After capturing the long-contested Donetsk airport last week, separatist forces in eastern Ukraine are now surrounding government troops near a rail hub in Debaltseve. The militants are advancing in Ukraine, as President Obama said on Sunday, “with Russian backing, Russian equipment, Russian financing, Russian training, and Russian troops.”
Russian President Vladimir Putin is moving his boundaries to the west, deeper into Europe. In the south, in the Caucasus, the Russian Federation this month effectively absorbed South Ossetia, once a part of Georgia. Last November, Putin swallowed Georgia’s Abkhazia. Less than a year ago, it annexed Crimea.
Yet as the willful Russian leader dismantles his neighbors, his economy is tumbling. The price of oil has collapsed beneath him and international sanctions have been heaped on top of him. Where does he find the wherewithal to go on with his quasi-imperial plans?
There’s a one-word answer: China.
In recent months China has thrown his economy a lifeline—several of them in fact.
To get an idea just how vital Beijing’s assistance has been, let’s take a look at just how deep the morass is that Putin’s been in.
In November, Russia’s gross domestic product fell 0.5 percent, the first decline since October 2009. December, when the numbers are announced, is bound to be worse. The price of oil is now at six-year lows—the Brent spot price has dropped by nearly 60 percent in six months—and oil and gas account for roughly two-thirds of the country’s exports. This year, the Russian economy may contract by 10 percent, and possibly by more. Inflation could reach 17 percent this year according to Alexi Vedev, Russia’s deputy economy minister.
The ruble has fallen 49 percent against the dollar since the end of 2013. A plunging currency will make it extremely difficult for the country to make required annual payments of $100 billion a year on its foreign debt which amounts to some $600 billion. To defend the currency, the government has raised interest rates. The benchmark hit 17 percent in the middle of last month. That, by itself, will eventually choke off economic activity unless it is reduced. But if it is reduced, the ruble will tumble.
Russians, not surprisingly, are pessimistic. There was more than $150 billion of capital flight last year, more than double the amount in 2013. This year will also see large amounts hemorrhaging out, but the government is trying to stop the flow by imposing “informal currency controls,” making it difficult to convert rubles into dollars. This will deepen the recession as Russian exporters will not be able to pay for raw materials from abroad. Because of capital flight, Russia’s foreign currency reserves fell to $380 billion at year’s end, from $510 billion at the beginning of 2014.
To make matters worse, Obama on Sunday all but promised more sanctions on Russia and Europe will almost certainly go along with the push. Putin, however, is defiant, blaming both Kiev and NATO for the renewed fighting in Ukraine.
And China is backing his play.
First there are a series of oil and gas contracts signed since 2013, signs of the “energy alliance” between the Dragon and the Bear.
These deals are starting to pay off for Putin. China’s imports of Russian oil hit an all-time high in November. November’s record, however, did not last long. In December, China topped that by importing 876,000 barrels per day of Russia’s crude. That was up 86 percent from December 2013.
Thanks in part to oil and gas sales, total trade volume between China and Russia increased 6.8 percent to $95.3 billion last year, a record. Putin says trade with China will hit $200 billion in 2020.
That sounds high, but that’s not all. Beijing apparently has made a decision to support the Russian economy, come what may. As Shen Danyang of China’s Ministry of Commerce said this month, “If there is a need from the Russia side, China is willing to offer necessary aid within its capacity.” Those remarks echo those of Foreign Minister Wang Yi’s from December and an editorial from the same month in the Communist Party’s Global Times. “Russia is an irreplaceable strategic partner on the international stage,” the paper declared. “China must take a proactive attitude in helping Russia walk out of the current crisis.”
Those words are more than just words. In October, Moscow and Beijing entered into a $24.4 billion currency swap arrangement, effectively providing Russia liquidity. Chinese Commerce Minister Gao Hucheng has talked about extending additional help by expanding the swap.
Then the People’s Bank of China, China’s central bank, on December 26 permitted the trading of renminbi-ruble derivatives, facilitating trade between Chinese and Russian companies. China’s Export-Import Bank did its part by extending credit to two sanctioned Russian banks. Premier Li Keqiang, in a three-day visit to Moscow in October, signed 38 deals with the Russians.
Will that be enough? Li Jianmin of the Chinese Academy of Social Sciences in late December raised the possibility of channeling more aid to Russia through the Shanghai Cooperation Organization or the BRICS forum.
Why is China doing all this? In the Russian strongman, Beijing’s policymakers see not only someone who shares their general outlook and a fighter willing to take on Washington, but also a now needy and therefore pliable junior partner. With America essentially identified as China’s geopolitical opponent, it is only natural that Beijing seeks to fortify the Kremlin. The Chinese are “happy to join with Moscow to expand business in defiance of Washington,” notes Alexander Salitsky of the Institute of World Economy and International Relations.
How close are Moscow and Beijing? Last year, Putin met Xi Jinping, China’s ruler, five times.
And what does China get in return? Beijing gets an opportunity to expand the use of its currency as Russia, targeted by new rounds of sanctions, is progressively shut out of the dollar-based global financial system. Chinese leaders dream about their currency being used around the world in place of the greenback, and Russia’s moment of need gives them an opportunity to bring Russia into an expanding renminbi zone.
So Obama and European leaders can pile on all the sanctions they want on Russia, to “weaponize finance” as some say, but Beijing will be standing by to help Putin weather the West’s attack.
The battle between the reigning dollar and the challenger renminbi, the 21st century’s version of the tariff wars of the 1930s, is now being played out in a new arena, Russia. The Chinese, in the last few months, have made it clear they are willing to deploy great resources to this long struggle.