Dear BWR Subscribers,
“Barbershop Whispers….Russia” begins with “My Takeaways” on the main topic, followed by the main topic discussion. The last two sections of “Barbershop Whispers…Russia” are “Follow-ups” regarding previous publications and “Quick Bites” briefly addressing emerging events.
In last week's BWR, I discussed the symbiotic relationship between Russia and Tajikistan. Russia receives inexpensive migrant labor in a time of labor shortages, and Tajiks receive well-paid jobs—compared to what is available in Tajikistan—and send the money home.
In this week’s BWR, I discuss President Putin’s visit to China and meeting with Chinese President Xi. A large Russian delegation of government officials and executives was in tow, reflecting Russia’s trade and government relations priorities with China.
Takeaways:
GLOBAL ORDER: Putin and Xi continue to advocate for a multi-polar international system as Putin begins his fifth presidential term and takes the 2024 Chair of BRICS.
TRADE: Amid tightening Western sanctions, Russia increasingly depends on China for consumer and technology imports. Only North Korea is more dependent on Chinese trade today. The number of Chinese-made automobiles is the most visible display of the changing trade landscape. The tenfold increase in Chinese imported CNC machinery from 2022 to 2023 indicates technology assistance with Putin’s war.
ENERGY: Russian LNG (YAMAL and Arctic-2) has taken priority over pipeline gas (Power of Siberia 2) to China. Tightening Western sanctions on technology transfers to complete the Russian LNG projects and the delayed delivery of icebreaker-class ships from South Korean Shipbuilders are bringing China and Russia closer together in this energy sector. However, Russia is absorbing the cost of this through discounted gas prices.
This week, President Vladimir Putin made his way to Beijing, with a large Russian delegation of government officials and businessmen, to pay homage to China’s President Xi Jinping. Included in the Russian delegation were Russia’s leading bankers and energy executives—Central Bank Governor Elvira Nabiullina, Sberbank CEO German Gref, VTB chief Andrei Kostin, Finance Minister Anton Siluanov, Rosneft chief Igor Sechin, Novatek's CEO Leonid Mikhelson, RUSAL oligarch Oleg Deripaska, newly appointed Defense Minister Andrei Belousov, newly appointed Head of the Security Council Sergei Shoigu, and Foreign Minister Sergei Lavrov.
The two-day visit comes as Putin begins his fifth presidential term, Russia Chairs 2024 BRICS, and as Russia grows more dependent on China in the face of increasing Western sanctions.
According to presidential aide Yuri Ushakov, an informal closed-door meeting between Xi and Putin took place on the first day. Other Russian officials attending the meeting were Foreign Minister Sergei Lavrov, new Defense Minister Andrei Belousov, and new Security Council head Sergei Shoigu. Based on the participants’ government roles, one can assume the meeting was about Putin’s war on Ukraine, the participants’ new roles, and equipment & technology needs.
Trade
China is now Russia’s largest trading partner, accounting for more than 31% of all Russian exports and 38% of imports, and only North Korea is more dependent on Chinese imports. China/Russia bilateral trade in 2023 reached a record $240B, in contrast to the pre-second Ukrainian invasion trade of $140B in 2021. Moreover, more than 90% of settlements between companies are conducted in RUB and CNY, avoiding USD and EUR.
The trade for consumer goods and Chinese technology in exchange for cheap energy will continue to erode Russia’s global competitiveness.
The market's change in available consumer goods is the most visible display of Russia’s pivoting trade flows to China. For example, automobile imports from China increased by 594% since 2022. The Rolf Group, recently confiscated by the Kremlin, was once the largest wholesaler and retailer of imported European cars into Russia. Today, more than 50% of newly imported vehicles into Russia are Chinese. Many of the automobile assembly plants that previously assembled Western brands have been replaced with Chinese assembly plants.
While China claims not to be providing Russia with weapons and military components for its war against Ukraine, China does supply the Kremlin with advanced computer numerical control (CNC) machines that are crucial for Russia’s military-industrial complex. China has increased the supply of CNC machines to Russia tenfold since the beginning of the second invasion in 2022. According to Russian customs declarations, Chinese shipments of CNC machines in July 2023 amounted to $68 million, a substantial increase compared to the $6.5 million recorded in February 2022.
Energy
Gazprom announced in early 2024 that it had overtaken Turkmenistan as China’s largest volume natural gas supplier. However, Turkmenistan’s export earnings to China remain greater than Russia’s. The Turkman Portal reports that during the first quarter of 2024, Turkmenistan generated $2.4B in earnings from Chinese natural gas exports compared to Gazprom’s $2B over the same period.
China continues to take advantage of Russia’s need for cash to fund the war when Russia struggles to replace its lost European markets with Asian markets. This is also playing out in the infrastructure financing of Power of Siberia 2 (POS2). China is in no hurry to finance it or negotiate a long-term purchasing agreement, partly because it has substitute sources, such as Turkmen pipeline gas. The collective capacity of three pipelines connecting Turkmenistan and China totals 55 bcm, while POS1 is expected to reach a capacity of 38bcm by 2025.
