China Offers Enhanced Cooperation as Russia Struggles

By Bloomberg News Dec 19, 2014

China offered enhanced economic ties withRussia at a regional summit this week as its northern neighbor struggled to contain a currency crisis.

“To help counteract an economic slowdown, China is ready to provide financial aid to develop cooperation,” Premier Li Keqiangsaid at a Dec. 15 gathering in Astana,Kazakhstan. While the remark applied to any of the five other nations represented at the meeting of the Shanghai Cooperation Organization group, it was directed at Russia, according to a person familiar with the matter who asked not to be named as the plans weren’t public.

Any rescue package for Russia would give China the opportunity of exercising the kind of great-power leadership the U.S. has demonstrated for a century -- sustaining other economies with its superior financial resources. President Xi Jinping last month called for China to adopt “big-country diplomacy” as he laid out goals for elevating his nation’s status.

“If the Kremlin decides to seek assistance from Beijing, it’s very unlikely for the Xi leadership to turn it down,” said Cheng Yijun, senior researcher with the Institute of Russian, Eastern European, Central Asian Studies at the Chinese Academy of Social Sciences in Beijing. “This would be a perfect opportunity to demonstrate China is a friend indeed, and also its big power status.”

China Ready

Russia isn’t in talks with China about any financial aid, said Dmitry Peskov, a spokesman for President Vladimir Putin. He said he didn’t know if China is preparing to offer aid. China’s Foreign Ministry, asked about assisting Russia, said the country is ready to work with all members of the SCO group to strengthen economic cooperation.

One-time Cold War ally China already proved a help to its neighbor embroiled in tensions with the U.S. and European Union earlier this year, signing a three-decade, $400 billion deal to buy Russian gas.

Seeking China’s support is one of Russia’s most realistic options, the state-run Chinese newspaper Global Times wrote in a Dec. 17 editorial. A decision on whether to use some of its windfall gains from falling oil prices to aid Russia would hinge on whether Putin’s government is willing to ask for assistance, said Cheng, who is also a research fellow at the Development Research Center, which is a unit of the State Council, or cabinet.

Putin Grit

The two nations’ strategic partnership means that China would have to step in if the ruble crisis deepens, Cheng said.

Putin gave no indication he was entertaining the idea of asking for Chinese help. In an annual press conference, he warned that his nation’s economic slump could drag on for two years. Blaming the U.S. and Europe for the crisis, he advised his central bank not to spend shrinking currency reserves to protect the ruble, which has plunged 32 percent in the past two months against the dollar.

Russia’s currency weakened 2.3 percent this week even after the central bank raised its key interest rate to 17 percent from 10.5 percent.

IMF Difficulty

While emerging markets facing such situations typically can turn to the International Monetary Fund for help, Russia’s impasse with Group of Seven nations over the situation in Ukraine may make it difficult to find loan conditions agreeable to all member countries, given that the U.S. and European nations dominate the Washington-based lender.

Putin in any case “would probably rather cut off an arm than negotiate a financial support package” with nations whose sanctions helped fuel its crisis, William Hess, co-head of research at New York-based PRC Macro Advisors Ltd., wrote in an e-mailed note Dec. 17.

Meantime, Russia’s strategic importance to China means it may consider “bold steps” at a time when few others are willing to help, he said. “This brings us back to China and leaves Xi Jinping and China as Putin’s possible white knight.”

China has used $25 billion of its foreign-exchange reserves to support oil supply from a Sino-Russian pipeline, and another $67.3 billion to boost the supply of crude oil from Russia, according to a statement on the central Chinese government’s website posted this week. The statement didn’t specify what type of support was provided or a time frame for the help, other than saying it was since Li took office in March 2013.

Reserve Strength

China’s reserves -- the world’s largest -- stood at $3.89 trillion at the end of September. Russia had $373.7 billion at the end of last month, according to data compiled by Bloomberg.

At the Astana gathering of the Shanghai Cooperation Organization this week, Li met with Russian Prime Minister Dmitry Medvedev. The group includes Kazakhstan, Kyrgyzstan, Tajikistan and Uzbekistan along with Russia and China.

“China is ready to take such measures bilaterally and with other members of the SCO group,” Li said of his offer for help.

Faxed questions to China’s State Council on a potential specific offer of aid went unanswered. Asked whether China would offer support to Russia amid its crisis, Foreign Ministry spokesman Qin Gang said that “we believe that Russia is capable of surmounting the current temporary difficulty,” citing its currency reserves, natural resources, industry and relatively low government debt.

’New’ Points

“We are ready to work with all SCO members to step up economic cooperation, promote economic restructuring and upgrade, and explore new growth points of cooperation so as to achieve common development and stability,” the spokesman said, according to a transcript of the briefing.

Russia’s currency-swap deal with China is one potential avenue of help, said Arthur Kroeber, Beijing-based managing director of economic research firm Gavekal Dragonomics. The agreement on a three-year 150 billion yuan ($24 billion) local-currency swap was one of the accords reached between Putin and Xi in October.

“China values Russia as a strategic counterweight to the U.S. and so has no interest in a Russia implosion,” Kroeber wrote in an e-mailed response to questions. Kroeber said that low risk of a Russia collapse means that “Chinese assistance other than maybe a bit of discreet buying of ruble assets” is “not that necessary.”

China, the world’s largest oil importer, has emerged as one of the biggest winners from the slump in the fuel’s price that has hammered its northern neighbor. A 30 percent drop in the price of oil alone could add 0.3 to 0.5 percentage point to China’s growth, says Mizuho Bank Ltd.

Russia’s crisis is a double-edged sword for China, said Wang Haiyun, a former Chinese military attaché to Russia and a senior consultant to the Shanghai Cooperation Organization.

“If China gets involved too much it would risk being dragged into the crisis itself,” Wang said. “China could offer to bail out Russia but at the same time it has to watch out for any potential risks.”

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