soviet treaty of 1971. It notes,  “When a situation arises in which one of the contracting parties deems that peace is being threatened and undermined or its security interests are involved or when it is confronted with the threat of aggression, the contracting parties shall immediately hold contacts and consultations in order to eliminate such threats.”

It is not as if the two countries have common security concerns. Russia’s main aim is to create a security buffer between its heartland and NATO in the West, while China’ main focus is on pushing the US back beyond the first island chain in the Pacific.

Arms sales from Russia to China declined after 2006 because of Moscow’s annoyance at Beijing’s copying of Russian designs. But the Russian problems with the West has compelled them to resume sales. So  today, Russia remains the largest external provider of Chinese military equipment. Of course, Beijing has developed a indigenous, high tech defence industry with the abiity to reverse engineer even sophisticated military hardware. But it still needs some  cutting edge stuff like the S-400 Triumf missile defence system of which it will be the first customer. There are also reports of China acquiring 24 Su-35 fighters and there is a lot of work on joint projects on dual use technologies, for example a tie up between Karpesky Labs and the state-owned China Cyber Security company for defence against cyber attacks. In the past two years the ties are going beyond technology transfer.
 In May this year the Russians and Chinese participated in a joint computer exercise  in Moscow on ways to jointly counter a ballistic missile attack. Given the need to exchange information in a sensitive area, it speaks of the enhanced trust between the two.
The essential focus of their new cooperation is in ways to counter the US and its allies. China used to copy Russia, now Russians are sourcing components from China. Russia plans to  buy Chinese diesel engines which they had originally planned to get from Germany for their coastal patrol vessels. In April they discussed exchanging electronic components used in spacecraft construction with Russian liquid fuel rocket engine technology.
Another area of learning seems to be in hybrid warfare, both China and Russia are using a mix of civilian and paramilitary to push back against the West in Ukraine and in South China Sea.

Central Asia

The rise of China and the relative decline of Russia has implications for the Russian near-abroad in Central Asia. This is China’s area of vulnerability, bordering as they do its restive province of Xinjiang. Whereas for Russia these are legacy areas from the days of the Soviet Union.  For China this is also an area of opportunity through which it seeks to enhance its Eurasian vision.

In September 2013, Xi Jinping announced the One Belt One Road (OBOR) plan at a speech in Astana. Over the years, China has signed major oil and gas deals and developed pipelines that have had a significant shift in the economic relations of Central Asian countries in relation to China.
Trade between the region and China has grown from $ 1 billion in 2000 to $ 50 billion in 2013 and then coming down to about $43 billion. Chinese companies own 25 per cent of Kazakh oil production and account for 50 per cent of Turkmenistan’s gas exports. China’s Eximbank is the largest single creditor to Tajikistan and Kyrgyzstan holding 49 and 36 per cent of their government debt.
The 2008-2009 economic crisis marks the point when Chinese trade with Central Asian countries exceeded that of their trade with Russia for the first time. Today, Russian trade with the region is of the order of $27 billion.

Over the years, Chinese infrastructure construction has negated Russia’s advantage as being the best connected to the Central Asian region. Among the projects are:

The Central Asia-China (Turkmenistan-China) 3,666 km long gas pipeline runs from Turkmenistan to China via Uzbekistan and Kazakhstan and was commissioned in 2009. Today this comprises of three pipelines and the fifth pipeline Line D which will go through all five central Asian repubics is under construction.

The 2228 km Kazakhstan-China oil pipeline runs from Atyarau in the Caspian sea to Alashankou in Xinjiang . In future, this will be the main means to tap the huge Kashagan oil field.  

Central Asia is also the region through which Beijing’s ambitious goal of developing overland communications links with Europe under the OBOR. Trains are already running to destinations in Hamburg, Madrid and Teheran. The number of containers travelling by train between China and Europe via Kazakhstan has increased 18 times between 2011 and 2014, and   doubled in 2015  according to KTZ, the Kazakh state railway company.

The route is attractive to electronics companies such as HP — which has helped to pioneer it — for whom the shorter transit time compared to shipping by sea is worth paying for. The journey from China to Europe takes 14-16 days, compared with a month or more by sea, although the cost of shipping one container is some $9,000 compared with $3,000 by sea.

Russia has its own Eurasian Economic Union plan, but as of now it appears that China is leading the game. Beijing has been careful not to over-step, it has agreed to coordinate OBOR investments between the AIIB and the World Bank and ADB. In May 2015 bowing to the inevitable, the Russians sign an agreement with China to coordinate the projects.

As for China, it is only beginning its grand One Belt One Road design which could see much greater investments in transportation infrastructure in the Central Asian republics and their closer economic and political integration with China which, in turn, is merely a prelude to a closer Eurasian integration under Beijing’s auspices in the coming half century.

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