To examine the significance of Russia's strategy of developing closer political and economic ties with countries to its east, especially China, the World Economic Forum spoke to Yaroslav Lissovolik, Programme Director at the Valdai Discussion Club.

China's President Xi Jinping met with Vladimir Putin earlier this year. What is the significance of deeper Sino-Russian ties?

The economic rationale for closer Russian-Chinese ties has to do with Russia’s intention to develop its far-eastern regions through more economic cooperation with regional heavy-weights. Part of this entails rebalancing geographical patterns of Russian trade, which since the fall of the Soviet Union were mostly focused on Europe.

In economic terms, Russia sees China as a large market for Russian agricultural goods, manufactured products as well as oil and gas and other natural resources. Also significant may be China’s role as an investor in Russia’s economy against the backdrop of sharply lower investment flows from the West.

So far, however, this substitution effect has not come to fruition: according to the United Nations Conference on Trade and Development (UNCTAD), foreign direct investment (FDI) into Russia contracted significantly from 2014, with further decline in recent years. The level of FDI inflows dropped from $37 billion in 2016 to $26 billion in 2017 and to $13 billion in 2018.

Accordingly, while increased trade with China served to make up for the decline in the share of the EU, in the investment sphere, cooperation with China has fallen short of the scale of the decline in FDI flows from Europe and other parts of the Western world.

Russia has seen a significant decline in foreign direct investment
Image: Russia Matters

On the geopolitical front, Russia sees China as a crucial ally in advancing a multipolar world order that broadens the possibilities for new reserve currencies, new international development institutions and other elements of global economic architecture that render globalization more inclusive for Russia and other emerging markets.

In fact, in the past several years several important initiatives emerged in the relations between China and Russia, namely a non-preferential trade agreement between China and the Eurasian Economic Union (signed in 2018) as well as cooperation within BRICS to promote settlements in national currencies.

The key focus of the cooperation between Russia and China currently centres on the integration of China’s Belt and Road Initiative (BRI) and the Eurasian Economic Union. This cooperative effort referred to as “integration of integrations” is meant to supply greater connectivity to the Eurasian economic space via infrastructure development.

For the vast landlocked regions of Central Asia and Russia’s inward regions in Siberia and Urals the co-integration of the BRI and the Eurasian Economic Union serves to transform geography into an economic advantage allowing these regions to serve as strategic intermediaries of increasing transportation, investment and trade flows between Europe and Asia.

In other words, the long-term significance of this strategic alliance is the creation of possibilities to transform the factor of Eurasian geography from weakness into strength.

Could closer Sino-Russian ties get in the way of Russia’s relations with other countries in the region?

There are as of yet no clear signs that Russia’s cooperation with China is hampering other bilateral ties. In fact, Russia’s “turn to the East” is accompanied by intensive efforts to develop ties with other major players in the regions, including Japan, South Korea and the ASEAN countries, as well as with India in the Indo-Pacific region.

Earlier this year, Russia launched talks on trade liberalization in services and investment with South Korea, while the Eurasian Economic Union (Russia is the largest economy in this trade bloc) has signed a memorandum on cooperation with ASEAN. Russia actively pursued FTA talks with members of ASEAN, launching together with partners from the Eurasian Union their first FTA with Vietnam in 2016, which was followed by launching of FTA talks with Singapore.

A number of other ASEAN countries (including Thailand and Indonesia) have expressed interest in discussing the prospects of creating an FTA with the Eurasian Economic Union.

Russia will be seeking to promote greater competition among the dynamic powers of the Asian Pacific for greater access to its large domestic markets as well as to its natural-resource wealth

Indeed, Russia’s strategy in the Far East will likely be directed at diversifying its ties with the main players in the region, rather than concentrating solely on developing ties with China. To some degree Russia will be seeking to promote greater competition among the dynamic powers of the Asian Pacific for greater access to its large domestic markets as well as to its natural-resource wealth (both in terms of investment into developing projects and imports of fuel resources from Russia).

The way that Russia could promote greater competition among the countries in the region may follow a US-style “competitive liberalization” strategy of the pre-Trump era, whereby FTA and other types of economic alliances are concluded with the countries offering the best conditions of economic openness to Russia’s exports and investment.

While tensions do exist in the East Asian region among key players, what is encouraging is the emergence of regional integration projects that are approaching mega-regional scale and that bring together the largest heavy-weights in Eurasia (Shanghai Cooperation Organisation, Trans-Pacific Partnership, Regional Comprehensive Economic Partnership, etc.).

In the end, the longer-term goal advanced by Russia’s leadership is the promotion of the so-called Greater Eurasian Partnership that would provide a platform for economic cooperation among all countries and regions of the Eurasian continent.

This involves working together not only with China, but also other key players on the continent, including India, ASEAN countries and of course the EU. Indeed, the relationship between Russia and the EU will continue to be at the heart of the quest for security and economic prosperity in Eurasia.

How would you classify Russia’s view toward Europe?

In economic terms Russia has always looked to Europe for trade, investment and access to new technologies. Europe has on many occasions presented models of development that Russia sought to emulate and indeed throughout the first two decades of transition, Europe was the focal point of Russia’s increasing openness to the outside world. Despite the proclaimed policy of the “turn to the East” the Russian business elite remains largely European in orientation.

Accordingly, greater progress in developing ties between the EU and the Eurasian Economic Union as well as a normalization in bilateral ties with European countries may be reflected in a significant pick-up in investment and trade volumes after a protracted period of sub-par dynamics.

In fact, some of the recent developments in the economic relations between Russia and the EU do appear to point to this possibility. Last year witnessed a strong recovery in investment flows from Germany into Russia, with auto-makers Mercedes-Benz opening a factory outside of Moscow.

Similar trends are observed in the relations with France, where landmark investment deals such as Total’s acquisition of a 10% stake in Russia’s Arctic gas project are accompanied by a significant pick-up in bilateral trade and investment. Whatever the gravity of history may be, the “gravity pull” of geographic proximity of Russia and the EU in Eurasia will call for greater economic cooperation in the future.

Yaroslav Lissovolik, Programme Director at the Valdai Discussion Club