The transformation of global architecture fueled by the world crisis has predestined the rise of new realities not typical of both a unipolar and a bipolar world. During the Cold War, Moscow and Washington would set the international agendas, forcing other players to act within those formats. In contrast, the foreign policy strategy of today’s Russia is explicitly reactive in many ways. Still, a player who positions himself skillfully against the backdrop of other leading centers of power can derive considerable dividends even from this situation.
Russia has traditionally attached special significance to the West as its leading partner (or rival, in some historical periods). Yet the past ten years have seen China stake a claim to global leadership. Its ambitions stem from its economic power, as well as its fast-growing political and military might. For Moscow, which has learned ways of reacting to current challenges from the West (including the U.S.), there is an effect of novelty in China’s case, and Moscow has no rational strategy towards it, not even a reactive version. Russia needs to scrutinize the agenda set by China and try to understand whether it can influence each avenue of this agenda or integrate into it, and whether it is in line with Moscow’s interests – for instance, in case of mutual correction (convergence) – or it is mutually antagonistic.
DELIVERANCE FROM THE “DOLLAR CURSE”
Overall, China’s strategy of consolidating its global position is simultaneously a strategy to end its vulnerability in the broad sense of the word – economic, industrial, financial, demographic, resource/material, etc. The most vulnerable spot for China in the short- and mid-term is the “dollar curse.” China has the world’s largest financial reserves at over $2 trillion, and about a third of that amount is kept in U.S. securities.
Critics of the theory that China can grow rapidly without entering into an alliance with the U.S. say that Beijing and Washington are both rivals and forced allies, since the U.S. is the main market for Chinese manufacturers and China’s impressive foreign exchange/gold reserves would mean nothing without the U.S. dollar as the global reserve currency. Yet apologists of this viewpoint are in for a big disappointment as China has for several years now been testing an inconspicuous yet very efficacious strategy of ridding itself of the “dollar curse.”
Standard ways of getting rid of dollar-denominated assets cannot be applied in this case owing to the size of the assets, as the move would not remain unnoticed by international markets. Attempts to swap these assets for securities denominated in any other currency would mean a blow to the U.S. dollar and consequently to Chinese reserves. A large-scale purchase of raw materials on markets (to say nothing of addressing the problem of storage) or futures for the materials might push up prices. This would mean a devaluation of the U.S. currency and hence a devaluation of China’s reserves.
Currently, Beijing prefers to purchase raw materials that are not on sale yet. It issues loans (the most desirable borrowers are national governments and corporations close to them) against guarantees of resource supplies over the long term (10 to 25 years and more). In other words, this is just a disguised form of selling/purchasing natural resources, which does not affect the dollar’s exchange rate or prices of raw materials.
A graphic instance of this is a recent transaction between China National Petroleum Corp. (CNPC) and the Venezuelan state company Petroleos de Venezuela SA (PdVSA).
Under a $20 billion agreement signed in April 2010, Caracas will get a loan for the development of an oil-producing joint venture and will repay it with oil shipments over a period of 25 years. This is not the first agreement of this kind between China and Venezuela, as both countries launched cooperation in the energy sector a long time ago. Venezuela exports 460,000 barrels of crude a day to China by way of repaying a previous loan of $8 billion.
Venezuela is not Beijing’s only partner in its “minerals-for-dollars” program. In June 2009, China made public the issuance of a $5 billion loan to develop the South Yolotan natural gas deposit in Turkmenistan. Ashgabat estimates the field’s reserves at 16 trillion cubic meters. At about the same time, CNPC began developing the gas deposit in cooperation with South Korea’s LG and Hyundai and Petrofac Emirates of the United Arab Emirates.
During a recent visit by Chinese President Hu Jintao to Tashkent, Uzbekistan to attend a summit of the Shanghai Cooperation Organization, Uzbekistan’s state corporation Uzbekneftegaz and CNPC signed an agreement to supply 10 billion cubic meters of gas to China. The signing ceremony was attended by Uzbek President Islam Karimov. The document was accompanied by agreements for loans totaling $2 billion and for direct investment to build a gas transport infrastructure in Uzbekistan.
Considering previous agreements with Turkmengaz for 40 billion cubic meters of gas and with Kazakh corporation Kazmunaigaz for 10 billion cubic meters, Beijing’s Central Asian gas package has reached 60 billion cubic meters annually. As for the overall amount of loans China has issued worldwide as part of the “loans for resources” program, the loans total an estimated $150 billion-$200 billion (a more exact figure is difficult to provide, since the details of some transactions have not been disclosed). This is less than 10 percent of China’s foreign exchange/gold reserves, but the provision of such loans has noticeably picked up of late. If the pace of the program continues at the same rate or if it is stepped up, all the reserves available to Beijing will run out by 2015 or 2017 (with the exclusion of possible expenditures for stimulating domestic demand and for swap loans, which would give the situation a still greater dynamic). This, in turn, will enable China to considerably reduce the negative impact of the “dollar curse” – if not shake it off completely – and give it a free hand for a full-scale war against the dollar if need be.
