Russia has also become a lot more important to China

Published by Nikkei Asia on May 3, 2024, 05:00 JST

Image of dependence on Beijing overlooks role of geoeconomic strategy

Western sanctions against Moscow have focused attention over the last two years on the critical support China has provided for Russia's wartime economy.

What has been often overlooked is the part Moscow is playing in Beijing's geoeconomic designs. As bilateral trade and economic connections grow, Russia is filling a unique and vital role in China's plan to protect its economy against Washington's competitive de-risking strategy.

Despite Western condemnation of Chinese support for Moscow amid the war in Ukraine, Chinese President Xi Jinping is doubling down on his relationship with Russia.

Last month, Xi received Russian Foreign Minister Sergey Lavrov in Beijing. Preparations are underway for Russian President Vladimir Putin to visit Xi in China next month and for the two leaders to meet on the sidelines of the next Shanghai Cooperation Organization summit in Astana, in July as well as other events.

Much has been said about the significant asymmetrical leverage China has over a globally isolated and economically enfeebled Russia. But this is just one aspect of the bilateral relationship.

It is important to note that Xi's geoeconomic strategy focuses on three interconnected elements: strengthening China's economic and technological security and sovereignty, diversifying trade links with non-Western states and maintaining China's position as an irreplaceable center of global manufacturing and technological supply chains.

Russia plays an important part in each of these elements.

First, Russia is a major energy, agricultural and defense technology partner for China.

China, which is always sensitive to energy and food security matters, has swiftly taken advantage of Russian oil, gas, grain and fertilizer prices depressed by sanctions and the loss of European markets.

Russia's defense industry, under stress from the conflict in Ukraine, sanctions and reputational damage, is also much more open to Chinese demands today than before the war began in 2022, including providing access to previously off-limits technologies.

In 2023, Russia became China's largest oil supplier, overtaking Saudi Arabia, as shipments rose 24% to over 107 million metric tons. As a result, Russia provided close to 19% of China's overall oil imports.

Secondly, Russia is a large market for Chinese goods and services at a time when the Chinese economy faces significant internal headwinds, overcapacity issues and pressure from Washington's ever-widening trade and technology restrictions.

China's two-way trade with Russia reached $240 billion last year, up 26% from 2022. Imports from Russia increased 13%. While trade volumes will fluctuate, the trajectory is set to continue upward.

Chery Automobile cars imported into Vladivostok: Russia is now the top export market for Chinese carmakers.   © Reuters

Last year's surge meant that Russia overtook Australia and Germany to become China's sixth-largest trading partner.

In particular, Russia became the top export destination for Chinese carmakers who rushed to fill the gap left by departing Western brands. Over 900,000 Chinese cars were shipped to Russia last year, overshadowing second-place Mexico's import of 415,000 vehicles.

Russia and China are also busy expanding inland trade infrastructure -- railroads, ports, roads and storage facilities -- to service burgeoning overland trade as an alternative to maritime corridors which could be susceptible to instability in the Middle East and potential U.S. blockades.

In a sign of how deepening economic integration and pressure from Western sanctions are affecting companies in the two nations, Russian metals company Nornickel indicated last week that it will effectively move a copper plant from the country's Arctic region to China to get better access to new machinery as well as to the world's biggest metals market.

Thirdly, Russia is serving as an important laboratory for Beijing to wargame its economic resilience in the event of large-scale economic conflict with the West as might be triggered by war in the Taiwan Strait or an escalated trade war if Donald Trump returns to the White House.

Despite being the most sanctioned and globally isolated major power in recent history, Russia has demonstrated incredible survival skills that China is keen to learn.

Chinese economic policymakers are studying Russia's economic and monetary policy responses to Western sanctions and economic warfare, just as diligently as Beijing's military planners are scrutinizing Russian performance on the battlefield in Ukraine.

In Russia, China is also testing the viability and limitations of its currency systems. With Moscow seeking to de-dollarize its economy, 42% of all foreign currency trading on the Moscow Stock Exchange in 2023 was in yuan, more than three times as much as the year before. The dollar's share, meanwhile, declined to 39% from 63%.

Russia is, of course, no substitute for China's trade and investment relationships with the U.S., the European Union and Japan.

But Beijing's broader geopolitical objective is to dilute American power. China is betting on the staying power of its economy and trade, which remains robust. If Beijing can credibly demonstrate that it can replace the West in Russia's supply chains and energy trade, it will be yet another convincing reinforcement of its status as the world's most indispensable economic power.

By both design and circumstance, China and Russia are working together on making American economic power look replaceable. They have created alternative global economic institutions and strategically focused their economic and diplomatic attention on relationships with countries in the Middle East, Africa, South America, and South and Southeast Asia offering an alternative to the Western rules-based order.

China has also developed its indigenous capabilities and platforms to reduce technological and financial reliance on the West. Russia is following suit, albeit on a smaller scale. China has the capacity to do this alone, but with a major power such as Russia working with it in unison, Beijing gains credibility for its claim to leadership in a multipolar world.

China and Russia each play a weak hand in competition with the U.S., but a combined strategy of chipping away at the rules-based international system -- especially its economic dimensions -- is working well for Putin and Xi.

While the geoeconomic alignment between China and Russia is evident, it faces significant risks and hurdles. Just as Lavrov was meeting Xi recently, several Chinese banks blocked Russian payments for Chinese electronic components, likely due to the threat of U.S. sanctions. Whether that was an isolated incident or a structural adjustment by Chinese strategists remains to be seen.

Pragmatic and self-centered, China and Russia each see trade and economic connectivity as key to their survival and resilience. In war and in peace, as fragile and asymmetric as their partnership may seem, Russia and China's grand geoeconomic play is vital and set to become even more prominent.