A Russia-China Alliance Emerging, A Disaster For The West

May 21, 2014 | Roundtable Discussion

By Mark Adomanis | –

Just the other day I wrote that Russia and China were moving closer together and that this posed a significant threat to the West. It’s true that Russia and China are an odd couple with a long history of animosity and suspicion. Recent experience, however, seems to have taught both of them that American-led security alliances are an even more pressing danger. It might be an alliance of convenience, but it’s an alliance nonetheless.

Russia and China’s increasing fear of, and contempt for, the West is the background to the massive $400 billion natural gas mega deal between Gazprom and the China National Petroleum Corporation that was signed earlier today. As one might expect for a contract between two secretive and state-owned firms, the precise terms were not immediately available. According to the BBC, the agreement lasts for 30 years and is “expected to deliver some 38 billion cubic meters of natural gas a year” starting around 2018. The single most important part of the contract, though, the price per cubic meter that China is obligated to pay, has not yet been revealed, and has been the source of some pretty raucous disagreements between analysts. Whether Russia scored a massive coup or whether it got duped by Beijing is not yet clear, and won’t be clear until the unit price is publicly released.

38 billion cubic meters might sound like an absurdly large amount of gas, but it’s actually not that huge when compared to Russia’s trade with other countries. For comparison’s sake, Russia has routinely delivered around 40 billion cubic meters of gas a year to Ukraine alone. The total amount of its exports to Western Europe was much larger still. So, simply as a factual matter, Russia has not suddenly re-oriented the entirety of its natural gas industry towards Asia. The contract is a major step in that direction, but even if Gazprom fulfills every single letter of the contract it will still be heavily dependent on its traditional customers in Europe for the foreseeable future.

Although I think that Russia-China partnership is a very important story, I would advocate extreme caution in analyzing the significance of this particular natural gas deal. Why? Well when dealing with “state capitalist” entities a contract is never really a contract: if, 10 years from now, Gazprom realizes that it is subsidizing Chinese gas imports it will do what it has always done and threaten to cut off the flow unless it gets more money. The Chinese side will act similarly: if the leadership at CNPC realizes that they are paying a significant premium for Russia gas, they will switch to other suppliers as quickly as possible. The ability to quickly enter into or revoke contracts is simultaneously state capitalism’s greatest strength and its most glaring weakness. When necessary, companies like Gazprom and CNPC can move extremely quickly and enter into agreements without the need for shareholder meetings or discussions with boards of directors. They can take advantage of opportunities ruthlessly and with little warning. And, when they feel the need to exit a contract, they do not need to worry themselves with legal niceties: they simply do what they need to.

The problem, of course, is that this lack of legal accountability creates an enormous amount of uncertainty over long-term projects. The “30 year” agreement between Russia and China could last for 5, 10, 15, or 20 years. Or it could last for the entire 30. No one really knows. So, yes, this contract is important and it suggests that Russia and China will cautiously move towards closer economic and diplomatic engagement. But we shouldn’t overstate what it is going to accomplish because there’s no guarantee that it will ever be implemented.

It’s always dangerous to declare the crisis in Ukraine over. Every time it seems as if the situation has “de-escalated,” something awful happens: a building is burned down in Odessa, Ukrainian soldiers are ambushed outside of Slovyansk, a mayor is shot, or a journalist is kidnapped. These provocations have usually, but not always, been at the instigation of pro-Russian separatists, and have promptly caused a renewed spiralling of tensions and violence. It’s been clear that the Russian authorities have been trying their utmost to maximize the chaos in Ukraine in order to prevent the post-Yanukovych government from consolidating its hold on power, and they have done little or nothing to ameliorate, and quite a lot to incite, increasingly dangerous East-West cleavages.

Nonetheless, the most recent overtures from Moscow have been decidedly less antagonistic than before. While far from certain, it at least appears possible that the Kremlin is backing down having realized that it overplayed its hand. I’ve been harshly critical of the Kremlin’s efforts to destabilize Ukraine, and if these efforts really have failed then we should all be grateful. Russia has perfectly legitimate concerns regarding the composition of the new government in Kiev, but its behaviour over the past three months has been as dangerous as it is indefensible.*

So what does the situation Ukraine have to do with China? Well international politics doesn’t take place in a vacuum. The West has been openly debating the imposition of severe sanctions on Russia’s already-reeling economy to force it to “pay a price” for its recent actions. It’s entirely possible that these sanctions won’t happen, German industry is furiously opposed to them, but despite the bluster of people like Sergei Glazyev Russia’s ability to directly respond is extremely limited. Russia could cut the flow of oil and gas to Europe, but the health of its government finances depends on selling as much energy as possible. Unless Russia wants to force itself even deeper into a recession, in the short term it has no other choice but keeping the pipelines open.

What Russia can do, at least in the medium and long terms, is re-orient itself away from Europe. And it appears that it has decisively decided to do just that. Reuters, the New York Times, and the Financial Times have all recently published lengthy and well-written stories on Russia’s turn towards China, stories which are worth reading in full. Previously, Western experts tended to be extremely dismissive of any potential Russia-China entente. In the standard narrative, the two countries were too culturally and economically distinct, had too long a history of suspicion and distrust, and placed a much higher value on ties with the West than with each other. To simplify things only slightly, the assumption was that the two countries disliked each other so much that they could never, under any circumstances, become allies.

Not all of that has changed overnight, of course. Russia and China are still very different countries with very different economies and very different ways of viewing the world. However, both Russia and China, fresh off of sharp disagreements with American-led security blocs, appear much more comfortable with the prospect of confrontation than they were in the past. They also appear substantially more open to the possibility of cooperating with each other. This change has, to put it mildly, not been very well noticed in Washington. As the Times put it:

In highlighting that the sanctions are helping to disrupt the Russian economy, the Obama administration has virtually ignored that it is pushing Russia toward greater dependence on China, Mr. Gaddy noted.

It’s rare for the Times to be so critical of Obama, but this is an appropriate criticism. A Russia-China alliance would, of course, be an absolute disaster for the United States, pretty much the only grouping of countries that would be genuinely interested in and capable of challenging its position of global leadership. Preventing the emergence of a Russia-China alliance ought to be at the very top of the list of US foreign policy priorities, but, as the Times noted, no one seems to be paying any attention. In Washington circles, Russia and China are considered two totally different and mutually exclusive issues studied by different groups of people with different affiliations.

A Russia-China alliance is far from inevitable. Frankly, given the troubled history of the two countries, I don’t think it would take a herculean diplomatic effort to head off the creation of such a partnership. The current policy of not doing anything, however, is clearly not an adequate response to such a serious potential threat. The US foreign policy community needs to wake up or, a decade from now, we’ll be hearing anguished debates about “who lost Eurasia.”

* Russian conduct has been indefensible not on “humanitarian” grounds but on the bases of national sovereignty and the inviolability of international borders. These are concepts that, until recently, the Kremlin and its supporters loudly defended. Even if, like me, you are decidedly sceptical of the new Ukrainian government, international law strictly forbids the forcible seizure of territory.

I am a MA/MBA candidate at the Lauder Institute at the University of Pennsylvania with a focus on Russian politics, economics, and business. Please note that all opinions expressed here are mine and mine alone and that I do not represent Lauder, Wharton, or any other organization. I focus on Russian demographic and economic trends, and do my best to inject hard numbers (and flashy Excel charts) into conversations and debates that are too frequently driven by anecdotes.

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