Russia’s current needs correlate more or less with the above mentioned strategy taken up by Beijing. Moreover, it became a testing ground where this strategy was initially tried in the first half of the 2000s. Chinese banks granted a $6 billion loan to Russian oil company Rosneft to purchase the upstream operator Yuganskneftegaz. Rosneft pledged to export 48.8 million tons of crude oil by rail to China until 2010 by way of repaying the loan. The price of the oil was pegged to Brent crude with a $3 discount. To all appearance, the Chinese deemed the experiment successful, since the China Development Bank (CDB) granted loans of $15 billion to Rosneft and $10 billion to the oil pipeline system operator Transneft in 2009. In exchange, Rosneft is expected to supply 300 million tons of oil to China over the next 20 years, while Transneft will build a branch from the Eastern Siberia-Pacific Ocean pipeline from the Russian town of Skovorodino to Mohe in China. The latter should have a throughput capacity of 15 million tons a year, with a possible increase up to 30 million tons.
TRANSIT ROUTE SECURITY
The second biggest problem the Chinese are trying to alleviate is the vulnerability of routes through which mineral resources are supplied to China. The country badly needs resources, especially energy commodities. China, a country with huge mineral wealth, has turned into a net importer of coal and oil over the past two decades and, quite probably, has become a net importer of natural gas over the past year or two.
There are several traditional sources of raw materials for China – the Middle East, East (and recently Central) Africa, Australia and Latin America. These regions are united by trade routes that cross oceans. A military conflict between China and the U.S. (as a measure of last resort to curb Beijing’s growing influence) would make all these routes highly unreliable considering the capabilities of the U.S. Navy. Although the Chinese are rearming their army and navy rapidly enough – the navy is increasing its strength in littoral areas even faster – they will remain inferior to U.S. aircraft carrier groups for quite some time. Meanwhile, even a short-term blockade of delivery routes to China could inflict irreparable harm to its economy and to the combat capability of its armed forces.
The Chinese are already trying to reduce these threats, for instance, by the speedy construction of transshipment facilities in Myanmar, a country ruled by a military regime under Beijing’s patronage. From there, raw materials arriving from the Middle East and Africa (mostly oil and liquefied natural gas) will be pumped through pipelines to China. This is a half-baked measure, though, as it does not provide a clue to the main problem. The route via Myanmar will make ocean voyages shorter (and provide an opportunity to bypass the over-congested and extremely narrow Strait of Malacca), but it will not solve the transoceanic transport problem completely. To remove this threat Beijing needs alternative sources of raw materials and new routes via secure land corridors.
Therefore, China has started probing three new resource provinces – Iran, Central Asia and Russia. Iran, where China is a major investor, seems to be the most problematic partner from the point of view of route security. There are two possible routes to send Iranian products to China. The maritime option shares all the risks of other sea routes, while deliveries of energy resources by land imply transit via an extremely unstable Afghanistan and northern Pakistan. There is a strong U.S. influence in these two regions (that will obviously have a lasting impact even after the coalition forces withdraw). Hence this route is not much different from the sea routes.
Considering what we said above, Central Asia and Russia offer the safest routes for supplies, so China is expanding economically in both regions. However, supplies from there have an Achilles’ heel as well, as they must cross the restless Xinjiang Uyghur Autonomous Region where about 200 people died in ethnic clashes more than a year ago. Although Beijing has shown awareness of the risks and seeks to assimilate the Uyghur minority as rapidly as possible, the risk of instability (including possible terrorist acts against oil and gas pipelines) will remain big enough for many years to come.
In this situation Russia is the only country that can offer a unique route from the security viewpoint. There are plans to pump natural gas from Russia’s unified gas supply system to China along two routes – the western route from the traditional gas producing areas in Western Siberia and the eastern route from deposits on the island of Sakhalin. The western route, which will have a throughput capacity of 30 billion cubic meters of gas annually, is the priority. The Western Siberian deposits are close to the existing gas infrastructure, which will help to launch supplies shortly. The construction of the new pipeline system Altai is envisioned in the first phase. The system will be built in the already functioning transport corridor, with its subsequent extension through the Altai Mountains to the western section of the Russian-Chinese border. It will be connected to China’s West-East pipeline there. The latter will pump gas to Shanghai. However, the Altai pipeline will approach the border in the same area where Xinjiang Uyghur is located, which will reduce the security value of the project.
