Russia: Watching Two Tigers Fight

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The deepening US-China trade war and threats of additional US sanctions against Russia are accelerating a rapprochement between China and Russia, as the two powers find in each other an economic and political ally on which to lean as their relations with the US deteriorate -- with that alliance reinforced by China's need for raw materials from its resource-rich neighbor. There is also undoubtedly a personality component to the deep relations between the two countries. By his own account, Chinese President Xi Jinping has met his Russian counterpart Vladimir Putin nearly 30 times since coming to power, and the two share a preference for a multilateral order over a US-led order. But how solid a ground that provides for a long-term strategic partnership remains to be seen. Relations with the US remain a priority for Beijing, while Moscow's ties with Europe -- historical, ethnic, religious, linguistic and economic -- are much closer, some analysts say (EC Sep.1'17). As if to illustrate that point, when speaking at the St. Petersburg International Economic Forum last week, Xi called US President Donald Trump "a friend" who like China is not interested in a complete collapse of the relations between the two countries. Moscow is taking a pragmatic stance too. In a hint that the spat between the US and China could weaken both countries to Russia's benefit, Putin -- speaking at the same panel as Xi -- cited what he said was a Chinese proverb that when two tigers are fighting, the smart monkey sits aside and waits to see who wins. That said, he immediately emphasized that trade wars triggering a decline in global GDP growth could result in "big problems and colossal losses" for everybody, including Russia. Still, the growing importance of the Russia-China relationship cannot be denied. The Global Times, a Chinese tabloid that often reflects the views of the Chinese government, was keen to highlight that the ties between the two countries go beyond geopolitics to something deeper: "China-Russia ties have gone far beyond the impact of the triangle effect in the conventional sense. In other words, regardless of the state of China-US relations or US-Russia relations, China-Russia relations will continue to grow closer." Putin also emphasized the strategic nature of the partnership with Beijing by saying that Russia doesn't have "so deep and wide relations as we have with China" with any other country in the world -- although trade turnover between the two neighbors, which reached $108 billion last year, is still lower than the nearly $300 billion Russia had with Europe in 2018, even under sanctions. Chinese companies and capital are already active in 30 ventures in Russia, with total investments of $22 billion. During Xi's visit, 27 agreements were signed on cooperation in the energy, industrial and agricultural spheres. Deals, Deals Energy and technology are two sectors where China's strategic competition with the US means it needs more partnerships (EC May31'19). To that end, the deal that Russian telecom company MTS signed with China's Huawei to develop a 5G network in Russia was a welcome show of support for a company treated as a security threat by the US. Energy cooperation was also far-reaching. State China National Petroleum Corp. and state China National Oil Offshore Oil Corp. (CNOOC) signed definitive agreements to each take a 10% stake in Novatek's Arctic LNG 2 project, expected to give each company almost 2 million tons per year of LNG when it comes on stream by 2022-23. While Russia clearly needed Chinese financing and backing for Novatek's Yamal LNG, which was built after the US imposed sanctions on Russia over its annexation of Crimea, Arctic LNG 2 has attracted plenty of suitors -- from Saudi Aramco to South Korea's Kogas and a Japanese consortium of Mitsui and Mitsubishi. CNOOC's participation, its first foray into Russian LNG, was finalized just after China started imposing import tariffs of 25% on US LNG and may signal to the US that China's largest LNG importer has other options (EC May17'19). Novatek has also agreed to take China Cosco Shipping into a joint venture to manage the LNG tanker fleet in the Arctic, and it signed a heads of agreement with Sinopec to set up a joint venture to market LNG and natural gas to end-customers in China. Sinopec and Russia's largest petrochemical producer, Sibur, likewise agreed on a potential joint venture complex and export plan. Another 10 accords were signed during a second Russia-China energy forum organized by Rosneft, which accounts for the bulk of Russian crude exports to China. Russia was China's top crude supplier from 2016-18 (EC Jun.7'19). To expand energy cooperation further, Rosneft head Igor Sechin invited the Chinese side to participate in the development of Russia's planned Arctic cluster, where production of 2 million barrels per day is targeted by 2030. "With growing production and trade of hydrocarbons, we can create new benchmark crudes and influence price formation," Sechin said at the forum. He also emphasized the rising status of each country's national currency, although sources say that Sechin strongly opposes abandoning the use of the dollar in oil trading. The Rosneft chief's public shift could reflect an intergovernmental agreement, inked last week, on expanding the use of the ruble and yuan in response to US financial sanctions. Nelli Sharushkina, Moscow, and Maryelle Demongeot, Singapore Compass Points • SIGNIFICANCE: Russia-China relations are getting stronger, and the two powers share many common views. Neither, however, is ready to turn its back on the US and the West. • CONTEXT: In a demonstration that relations with the West remain important for Russia as well, a number of deals with Western oil firms were also signed at the St. Petersburg forum -- for Royal Dutch Shell and Repsol to explore the Russian Arctic onshore zone with Gazprom Neft and for OMV to help develop Gazprom's giant Urengoi gas field in West Siberia. • NEXT: Watch to see if Gazprom's efforts to agree new contracts for pipeline gas supplies to China bear any fruit. China is also still to approve Russia selling sovereign bonds in yuan, which could allow Moscow to have an alternative for raising financing should Washington impose sanctions on Russia's new sovereign debt.

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