Wednesday, June 12, 2019

Russia in Review: May 14 - June 11, 2019 (Part 1)

Russia in Review is a weekly intelligence summary (INTSUM) produced by the Institute for the Study of War (ISW). This ISW INTSUM series sheds light on key trends and developments related to the Russian government’s objectives and its efforts to secure them. Receive future Russia in Review INTSUM products via-email by signing up for the ISW mailing list.

Reporting Period: May 14 - June 11, 2019 (read the previous Russia in Review here)

Part 1 of 2 (read the second part here)

Authors: Mason Clark and Nataliya Bugayova

Key Takeaway: Russia and China signed numerous agreements to boost economic cooperation and attempt to limit dependence on the West during Chinese President Xi Jinping’s June 5-7 state visit to Russia. The Kremlin risks ceding strategic ground to China in the long term as it seeks additional sources of cash and international partnership in the short term.

Russia and China promoted their strategic partnership during Chinese President Xi Jinping’s June 5-7 state visit to Russia. Xi Jinping and Russian President Vladimir Putin signed nearly 30 agreements during Xi’s visit to Russia, including a joint statement on Sino-Russian strategic cooperation.[1] Putin and Xi claimed relations between Russia and China have reached an unprecedented level.[2] Xi highlighted his personal ties with Putin and described Putin as his "best friend," while Putin framed the Russo-Chinese relationship as a strategic alignment.[3] Xi’s visit focused on economic cooperation with limited comments on international affairs.[4] Putin accused the U.S. of attempting to “extend its jurisdiction to the whole world” as Putin and Xi continued to frame themselves as champions of a multipolar international order in opposition to U.S. hegemony.[5] Putin and Xi discussed linking the Russia-led Eurasian Economic Union (EAEU) and China’s Belt and Road Initiative (BRI).[6] This idea supports Putin’s vision to create a Great Eurasian Partnership that would include the EAEU and BRI among others.[7]

Russia and China boosted cooperation in the energy, technology, and agricultural sectors. Putin and Xi designated 2020 and 2021 as years of Russian-Chinese scientific, technical, and innovation cooperation.[8] The Russian Direct Investment Fund (RDIF) and the state-owned China Investment Corporation agreed to invest $1 billion in the newly created Russia-China Science and Technology Innovation Fund.[9] The RDIF and Chinese e-commerce giant Alibaba Group will invest $100 million each in a joint venture involving Russian phone operator Megafon and internet company to expand e-commerce in Russia.[10] Chinese telecommunications manufacturer Huawei signed a deal with Russian telecom company MTS on June 5 to develop a fifth-generation wireless technology network (5G) in Russia. Huawei also purchased the rights to use facial recognition software developed by Russian company Vocord on June 3.[11] The U.S. has recognized Huawei as a security threat and is attempting to disincentivize U.S. partners from using Huawei.[12] China is likely the driver of the 5G deal with Russia as Huawei is facing resistance in its international business development and seeks Russia as a potential market.

Putin and Xi also signed a number of energy deals. Putin and Xi agreed that Russian state nuclear energy corporation Rosatom would build several more nuclear power units in China, including a “demonstration fast neutron reactor.”[13] The Kremlin is continuing its campaign to capture global nuclear energy markets with projects underway in Europe, Africa, and Asia. Putin and Xi also announced that the Power of Siberia gas pipeline, intended to deliver 38 billion cubic meters of gas annually to China, will become operational in December 2019. China Petrochemical Corp Sinopec has secured a 40 percent stake in Russia’s Amur Gas processing plant project.[14] Sinopoc will also help Russian gas company Novatek market Russian LNG produced in the Arctic to end-users in China. Novatek announced the sale of a 20 percent stake in its gas liquefaction project in the Arctic to Chinese CNODC, a subsidiary of China National Petroleum Corporation, in April.[15] ISW assessed that increased Russian cooperation with China in the Arctic can limit U.S. freedom of movement in the region.

China seeks to reduce its dependence on American technology – the key premise of its Made in China 2025 strategy. China likely has the manpower and industrial strength to take advantage of Russian technical knowledge. The Kremlin seeks additional forms of cash, as Western sanctions dried up foreign direct investment into Russia. The Kremlin might be using its technological cooperation as a means to secure Chinese investment in other areas, such as energy and Arctic development projects. The U.S. must consider the long-term implications of technology transfers between Russia and China, in particular from the standpoint of military capabilities and governance. China is using technology to aid its authoritarian population control policies; the Kremlin might also be heading in this direction as Putin’s value proposition to his population declines. China has already been spreading its censorship-enabling technologies. China National Electronics Import & Export Corporation (CEIEC), which develops surveillance systems for the Chinese government, exported its technology to numerous authoritarian governments in countries such as Ecuador, Venezuela, Bolivia, and Angola. CEIEC lists Moscow as its only European office.[16]

