Putin's caravan of CEOs goes courting in China

Putin's caravan of CEOs goes courting in China
Bridge-building: Russian and Chinese presidents Vladimir Putin and Xi Jinping.
By Nick Allen in Warsaw June 24, 2016

President Vladimir Putin rolls into Beijing with a heavyweight posse of Russian CEOs on June 24 in what could be a defining moment for his country's vaunted 'pivot East'. Launched two years ago during Moscow's stand-off with the West over its annexation of Crimea and support for separatist rebels in East Ukraine, the drive has yet to work its magic for Russia though.

Underscoring the countries' declared "strategic partnership", the two-day visit with scheduled talks between Putin, his Chinese counterpart Xi Jinping and big business leaders should see the signing of around 30 mainly energy, trade and transport deals. But much still hangs on whether China is ready to abandon the waiting game it has played since 2014 as it strengthened its negotiating hand in gas and oil deals, which to Russia's frustration languished for many months.

The presidents will also give a start to talks on integration of the Eurasian Economic Union (EAEU) and the Silk Road Project to develop trade corridors across Eurasia, Putin's aide Yuri Ushakov said on the eve of the trip.

"Negotiations to prepare a trade and economic cooperation agreement between our integration projects will be formally started in Beijing. Achievement of a new partnership level is meant, implying the buildup of common economic space on the whole Eurasian continent," Ushakov told TASS.

On his way to Beijing, Putin stopped in the Uzbek capital Tashkent, where he, Xi and Mongolian leader Tsakhiagiin Elbegdorj also adopted a programme for building an economic corridor between the three countries that will include some 30 projects.

But first Russia and China have some catching up to do. Rather than growing, bilateral trade fell from $95bn a year in 2014 to $65bn last year, largely due to ruble devaluation caused by the impact of Western sanctions and low global oil prices. Encouraged by signs that Russia's recession has bottomed out, Foreign Minister Sergei Lavrov said in late May that a turnover of $200bn by 2020 was "quite achievable", a claim that is raising eyebrows. 

"[This] would require 2-digit Russian economic growth in 2017-2019 and I just don't see that happening," Simon Saradzhyan, director of the 'Russia Matters' project at Harvard University's Belfer Center, told bne IntelliNews.

At the same time, "China has not compensated for losses incurred by Russia in the course of the sanctions war with West, but it would have been naive to expect China to do so in the first place," Saradzhyan added. "China could not have possibly compensated for the [Western] ban on exports of certain technologies to Russia. What Russian leaders may have been surprised by is that Chinese lenders didn't quite step in to compensate for credit restrictions imposed by the West."

One good recent indicator, however, was the agreement in March by Gazprom and Bank of China on a €2bn five-year credit line, the largest loan from a single institution in the Russian company's history.

In a bid to show the West that the pivot East is viable, Putin initially visited Beijing in May 2014 to preside over the signing of a raft of deals, including a $400bn, 30-year natural gas contract. But since then, Chinese companies in general have also been cautious about developing their business in Russia.

Hi-energy delegation

Energy will be a central issue of the agenda in Beijing. Flanking Putin in Beijing will be Rosneft head Igor Sechin, Gazprom CEO Alexei Miller, head of the Russian Direct Investment Fund Kirill Dmitriev, Russia's business ombudsman Boris Titov, as well as chief executives of most other Russian majors.

The meetings have been planned to reach a breakthrough on sticking points such as the price of gas that will flow to China through the Power of Siberia-2 pipeline (the so-called "western route" to China that will supplement another more easterly pipeline project) that is being built.

Meanwhile, "Russia has been increasing the volume of supplies via the Russian-Chinese oil pipeline, the implementation of the Tianjin Refinery project is under way, the construction of the main Power of Siberia gas pipeline is on schedule as it will reach its full capacity in 2020," said Ushakov, who did not confirm that the privatisation of Rosneft will be discussed with Chinese business representatives.

Now it remains for Putin to persuade the Chinese to fully release the brakes on the overall partnership. But the idea that China has been stalling Russia to better its terms in the gas supply issue also doesn't hold any more, Harvard's Saradzhyan said.

"I don't think time is on either [country's] side. If anything, Russia's negotiating position is improving, given that its economy is forecast to resume growth next year, while the EU is also now likely to ease sectoral sanctions in December. So waiting for Russia's position to weaken would not be a good strategy. I don't expect a breakthrough on this [pricing] issue at the upcoming meeting. But I'd still expect a raft of deals to be signed. No head of state goes on a pre-planned visit to another state before his aides do homework to prepare deals for him and his team to sign."

The sale of stock is Rosneft is one obvious candidate for a major accomplishment out of the 30 potential deals that the Russian side says will be on the table at the summit. "But only if Chinese give up on the idea of having a meaningful say in running the company. Tech deals matter, but they won't be as large as the potential $11bn Rosneft stock deal," the expert added.

Packing the big guns

Despite a fraught modern history of rivalry and armed conflict between the two countries, and lingering Russian fears about Chinese expansionism, the new relationship has been trumpeted by both sides as a counterweight to a US-dominated world order. In May 2015, Putin cocked a defiant snook at Western leaders who stayed away from the 70th WWII Victory Day parade in Moscow by sitting side by side with Xi on the podium as a new generation of Russian heavy weapons rolled across Red Square.

Russian arms sales to China continue to thrive, even though some warn of the danger of arming a potential future challenger to Russia’s control of swathes of unpopulated Siberia, given that overpopulated China shares a 4,200km border with Russia.

Before leaving for Beijing, Putin sought to dispel such concerns, reminding that 25 years ago the two countries announced the launch of new relations, those of strategic partnership, and 15 years ago, they signed a friendship and cooperation treaty. "Since then, hard work has been done, resulting in an unprecedented level of mutual trust on which our collaboration is built," he told China's Xinhua news agency. "Our views on international affairs ... are either very similar or coincide."

How it will all shape up long term is still very much open, but a full partnership is likely to remain elusive. "Looking further down the road, one should expect both sides to try strengthen their strategic comprehensive partnership in both political, security and economic [terms], but it is unlikely this partnership will blossom into a full-blown official military-political alliance," Saradzhyan said.

Getting there

Transport links are another priority of Putin's trip and of a modern incarnation of the ancient Silk Road, although China has hitherto been more actively discussing this with Kazakhstan and other countries than with Russia. "We are laying together the new motorway from Europe to Asia across Russia, which will definitely improve motor traffic all over the continent," Ushakov said. "Throughput capacity of ports in the Primorsky Region will grow and construction of the Moscow-Kazan high speed railway is to be agreed by the year-end. This will be also discussed in Beijing."

In one glimpse into the crystal ball of what Eurasian trade can look like in decades to come, US company Hyperloop said this week it signed a cooperation deal with Russia to look at building a space-age "new Silk Road" transport link from China to Europe via Russia.

With testing already underway in the US, the futuristic transport system would propel carriages carrying passengers or cargo through pipes on cushions of air at speeds of up to 1,200 kilometres per hour. "Now a container from China can be in Europe within ten-eleven hours … we are talking of hours," the CEO of Hyperloop Dirk Ahlborn told TASS. The company plans to launch the first full-fledged transport system by 2020 after performing the first successful test drives in May in the desert near Las Vegas.

In Russia, pipelines for the Hyperloop trains can be built above the existing gas pipelines using their right-of-way, according to Ahlborn. "We can actually go above existing right-of-way," he said. "Obviously when I look at someone like Gazprom and the pipelines … these are massive rights-of-way available … It would be an interesting thing to look at."