Duo dynamics

China and Russia are driving closer and hardly any political interventions can change that

The past few years have been a period of unprecedented growth in economic ties between Russia and China. For Russia, China has become the main supplier of multiple consumer and industrial goods in the shadow of Western sanctions. In January to October of 2024, China accounted for about 34 percent of Russia's foreign trade, compared with 18 percent in 2021.China received privileged access to the Russian automotive market, and it helped China to turn into the leading global exporter of cars. In January to November of 2024, for example, China sold some 1,060,000 cars to Russia (the second-largest importer, Mexico, accounted only for about 420,000). In 2023, China accounted for about 45 percent of Russian oil exports, nearly half of the coal exports and 23 percent of pipeline gas exports.

Should one consider these growing interdependencies as the start of a long-term trend, or, rather, a short-term spike in economic activity, which is unlikely to last? Ultimately, the development will depend on five main factors.

The first and the most obvious factor is the economic sanctions imposed by the European Union, the United States, Canada and several other countries against Russia. Russia is currently the country with the largest number of individual sanction measures against its economy in the world. While it has not led to the complete decoupling of Russian and Western economies, it has massively decreased flows of goods and capital. For Germany, for example, Russia accounts for less than 1 percent of total exports; its official exports to Russia involve a very small number of industries (pharmaceuticals and food).

It is unlikely that the sanctions against Russia will be completely revoked in the future. And even if Donald Trump's new administration succeeds in its ambition to negotiate a deal over the crisis in Ukraine, and this deal will include some sort of sanctions relief, it will not lead to the restoration of economic ties between the West and Russia. For businesses, it is enough to know that imposition of sanctions is possible — depending on the development of political relations, and that they need to be extremely cautious.

Russia moves into the same category of countries as Iran or Belarus — even if sanctions are reduced at some point of time, they can always be restored, and it deters the development of trade and investments. This will massively strengthen the development of economic ties between China and Russia in the long run.

Second, the US created a legal basis for the use of secondary sanctions against companies and financial institutions engaging in transactions with Russia in 2023-24. It means that those willing to do business with Russia may face major repercussions: They will be cut off from the US market (and, because of the crucial role of the US dollar in international payments, from other markets as well). Even the threat of secondary sanctions is often enough for large companies to reduce their activity or to introduce additional checks — again, Iran is a case in point. Secondary sanctions could negatively influence the dynamics of economic relations between China and Russia — in the last year it already experienced setbacks because of this factor. At the same time, the threat of secondary sanctions works only as long as Chinese companies can operate under the assumption that there is a course of action allowing them to avoid US sanctions altogether.

The problem is that deteriorating political relations between China and the US make it increasingly likely that Chinese companies will face US sanctions regardless of whether they deal with Russia or not. The attitude toward China as an economic and political rival, which has to be contained, is among very few points of consensus between the Democrats and the Republicans in the US. If that is the case, disengaging with Russia makes no sense: one will simply delay the inevitable economic confrontation with the US. Under these conditions, US secondary sanctions will have a smaller effect.

The third factor is the transformation of the global economy. Since the first Trump administration, there has been increasing speculation about the world entering a new era of deglobalization; after an epoch of skyrocketing development of trade and free markets, governments will increasingly rely on protectionism, and the world will break up into competing economic blocs relatively isolated from each other.

The COVID-19 pandemic and the Ukraine crisis fueled this debate. As of now, the empirical evidence is mixed. Economic relations between China and the US are indeed going down, but many other countries are jumping in as intermediaries. There is a point of no return though: the divergence of technological standards. Once it happens, while there will still be enough space for trade in resources and raw materials, trade in manufactured goods will be severely limited. Furthermore, mutual mistrust may result in the emergence of alternative payment systems, which will also contribute to fragmentation. The deglobalization scenario will also support the development of economic ties between China and Russia.

As for Russia, over the past couple of years, it fared much better than many expected, demonstrating high growth rates. Most growth forecasts for 2024 are in the range of 3.5 to 4.5 percent. However, the stability of this growth is questionable. Even in the short run, a labor shortage is likely to become a hard constraint for Russia's economic development. By the end of November 2024, the unemployment rate in Russia reached 2.3 percent, which is an all-time record. Its economy remains dependent on the prices of commodities, especially oil. It is quite possible that in the coming years Russia will enter a special type of stagflation: high inflation, low growth rates and (contrary to other cases of stagflation) low unemployment and massive deficit of workforce. Even under these conditions Russia will remain a large market and an important trade partner.

Ultimately, a lot of factors are driving the Russian economy closer to the Chinese one. They are of long-term structural nature, and there are hardly any political interventions which could change it. Essentially, economic dynamics between Russia and China will be influenced by the dynamics of US-China relations (which will also affect the entire world economy) and the evolution of the Russian economy itself.

The author is a professor of Russian and East European Politics at the Free University of Berlin. The author contributed this article to China Watch, a think tank powered by China Daily.

The views do not necessarily reflect those of China Daily.

Contact the editor at editor@chinawatch.cn.