China is additionally turning to Russia as an agricultural source as China curbs its food imports from the U.S. and Canada.[17] Russian and Chinese officials discussed increased Russian food exports to China and Chinese investment in agricultural development in Russia’s Far East during Xi’s visit.[18]

Putin and Xi continued to attempt to limit Russia’s and China’s dependence on the Western financial system. Both leaders pledged to grow bilateral trade, which increased to $108 billion in 2018, exceeding the $100 billion goal.[19] Putin and Xi signed an agreement pledging to promote trade in the ruble and yuan instead of the dollar. The agreement also focuses on “ensuring uninterrupted banking services for transactions in conditions of instability in global markets.” Both countries seek to insulate themselves from shocks in the Western financial system. Putin accused the U.S. of using its financial system as a weapon on June 7. The Kremlin is heavily pushing for the de-dollarization of its economy to buffer itself from future U.S. sanctions. The Central Bank of Russia has grown the share of its yuan foreign currency reserves from 2.8% to 14.2% since 2018.[20] China is also looking for ways to mitigate the effects of the ongoing trade war with the U.S. and potential future shocks. The efforts have produced limited success thus far as companies in Russia still prefer transactions in dollars.[21] Russian and Chinese efforts to build an alternative to SWIFT interbank financial telecommunication system have also been progressing slowly, with Russia’s alternative service facing multiple limitations including limited operating hours, domestic-only transactions, and a lack of connectivity to banks in the Commonwealth of Intendent States (CIS).[22] Russia and China will, however, persist in their effort to build a coalition of countries to move away from the dollar.

The Kremlin will continue to boost its ties with China in search of additional resources and international coalitions while risking ceding ground to China in the long-term. Russia and China, continue to face several points of strategic divergence and imbalance in the relationship despite new agreements and rhetoric about strategic partnership. China has the upper hand with Russia in many respects given the size of the Chinese economy and population. The technology cooperation agreement that Xi and Putin signed likely benefits China more than Russia. Russia gains additional sources of cash through Chinese investment, but also provides China with critical resources such as energy and, potentially, food in the longer term. The Kremlin is likely not content with Chinese expansion in Russia’s backyard in Central Asia and in Russia’s Far East. Increased Chinese investment in Russia is also unpopular among the Russian population. The Kremlin has recently faced protests in Russia’s Chuvashia region against reported Chinese pressure on local farmers to sell land to Chinese companies. Over a million Russians signed a petition against a Chinese-backed water bottling plant near Lake Baikal earlier this year. The Kremlin needs Chinese investment to develop the Arctic, which is one of Putin’s stated strategic goals. The Kremlin is wary, however, of facilitating a longer-term Chinese military presence in the region. And while Putin and Xi agreed to link the Russia-led EAEU and China’s BRI, it is unclear how much leverage Putin has in shaping the terms of this cooperation.[23] The Kremlin is certainly aware of the risk of a closer relationship with China, but might think it can control the ties, which may simply not be true in the long run.