Interestingly, Gazprom CEO Alexei Miller was absent from the Russian delegation to China because he is in Iran holding talks with the Iranian Oil Minister Javad Owji. This suggests that POS2, after many years of negotiations over the financing and offtake agreements associated with China, continues to stall. This delay further complicates Gazprom’s finances after it posted a $7B loss in 2023 as a result of losing the European gas market. It was the first loss by the gas giant since 1999.
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In contrast, Mikhelson’s (Novetek CEO) presence in this delegation indicates a priority and progress on Russia’s Arctic LNG projects. With tightening Western sanctions forcing delays in the completion of Arctic LNG plants and logistics issues, China is stepping up. For example, ice-breakers originally contracted to a South Korean shipbuilder may be redirected to Chinese shipbuilders.
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Deripaska’s presence in the Russian delegation may tell a story about the growing aluminum trade between Russia and China. Russia has become more reliant on China for both imported alumina and exports of Russian aluminum.
Xi’s Global Ambition & the Russian Liability
Xi’s ambitions for China are to become the biggest economy in the World and make the Renminbi the global currency. At the same time, he seeks to replace the existing World order with one in which the BRICs have a more dominant role. Putin plays a significant role in the latter, but Xi is cautious not to anger the West too much as he courts Putin. China’s $17T delicate economy is intertwined with the US and EU’s combined $43T economies, and the Chinese economy is slowly recovering. Russia’s $2T economy does not help Xi achieve a global presence; on the contrary, Russia is a liability to Xi’s path toward global economic dominance.
With this in mind, Xi is playing a delicate game of musical chairs—two chairs and three people—as he juggles China’s relationship with the West and Russia. Claiming neutrality and an honest mediator role in Putin’s war against Ukraine, Xi ties to satisfy Putin and the West. He does not want to jeopardize his economic relationship with the West. Tightening Western sanctions will impact China’s banking sector through secondary sanctions if the West perceives them as aiding Russian companies evading Western sanctions. At a time when the Chinese economy is recovering and Xi is trying to attract Western investments, the relationship with Russia will remain a cautious one.
Putin and Xi concluded the two-day visit in Harbin, where Putin emphasized his personal relationship with Dear Friend Xi.
Emphasizing the personal nature of the relationship, Putin said the Harbin Institute and his alma mater, St. Petersburg State University, will open a joint school for 1,500 students.
“I’m sure that it will become a flagship of the Russian-Chinese cooperation in science and education,”
Putin praised his talks with Xi as “substantive,” saying he spent “almost a whole day” with him. At the trade exhibition in Harbin, Putin emphasized the importance of cooperation between Russia and China in jointly developing new technologies. Putin stated:
“Relying on traditions of friendship and cooperation, we can look into the future with confidence….The Russian-Chinese partnership helps our countries’ economic growth, ensures energy security, helps develop production and creates new jobs.”
Harbin was once home to many Russian expatriates and still retains much of its history in its architecture. For example, the St. Sophia Cathedral, a former Russian Orthodox church, still stands.
Xi and Putin have a longstanding agreement to visit each other’s countries once a year, and Xi was welcomed at the Kremlin last year.
Additional Recommended Reading(s):
Russian LNG – China and Asian Markets? (Barbershop Whispers…Russia)
“No Limits” Limits of the Putin and Xi Friendship (Barbershop Whispers…Russia)
Follow-ups & Quick Bites:
Follow-ups:
Georgian Protests Grow Larger
Georgian lawmakers brawl in Parliament as they pass the Foreign Agent Law, and tens of thousands of Georgians continue to pour into the streets to protest the law.
Georgian President Salomé Zourabichvili said she would veto the bill. However, the Georgian Dream Party and its allies that control the Parliament can override the president’s veto.
Georgian opposition parties believe the passage of the Foreign Agent Law will be used to suppress opposition to the Georgian Dream in the upcoming election in October 2024.
Additional Recommended Reading(s):
“Georgian Rose Revolution – Reloaded?” (Barbershop Whispers…Russia)
“Russia Baits Georgia with Return of Occupied Territories in Run-Up to Parliamentary Elections”- (The Jamestown Foundation)
Quick Bites
EU Plans to Ban Russian LNG Trans-Shipments
In a continuing effort to reduce the Kremlin’s energy export revenues and impede the development of its LNG business and market, the EU is considering a ban on the transshipment of Russian LNG out of Europe.
EU imports of Russian LNG totaled 14.4MMT in 2023, of which 2MMT represented trans-shipments to Asia, primarily China and India. The LNG shipments originate from the Arctic-based Novatek Yamal LNG plant and are trans-shipped from Zeebrugge (BEL) and Montoir (FRA). The Russian LNG is transported out of the Arctic in a limited number of ice-breaker class LNG carriers and transferred to standard LNG carriers in the EU for on-shipment. The trans-shipments are particularly important during the winter months, when the Northern Sea Route is frozen, making navigation difficult if possible.
The 14th Package of EU Sanctions against Russia will likely include a ban on EU companies providing goods and services that will contribute to the completion of the Arctic LNG and Murmansk LNG plants.
Additional Recommended reading(s):
“Russian LNG – China and Asian Markets?” (Barbershop Whispers…Russia)
“Russia Struggles with the Changing Gas Markets” (Barbershop Whispers…Russia)
Vol 2, No 23 - BWR 19.05.2024
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