Trade dependency

One of the most notable aspects of Russia's pivot to the East is its growing trade dependence on China. Chinese imports to Russia increased after 2008, culminating in China surpassing Germany as Russia's leading supplier of goods.

In 2006, China's share of Russian imports was a mere 9.4%, but by 2021, it had surged to a substantial 24.8%. Likewise, China's share of Russian exports nearly tripled during the same period, making China Russia's largest export destination by 2017.

Since the 2022 invasion, Russia has stopped publishing detailed customs statistics. Consequently, we must rely on various sources, including occasional reports from Russian officials, data from other countries and expert assessments. According to Iikki Korhonen, who leads the Institute for Transition Economies at the Bank of Finland, China's portion of Russian imports “likely exceeded one-third and may have reached as high as 40% by the end of 2022."

Russia is now, if not the most dependent country on China, then second only to North Korea.

The level of dependence in foreign trade that Russia currently exhibits is typically associated with colonial or former colonial relationships, as well as "center-periphery" systems. In these systems, the central entity's share of foreign trade with peripheral countries is akin to China's role in Russia's foreign economic activities.

Throughout recorded history, no partner of Russia — except for China post-2008 — has accounted for more than 16% of Russian imports. Similarly, in terms of Russian exports, no partner, except China since 2018, has surpassed a 15% share. "In terms of imports,” Iikki Korhonen argues, “Russia is now, if not the most dependent country on China, then second only to North Korea."

Worth noting, just as North Korean leader Kim Jong-un wraps up a rare six-day trip to Russia that underscored how Moscow and Pyongyang's interests, military and commercial in particular, are aligning

Hydrocarbons and goods dependence

Recognizing the risks associated with such concentration, countries are taking steps to mitigate it. Germany's recent "China Strategy" is a prime example, aimed at reducing foreign economic reliance on China.

This strategy underscores China's efforts to reduce its own dependence on other nations while simultaneously establishing dominance in global production chains. In contrast, Russia has taken a different path, with Europe successfully decreasing its reliance on Russian oil and gas in just a year.

But Russia now finds itself critically reliant on China — both as a purchaser of hydrocarbons and a supplier of goods, including its own products and transit items from other countries. For instance, the majority of semiconductors and microcircuits crucial for military production are sourced through China, subject to the strictest sanctions.

Chinese companies have taken a dominant position in certain industries, exemplified by their majority share in new car sales following the exit of Western companies. Capitalizing on this dominance, Chinese firms are leveraging their influence to recalibrate pricing dynamics.

As Maxim Shishko, the director of luxury car company Avtodom, succinctly puts it, "Chinese brands now have the power to reconfigure pricing, which allows them not only to maintain current prices but even to lower them. After all, why raise prices when Chinese brands hold sway?"

Currency dependence

Russia's growing economic ties with China extend beyond trade. The adoption of the Chinese yuan (RMB) as a foreign exchange currency has become a significant aspect of this shift.

This transition has been accelerated by the desire to reduce reliance on "toxic" currencies such as the US dollar and the euro due to the impact of sanctions. Today, the yuan plays a central role in Russia's foreign exchange transactions.

The majority of transactions on the Moscow Exchange now involve the yuan-ruble pair, and the yuan's share in Russia's foreign exchange market stands at 44%. With sanctions affecting leading Russian banks, including the Central Bank, their reliance on the yuan is shaping the exchange rates of other currencies used within Russia.

This transition isn't limited to financial institutions. Russian businesses are increasingly turning to the yuan for international trade, despite the higher transaction costs compared to dollars or euros. The share of "non-toxic" currencies, including a substantial portion of yuan, has grown rapidly in the foreign exchange holdings of Russian companies, surpassing 40%.

Debt dependence

Another dimension of Russia's growing dependence on China is its mounting debt ties. Chinese loans have become a vital source of financing for Russian entities, including companies and the government. These loans often come with specific terms, such as collateralization or repayment in goods, deepening economic reliance and potentially leaving Russia vulnerable to China's influence.

China's support extends beyond loans to providing lender-of-last-resort services to developing countries struggling with debt. While this assistance has prevented many defaults, it differs significantly from support offered by institutions like the World Bank and the IMF. China's rescue loans are often characterized as opaque and costly, with higher interest rates compared to traditional international lenders.

Indeed, reliance on Chinese investments often translates into accumulating debt. While China maintains ownership of assets, it tends to engage in acquisitions less frequently than developed countries do, with the U.S being a notable exception.

Russia aligns with this trend. As Oleg Vyugin, a professor at the Higher School of Economics, points out, "At present, China shows limited interest in making investments in Russia, except possibly for the promotion of its own products."

The risks associated with Russia's increasing dependence on China are multifaceted, encompassing economic, political, and strategic considerations. The current alignment of interests between the two nations appears harmonious, but the future remains uncertain. China faces its own economic challenges, including a looming corporate debt crisis, demographic issues, and shifting geopolitical dynamics that could impact its priorities and relationships with other nations.

Economic vulnerability

As of now, there are no significant issues arising from Russia’s reliance on China. Currently, the two countries’ interests are largely aligned, and their partnership is relatively equitable.

According to analyst Mikhail Korostikov, “There is no compelling reason for China to exert dominance over Russia, and there are no foreseeable changes in this dynamic over the next five to 10 years.”

However, Russia's vulnerability to its dependence on China is underscored by the vast difference in economic size between the two countries. Russia's GDP and population are approximately one-tenth of China's, and trade between the two nations holds significantly greater importance for Russia than for China. If China were to reduce its cooperation with Russia for any reason, it would pose a formidable challenge for Russia to navigate.

The consequences of dependence may become apparent if China's priorities change.

Furthermore, China's influence over Russia extends beyond economic matters. Russia's alignment with China in global geopolitics has broader implications for its foreign policy and international standing. This shift is not merely a replacement of one dependence (the West) with another (China), but a transformation of Russia's role in the global arena.

Russia's growing dependence on China across various economic facets represents a complex interplay of opportunities and risks. While the current synergy between the two nations benefits both parties, the future remains uncertain, and the consequences of this dependence may become apparent if China's priorities change.

These risks extend to trade, currency, and debt dynamics, as well as geopolitical considerations that could reshape Russia's role in the global landscape.

In navigating its relationship with China, Russia must carefully assess the potential pitfalls and challenges associated with its deepening economic ties while seeking to leverage the opportunities presented by this strategic alignment. Ultimately, the path forward for Russia in the era of its growing dependence on China will be shaped by its ability to manage these dynamics effectively in a rapidly evolving global landscape.