The “follies” of Russia’s pivot to China

Recently, there has been no shortage of highly pessimistic commentaries published & republished, pointing out the supposed “follies” of Russia’s eastern pivot, by highlighting this year’s decline in Sino-Russian trade, China’s stock market volatility, and its supposed economic “weakness”. The conclusion implied by these articles is clear: “Russia’s economic pivot to China is failing, because increased economic cooperation has not mitigated Russia’s recent economic woes, or the effect of sanctions. China cannot save Russia, and the latter must continue depending on the West.”

This is essentially a straw-man conclusion. One thing should be plainly apparent through even a casual examination of Russia’s biggest recent commercial agreements with China: most of these arrangements with China were NEVER INTENDED to offset the impact of Russia’s current recession, but rather to position Russia’s economy for greater long-term diversification and upward mobility on the global economic value chain.

The deal which draws the most frequent & recent use of this straw-man is the $400 billion Sino-Russian ‘Power of Siberia’ gas deal. What is often overlooked is the fact that implementation was not set to take place until 2018 in the earliest scenario, and more likely closer to 2020 given potential construction delays. Even then, this is a long-term arrangement that spans 30 years – which at best comes to about $13.4 billion of revenue per year. Bottom line, offsetting the immediate (’14-’16) economic pain of the recession and sanctions was NEVER the intent of this deal, and should not be a success metric.

Another deal that has come under plenty of media fanfare is China’s involvement in the Moscow-Kazan high-speed rail. Again, the earliest completion date cited is 2018, meaning Russia’s economy will not reap any productivity gains from faster transportation at least until then. From an investment point of view, the immediate economic impact is even more negligible. China will partially finance this HSR route, which could total $5 billion over the next 3 years; this means an addition of  $1.6-1.7 billion per year into Russia’s economy, which amounts to a paltry ~0.084% of Russia’s $2 trillion GDP.

A third attention-worthy agreement is the Sino-Russian joint-development of wide-body airliners, an endeavor that would usually take 8-20 years before bearing any fruit, if the Boeing 777 is an reasonable benchmark.

Finally, there is the Sino-Russian business incubator in Skolkovo, along with Russia’s plan to establish a Skolkovo branch in Vladivostok. From a pure probability standpoint, this is an endeavor that may NEVER yield any direct benefits. 75-90% of all startups and small businesses are destined to fail, most of those that do not fail after 1-2 years will never have billion-dollar valuations or high-profiled IPOs; we should not expect startups from Skolkovo to perform differently.

Given that most strategic Sino-Russian initiatives will NOT bear fruit for many years, does that mean they are “failures”, or should not be pursued? The answer to that question really depends on how Russians perceive their own strategic priorities and their own future. Is it in Russia’ interests to diversify its trade portfolio, and eventually move away from being Europe’s resource appendage? Is it in Russia’s interests to modernize its transportation infrastructure, so as to stimulate economic development in its eastern regions? Is it in Russia’s interests to move up the international business value chain, from being solely a natural resources exporter to a competitor in high-tech, high-margin industries such as commercial aviation and robotics? Is it in Russia’s interests to foster entrepreneurship and innovation in an increasingly knowledge-based global economy? Is it in Russia’s interest to be an economically sovereign and independent country? If the answer to the questions above is ‘yes’, then there is NO DOUBT that Russia should continue these initiatives with China, and continue its eastern pivot strategy.

The harsh reality is that with the exception of a few situations, there is relatively little China can do to ease the pain of current low energy prices and economic sanctions. This is the inevitable consequence of Russia’s 20-year+ over-reliance on resource exports to Europe for its economic development. In the face of this reality, Russia has two choices: instant gratification by acquiescing to the West in the hope of short-term relief, and continuing down the path of ‘business-as-usual’, or partner with China to diversify and modernize its economy. The latter involves far more hard work and risk-taking, but is also a far more viable way to move Russia on a path of genuine sovereignty and stable economic modernization.