[1] [“The Beginning of the Russian-Chinese Negotiations in a Narrow Composition,”] Kremlin, June 5, 2019, http://kremlin(.)ru/events/president/transcripts/60670; [“Xi Jinping Holds Talks with Russian President Putin,”] Ministry of Foreign Affairs of the PRC, June 6, 2019, https://www.fmprc(.)
[2] [“The Beginning of the Russian-Chinese Negotiations in a Narrow Composition,”] Kremlin, June 5, 2019, http://kremlin(.)ru/events/president/transcripts/60670
[3] “Beijing, Moscow to Sign around 30 Deals during Xi’s Russia Tour, Says Chinese Diplomat,” TASS, May 30, 2019, http://tass(.)com/world/1060743; [“Press Statements Following Russian-Chinese Talks,”] Kremlin, June 5, 2019, http://kremlin(.)ru/events/president/news/60672.
[4] [“Press Statements Following Russian-Chinese Talks,”] Kremlin, June 5, 2019, http://kremlin(.)ru/events/president/news/60672.
[5] [“Press Statements Following Russian-Chinese Talks,”] Kremlin, June 5, 2019, http://kremlin(.)ru/events/president/news/60672; [“Plenary Session of the St. Petersburg International Economic Forum,”] Kremlin, June 7, 2019, http://kremlin(.)ru/events/president/news/60707.
[6] [“Plenary Session of the St. Petersburg International Economic Forum,”] Kremlin, June 7, 2019, http://kremlin(.)ru/events/president/news/60707.
[7] “Plenary Session of St Petersburg International Economic Forum,” Kremlin, June 17, 2016, http://en.kremlin(.)ru/events/president/news/52178; “Meeting of Ambassadors and Permanent Representatives of Russia,” Kremlin, July 19, 2018, http://en.kremlin(.)ru/events/president/news/58037.
[8] [“Press Statements Following Russian-Chinese Talks,”] Kremlin, June 5, 2019, http://kremlin(.)ru/events/president/news/60672.
[9] [“Russia and China will Create a $1 Billion Science and Technology Innovation Fund,”] TASS, June 5, 2019, https://tass(.)ru/ekonomika/6511955; “RDIF and CIC to Invest in Russia-China Science and Technology Innovation Fund,” Russian Direct Investment Fund, June 5, 2019, https://rdif(.)ru/Eng_fullNews/4095/.
[10] “RDIF, Alibaba Group, MegaFon and Group Announce Signing of Definitive Documents for Joint Venture in Russia and the CIS,” Russian Direct Investment Fund, June 5, 2019, https://rdif(.)ru/Eng_fullNews/4096/.
[11] [“Huawei Bought Face Recognition Technology from a Russian Company,”] Novaya Gazeta, June 3, 2019, https://www.novayagazeta(.)ru/news/2019/06/03/152209-huawei-kupila-u-rossiyskoy-kompanii-tehnologii-raspoznavaniya-lits.
[12] "Addition of Entity to the Entities List," Bureau of Industry and Security, May 21, 2019,
[13] [“Press Statements Following Russian-Chinese Talks,”] Kremlin, June 5, 2019, http://kremlin(.)ru/events/president/news/60672; “Putin: Moscow, Beijing Agree on Building Several More Russia-Designed Nuclear Power Units,” TASS, June 7, 2019, http://tass(.)com/economy/1062602.
[14] “Sinopec Signs Agreement With Russian Oil Company,” O&G Links, June 10, 2019,; Sibur, Amur GCC Project, 2019, https://www.sibur(.)ru/en/about/investments/16906/; Zheng Xin, “Sinopec Signs Agreement with Russian Oil Company,” China Daily, June 9, 2019, http://www.chinadaily(.); Andrey Ostroukh, Katya Golubkova, “Russia’s Sibur eyes Moscow IPO no Earlier Than 2020: CEO,” Reuters, June 7, 2019,
[15] “NOVATEK and CNODC Sign Entrance Agreement to Arctic LNG 2,” Novatek, April 25, 2019, http://www.novatek(.)ru/en/press/releases/index.php?id_4=3173.
[16] CEIEC, Business Network, http://www.ceiec(.)com/content/business_networks.
[17] “Russia, China to Boost Energy, Agricultural Trade Due to US Trade War – Scholars,” Sputnik, June 1, 2019, https://sputniknews(.)com/analysis/201906011075519959-russia-china-us-trade/; Laura Zhou, “Russia Ready to Fill China’s Food Gap Left by US in Trade War Fallout,” South China Morning Post, June 7, 2019,
https://www.scmp(.)com/news/china/diplomacy/article/3013549/russia-ready-fill-chinas-food-gap-left-us-trade-war-fallout; Naomi Powell, “Canadian Soybean Exports to China Plunge 95% After Hitting Record High, as Diplomatic Dispute Continues,” Financial Post, May 17, 2019,
[18] [“Russia Will Expand the Supply of Agricultural Products to China,”] Ministry of Agriculture of the Russian Federation, June 5, 2019, http://mcx(.)ru/press-service/news/rossiya-rasshirit-postavki-selkhozproduktsii-v-kitay/; Ekaterina Burlakova, [“A Large Chinese Holding Will Invest Almost 10 Billion Rubles in Russian Agriculture,”] Vedemosti, June 6, 2019, https://www.vedomosti(.)ru/business/articles/2019/06/06/803577-holding-vlozhit.
[19] [“Press Statements Following Russian-Chinese Talks,”] Kremlin, June 5, 2019, http://kremlin(.)ru/events/president/news/60672.
[20] Irina Malkova, [“The Central Bank Transferred its Assets from the United States to China and Halved its Share of Assets in Dollars,”] The Bell, May 8, 2019, https://thebell(.)io/tsb-perevel-svoi-aktivy-iz-ssha-v-kitaj-i-vdvoe-snizil-dolyu-aktivov-v-dollarah/.
[21] [“Russia and China Prefer Settlements in Dollars and Euros, Rather Than in National Currencies,”] Reporter, May 31, 2019, https//topcor(.)ru/8996-rossija-i-kitaj-predpochitajut-raschety-v-dollarah-i-evro-a-ne-v-nacvaljutah.html.
[22] [“Stretched String: Is it Possible to Disconnect Russia From SWIFT,”] Forbes Russia, March 15, 2018, https://www.forbes(.)ru/finansy-i-investicii/358573-natyanutaya-struna-vozmozhno-li-otklyuchenie-rossii-ot-swift.
[23] [“Plenary Session of the St. Petersburg International Economic Forum,”] Kremlin, June 7, 2019, http://kremlin(.)ru/events/president/news/60707.