China in the spotlight

There was a notable eastward shift at last week’s VTB Capital Investment Forum in Moscow as Prime Minister Vladimir Putin geared up for a key visit to China this week.

Under Putin and Dmitry Medvedev, Russian governments have long sought to build stronger economic and trade ties with China, and key to these efforts are securing long-term oil and gas contracts. But pricing disputes have prevented any conclusive deals, and the two countries are also rivals in defense spending, which in China has far outstripped Russia’s as Beijing seeks a stronger voice on the world stage.

Economically, Russia currently needs China much more than China needs Russia. While both countries are lumped together in the BRIC grouping, China’s is miles ahead of Russia in terms of economic growth.

Recently Putin has been quick to brandish terms like «strategic relationship» when it comes to talking about China. In September he said that the two countries had «common challenges, common problems and common views on many of the events taking place on the international stage».

But while this partnership may hold firm when it comes to jointly vetoing UN resolutions on rogue Middle East leaders, it has yet to translate into better economic relations.

Analysts say economic ties between the two countries remain just that – very modest. A report by the Stockholm International Peace Research Institute released last week warned that Russia’s relations with China were growing increasingly uneasy given China’s growing clout on the world stage.

«In the coming years, while relations will remain close at the diplomatic level, the two cornerstones of the partnership over the past two decades – military and energy cooperation – are crumbling», the institute wrote in the report. «As a result, Russia’s significance to China will continue to diminish».

The biggest indicator that economic ties are flagging is the drop in energy cooperation between Russia and China over the past decade.

Although Russia is one of the world’s largest energy producers, the country was only the fifth largest supplier of oil to China in 2010, largely due to the Asian giant’s policy of diversifying reliance away from any one supplier of oil and gas.

Bilateral talks over pipeline agreements and gas supplies have stalled due to pricing disputes.

Russia wants China to accept European prices for its oil and gas exports, but the Chinese are holding out for a better deal.

Russian officials were hoping for a pricing breakthrough when Chinese leader Hu Jintao visited Russia in June and the two sides discussed a $1 trillion deal to supply Russian gas to China over 30 years, but price disputes got in the way again. Analysts expect Putin to push for a breakthrough during this week’s meeting as it becomes increasingly important for Russia to diversify gas exports contracts away from Europe. If the China contract is soon agreed then the Kremlin’s negotiating position in Europe will be improved.

Although Russia is unlikely to start converting its foreign reserve currencies into yuan, the country has been making some attempts to show its commitment to China through acknowledging the growing importance of the Chinese currency. The move followed an announcement by Putin that Russian banks would begin accepting deposits in yuan as well as rubles.

10/10/2011, The Moscow News

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