This is why the Chinese are displaying more interest in Russia’s Far East than in southern Siberia. It is the resource-rich Russian Far East that offers the safest route for supplies to China in case of a conflict between China and the U.S. Chinese private investors are already making strategic investments in the region. Hong Kong-based billionaire Li Ka-Shing, East Asia’s richest man, is among those who have taken the risk of investing in Russia. Li-owned companies have made an equity investment in NPMHoldCo, a new holding company that manages iron-ore projects for Petropavlovsk Plc. Together with the Asia Resources Fund they have purchased about seven percent of shares in NPMHoldCo. Petropavlovsk has pledged to list its subsidiary on the Hong Kong Stock Exchange before 2012.
Russia does not object to such a division of labor. The two countries have signed an agreement implying the resource-focused development of the Russian Far East with the aid of Chinese investments. The problem is the price of the resources and the watershed issue in this sense is the price of gas, over which Moscow and Beijing have been unable to come to an agreement since 2004. Still, signs of fundamental encouraging shifts have shown up. For instance, the Chinese hiked domestic wholesale gas prices by 24.9 percent on June 1, 2010. Another factor playing into Moscow’s hands is a growing tendency towards a permanent increase in wages in China, as there will be no need to minimize the prime cost of resources. The minimum wage increased 33 percent on average on June 30 in nine provinces of China and it was announced in April that about twenty provinces were planning to raise the minimum wage considerably before the year’s end. The minimum wage has already increased 17 percent in Shanghai, the nation’s financial capital, and 21 percent in Guangdong, the main export-oriented industrial center.
ACCESS TO GLOBAL ARCHITECTURE
Access to the global infrastructure for economic and political decision-making remains a key problem both Russia and China face. The West’s refusal to recognize the Russian elite’s right to equality in decision-making (the illusion of this right overwhelmed the Russian establishment in the 1990s) caused a rise of anti-Western tendencies in the 2000s. Both players are seeking a share in “global joint-stock capital” and with the “board of directors,” but each side is using its own tactics to achieve this objective.
China has emphasized setting up a national infrastructure and making it as attractive as possible from the standpoint of potential partners. This was precisely the path chosen by the West at the outset of its leadership. In many ways, the explanation behind this is that China has faced many of the same problems in the Western world as Russia has, namely, the reluctance of the Western political system to share its “original codes” with foreign powers and give them access to the media, financial system, etc. It is worth mentioning the positive regard that Western players have for China’s efforts in this vein. They express a willingness to take part in the infrastructures being created in China, although their consensus on this is situation-specific and often takes the form of Western investment in prospective assets.
In particular, the Agricultural Bank of China (one of the four biggest banks in the country) has recently made public plans to sell a 14 percent stake for $23 billion. The British bank Standard Chartered has said it will invest $500 million, while Qatar and Kuwait are planning to invest $3.6 billion. Other possible investors include the Temasek Holdings investment company of Singapore, Hong Kong businessman Li Ka-Shing, and Rabobank of the Netherlands.
Russia is also experimenting, with varying success, with setting up its own marketplaces that would have legitimacy and status in the eyes of the world community. For instance, the government has put forward a very pressing task of creating a world-class financial center in Russia. However, no sizable progress has been made in the area and Russian businesses are “voting with their feet,” showing their preference for foreign marketplaces. Most symbolically, the center of attractiveness for Russian businessmen is gradually shifting eastwards as they take part in legitimizing the infrastructure created by China.
For example, after aluminum producer RUSAL had a successful IPO, Oleg Deripaska, one of Russia’s richest businessmen, is preparing an IPO for molybdenum producer Soyuzmetallresurs (Strikeforce Mining & Resources, or SMR), another company that he owns. Earlier reports also mentioned his preparations for floating shares of EN+ Power in Hong Kong, a company that manages Deripaska’s energy assets. Besides the Deripaska-owned companies, the Hong Kong Stock Exchange has also aroused the interest of gold miner Zoloto Kamchatki, controlled by Victor Vekselberg, the Ilyushin Finance leasing company, subsidiaries of diamond producer ALROSA, and the above-mentioned company Petropavlovsk. According to the Russian Union of Industrialists and Entrepreneurs, 30 to 40 Russian companies will apply for a listing on the Hong Kong Stock Exchange. Candidates seeking to list include, above all, oil and gas and infrastructure companies.
One of the possible reasons for this popularity of the Chinese marketplace among Russians is China’s readiness to share the “original codes” of its infrastructure with others. For instance, Deripaska’s EN+ Group has joined the list of founding shareholders of the Hong Kong Mercantile Exchange (HKMEx) by purchasing 10 percent of its shares. As a founding shareholder, EN+ will have access to the Exchange’s in-house documents, operating principles, organizational structure, and information and system support. HKMEx, which is not linked to the stock exchange, will be a platform for trade in key commodities from Russia (energy resources and metals, in the first place), targeted towards Asian customers. Trading there is due to begin in 2010.
