Putin showcases Russia's pivot to Asia as he visits China for WWII parade

As he visits for China's World War II 70th anniversary military parade Thursday, the Russian president hopes to stabilize a relationship roiled by economic problems in both countries.

Alexei Druzhinin/Reuters
Russian President Vladimir Putin (L) and Chinese Premier Li Keqiang shake hands during their meeting in Beijing, China, Sept. 2, 2015.

President Vladimir Putin is in Beijing to help China mark victory over Japan in World War II with a huge military parade that is being largely boycotted by Western leaders, just as Russia's own VE Day extravaganza was last May

For Mr. Putin, it is another opportunity to showcase Moscow's "pivot to the east" in the face of Western sanctions and opprobrium over his Ukraine policies. His point: that Russia has economic alternatives and belongs to a wider geopolitical community of nations that is increasingly at odds with Western global leadership.

But as he made clear in an extensive interview with TASS before embarking for China, one of Putin's key goals will be to stabilize the relationship with Beijing at a turbulent moment when Chinese stock markets have crashed and economic slowdown looms, prices for Russian energy exports are tanking, and Russia's own economic troubles are posing unexpected challenges even for willing Chinese investors.

"The current outlook is not good," says Alexander Gabuyev, an expert with the Carnegie Center in Moscow. "In particular, Russian hopes of attracting lots of investment from China in a fairly short period of time are not going anywhere."

Trade between Russia and China has fallen by about a third this year, and seems unlikely to reach the $100 billion goal announced by Putin and Chinese Premier Li Keqiang just a year ago. Hopes that a 30-year, $400-billion deal inked last year to pipe Russian gas from the far east to China would be finalized during Putin's current visit to Beijing have dimmed, while a second pipeline project from western Siberia appears to have been shelved over pricing disputes.

Still, Chinese thirst for Russian energy has been growing nonstop, and increased by 20 percent over the past summer.

"The problem is that while the volume of our oil exports to China has gone up, the income we get from it has fallen by a third due to depressed global prices," says Mr. Gabuyev. "And nobody knows where that's headed, so a lot of talk about pipelines, and Chinese investment in Russian oilfields as well, is on hold."

The energy price issue has been a major sticking point in getting these big projects off the ground, even when – barely a year ago – oil prices were over $100 per barrel. Now, as prices have slumped, it's increasingly a buyer's market. 

The postponements in energy deals with China must be particularly galling for Putin, who last year ordered a review of Russia's China policy. That led to removing several former "taboos," such as allowing Chinese investment in big Russian infrastructure projects and strategic resources like oilfields, and accepting the need for Russia-China cooperation in former Soviet Central Asia. Yet due to economic uncertainty in Russia, the plunging ruble, and now China's economic worries, the hoped-for Chinese gold rush is not happening.

One idea to unblock energy negotiations, reportedly under discussion, would be to decouple Russian energy exports from global prices – which are denoted in US dollars – and sell oil and gas to China in yuan, with with prices tied to domestic rates.

As China moves toward market prices for domestic users, this move might also serve the political goal championed in Moscow and Beijing of weaning their trade from dependence on the dollar, says Alexander Salitsky, an expert with the Institute of World Economy and Economic Relations, the Russian government's main foreign policy think tank.

"People are pointing to the fact that deals aren't being finalized this week as a dire sign," he says. "But Putin is going back to China in October, and all these issues are very much still on the table. There's no reason the pricing issue can't be solved to Russia's satisfaction, and it seems that China would very much like to be able to buy oil and gas in yuan. They have a strategic aim of internationalizing their currency, and doing this would stabilize the energy prices with Russia."

Key deals still on track

Aside from energy, big infrastructure projects that have been agreed to between Russia and China still appear to be on track. They include a Chinese commitment to help finance a Moscow-Kazan high speed rail link in time for the Russia-hosted 2018 soccer World Cup. The line might eventually be extended all the way to Beijing, lowering the rail time between Moscow and the Chinese capital time from six days to 36 hours.

Another big project, under construction, is a superhighway from China to Europe, crossing Kazakhstan, Russia, and Belarus. Yet another, still in the talking stage, is a joint venture between Russia's United Aircraft Corp. and China's Comac to develop a wide-bodied passenger jet to compete with Boeing and Airbus in far-flung Asian markets.

"All political rhetoric aside, the basic idea of greater political and economic integration between Russia and China is a still a perfectly sound one," says Mr. Salitsky. "It's starting to happen, even if immediate results are not what was advertised."

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