Chinese burns - Beijing leaves its mark on former Soviet states

By bne IntelliNews December 16, 2010

Tim Gosling in Moscow -

The events in Oslo in December illustrated not only the strength of the ideological divide between China and the West, but also the growing clout that Beijing enjoys in the former Soviet Union (FSU), thanks to a simple equation: cash, with no strings attached.

China's fury, and subsequent diplomatic warnings, over the award of the Nobel Peace Prize to jailed dissident Liu Xiaobo saw around a third of invited countries excuse themselves. Whilst some of those will sign up to almost any move that cocks a snook at the US, others, including Russia, Ukraine and Kazakhstan, have more complex relations with the West.

However, the events suggest that China is emerging as a model to the transition economies of the FSU as its influence spreads steadily west. Beijing's emphasis on economic growth and social stability at the expense of the universal rights pushed by the West is one that is clearly recognised and appreciated in Moscow, Almaty and Kyiv.

Throw in China's increasingly key role as creditor, investor and customer since the onset of the global economic crisis, and it's hardly surprising that Beijing is finding a receptive audience. That the US and EU can barely afford to offer much more than finger-wagging these days is the cherry on top, and both have expressed concern this year over China's growing influence across Central and Eastern Europe.

That concern is well placed, because China is evolving into a leader of developing states across the world that embrace various forms of authoritarian capitalism, and which are growing in stature. As The Times put it: "The list of countries boycotting the prize... illustrates that the West has lost its monopoly on economic and political power."

Economic carrot

There are few regions where this shift is better illustrated than in the FSU. Beijing's massive sovereign reserves are a significant economic carrot, powering cheap loans and massive investment in the region. At the same time, it's hunger for energy makes it an ever-more important customer for its energy-exporting neighbours.

Without such resources, however, Ukraine is just beginning to eye the potential of China's cash. President Viktor Yanukovych started fishing for investments of up to $4bn on a visit in September. Combined with Yanukovych's insistence that EU membership is the ultimate goal of his administration, that left Brussels just enough leverage to pull Kyiv round at the last minute. Just two days after a junior Ukrainian official turned up in Oslo, a delegation from Ukraine's ruling Party of Regions was in Beijing to sign fresh declarations of friendship. Lilit Geovargyab of IHS Global Insight suggests that, "Ukraine's change of heart is reflective of the balancing act that the leadership has to perform between its ambitions to curtail some individual freedoms, and the constant pressure from its powerful pro-western opposition."

Russia was perhaps the most interesting name on the list of those absent from the Oslo shindig. Many suggest that Beijing can exert little pressure on Moscow given its size and status, but China's gravitational pull is growing as it repositions itself as the senior partner in the relationship.

Beijing certainly knows which buttons to push, hence Premier Wen Jiabao's recent call to expand bilateral trade and for Chinese companies to invest in Russian infrastructure, financial markets and innovation - all of which are top priorities for Moscow, of course.

At the same time, China became Russia's second-largest trade partner in 2010, according to Bloomberg, whilst Russia is losing importance for China, and dropped three places to become only its 11th largest trading partner in 2009, as it was overtaken by Australia, India and Brazil.

As Vladimir Portyakov of the Russian Academy of Sciences points out, because of the nature of that trade, it's a relationship that's becoming more and more unbalanced, "signalling a change in the power relationship between Moscow and Beijing." That shift is gathering momentum as China's economy continues to rapidly grow, and a recent HSBC report predicts that by 2020, no less than six Chinese provinces will boast GDP levels the equivalent of Russia's as a whole.

A great deal of that imbalance stems from China's success in modernising its economy, whilst Russia's remains addicted to natural resources. And China is now acting as pusher, offering a huge new energy thirst as global demand struggles. Since the crisis began, China has issued $25bn in loans to Transneft and Rosneft to power the rapid turn of oil infrastructure to the east.

Portyakov says that meanwhile, Russian experts have begun to discuss the lessons to be learnt from China's modernisation, suggesting that, "the very idea... symbolises the radical change of roles: Russia, seen as the teacher of China for much of the 20th century, has now become pupil."