China’s readiness to share access to its infrastructure and to accept rules of the game set by other actors is a crucial factor ensuring this country’s success in the world. In contrast, the West seeks to tailor the world to its own liking so as to make it more understandable and controllable. Yet Western scholars are gradually developing an awareness of where the Chinese model has a major competitive advantage. One of them, Stefan Halper says in his book “The Beijing Consensus” that the Chinese model, which he labels as “market authoritarianism,” will dominate the 21st century.
ACCESS TO CUTTING-EDGE TECHNOLOGIES
Access to cutting-edge technologies has critical importance for both Russia and China. Up to a certain moment Russia played the role of being a source of such technologies for China – mostly in the sphere of defense-related cooperation. The latter, however, has degraded in recent years and the causes of the degradation are clear enough: Beijing has bought everything from Russia that it had wanted to and now it manufactures the bulk of its weaponry on its own. As for new types of weapons needed by China, Russia is still in the process of developing them or else there are manufacturing problems. Currently Moscow does not have a single major defense contract with Beijing and the fundamental reason is obvious: Beijing needs different military hardware than what Moscow would like to sell to it. Moreover, Beijing is increasingly insisting that it also be granted a license for manufacturing negotiated weapons in China, which means that Moscow will not get similar manufacturing orders in the future.
Both Russia and China draw on advanced technologies from the West. Beijing, which has colossal financial resources, is trying to use the difficulties of the world economy and gain access to technologies under the guise of “charity.” As an example of this, the Chinese corporation COSCO has held talks in Athens with top Greek officials on joint projects for the development of the country’s transport infrastructure. The Greeks have invited the Chinese to invest in strategic sectors of the national economy, namely transport and tourism. COSCO has discussed projects for developing the ports of Piraeus, Thessaloniki and Volos. The Chinese are showing special interest in Greece’s main port Piraeus, which they would like to revamp and recreate as a world-class seaport.
Another example was set at the end of May when Ford Motor Company and the Chinese company Geely signed an agreement under which Geely would purchase Swedish car manufacturer Volvo. The Chinese corporation would like to keep Volvo’s plants operating in Sweden and Belgium and it is also examining the possibility of assembling Volvo cars at newly built factories in China.
Unlike Greece, other European countries treat Chinese state investments with much caution. The French authorities, for instance, have blocked China’s application to buy a French company, citing national security risks. Beijing is trying to neutralize such moods among the Europeans and it has launched a campaign to popularize the Chinese political system. The first ever inter-party forum organized by the country’s ruling Communist Party and 35 leading political parties of the European Union ended in Beijing at the end of May. The Chinese hope that events of this kind will fortify the nation’s positions in the EU as European politicians become familiar with the achievements of the Chinese economy and become used to the idea of Beijing’s inevitable rise.
Russia’s successes in this area are far less impressive. The only political move worth mentioning in this respect is an initiative to establish the Yaroslavl Forum of Political Scientists – a place to discuss problems of world democracy and security. Its objective is to play an equitable role in discussions about pressing global problems and thus to partially control the discourse.
As for the economic sector, Moscow does not have sizable financial resources (and what it does have will soon be needed for covering massive social payments). Thus it has chosen a policy of d?tente in the hope that the latter will open up access to technologies. Yet the sad experience with the failed purchases of Arcelor, Opel and a range of other assets leaves more questions than answers, even despite the optimistic results of Russian President Dmitry Medvedev’s visit to the U.S. in June 2010.
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As long as current trends continue, the place the Chinese world model has allotted to Russia satisfies this country’s elite and population on the whole. The task is to provide resources for the growing Chinese economy in exchange for access to the global infrastructure being created by Beijing. Wrinkles still exist in bilateral relations when it comes to prices of raw materials, but the rise of domestic prices in China and stimulating domestic demand through higher wages make the problem less acute. The main conflict is over access to technologies which Moscow can no longer provide under Chinese conditions.
Robert Kaplan, a senior fellow at the Center for a New American Security, wrote in a recent issue of Foreign Affairs magazine that the U.S. “might conceivably partner with Russia in a strategic alliance to balance against the Middle Kingdom.” A similar idea often comes into the picture in other U.S. publications. In contrast, it appears that Russian elites are undisturbed by the “creeping Chinese expansion” in the Far East and even facilitate it as best they can, since they are satisfied with the role the Beijing Consensus accords to them. A question that arises in this connection is whether or not the West in general and the U.S. in particular have anything to offer Moscow as grounds for “friendship against China” instead of the mythical “Chinese threat”.