Yet it's not just commodities. In its bid to diversify its investments away from US debt, China is also expanding into Russia's financial markets. Whilst the pair have clubbed together in a mutual bid to reduce the influence of the dollar by the launch of trading in each others currencies, you don't see Chinese banks or industrial giants issuing debt in rubles. Yet VTB issued its first debt denominated in yuan in December, beating the rate on its previous ruble bond by around 2.4%, and Rusal plans to follow suit in 2011.

It's a gas

Even so, despite being just next-door Russia currently sells no natural gas to China. Whilst Beijing has been busy diversifying its suppliers, it has stood firm in demanding a discount from Moscow for around five years now, as imports from South America have risen dramatically.

Most interestingly from Russia's point of view is the flow of gas from Central Asia. Not only does this create competition for Russia as a gas supplier, it also eats into its influence over its "near-abroad". Moscow has been extremely vocal over US and EU activity in Central Asia and the Caucasus, but remains notably quiet over China's advances in the same region.

The December 2009 opening of the Central Asia-China gas pipeline, which connects gasfields in Kazakhstan, Uzbekistan and Turkmenistan to China, had huge implications for those countries. Previously, Russia was the only substantial export route, and Gazprom has for years been playing hardball on pricing for gas that it has traditionally bought and then re-exported to Europe at a considerable mark-up.

CAC pipeline

Relations between Turkmenistan and Russia have already soured, with Turkmenistan blaming Gazprom's ineptitude for an explosion on one of its gas pipelines last year. Ashgabat is also hopeful of securing $4bn in loans from Beijing to develop new deposits and infrastructure. "Turkmenistan will extend their hand to anyone who can offer them something and at the moment the Russians can't offer them anything," says Shamil Yenikeyeff of the Oxford Institute for Energy Studies.

The pipeline also sent shockwaves through the West, and provoked a rare US Senate Foreign Relations Committee hearing regarding China's geopolitical thrust into a region in which it thought Russia was its rival. However, according to Yenikeyeff, "Central Asian countries perceive Russia as a declining power, while China is an emerging power."

Richard Morningstar, the US special envoy for energy, admitted at the time: "It is hard for us [the US] to compete with China in some of these countries. It's easy for Turkmenistan to make a deal with China when China comes in and says, 'Hey, we're going to write a check for X amount of money, we're going to build a pipeline'. That's not a hard deal to accept, and we can't compete in that way."

Beijing has spent years cultivating relations in Kazakhstan also. By 1997, it had agreed to build a 20m tonne-per-year oil pipeline, and has since poured billions in investments and loans into oil, gas and uranium production. Little wonder then that Almaty's ambassador to Norway was busy on December 10.

Yet despite all the hard cash that China is putting on the table, Geovargyan notes one point of irony in the fuss over the Oslo ceremony. "In some ways, the campaign to block the award ceremony could be one of the first signs that, much like the West, China is trying to attach political strings to its cooperation after all."

Western horizons

Central and Southeast Europe is being guarded by the EU umbrella, but China is still finding success in those regions in securing huge investments, whether it be building the infrastructure Poland so badly needs, or locating large plants in struggling Hungary or Slovakia. Many suggest that China sees the region as a beachhead to Western European markets, one with lower costs.

Suspicions that there is a geopolitical element are probably correct - in October, Germany's Committee on Eastern European Economic Relations warned that China seems driven by geopolitical rather than economic goals. "The financing terms for Chinese suppliers often betray a huge degree of state subsidy, say in the form of very low rates for long-term loans from the [Export-Import Bank of China]," the paper notes, suggesting a "direct correlation" between the risk assessments of foreign projects by Chinese banks and "the strategic interests of the political leadership in Beijing."

Dr Klaus Mangold, Chairman of the Committee on Eastern European Economic Relations, says: "There's nothing to say against affordable financing, when they are in some way economically comprehensible. But this is not the case."

The China Eximbank deal with Serbia, for example, involved a loan of €145m at 3% interest for a period of 15 years. The normal market interest rate for such a project, however, is a minimum of 6% over a period of five years. "This can not be justified at all as an interest rate orientated to international markets," Mangold said.

The US has been issuing similar warnings for some time over Chinese commercial interest in Africa and Latin America - especially those countries with natural resources.

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