Why Russia's turn to China is a mirage

On July 8 and 9, Russia hosted Chinese, Indian, Brazilian and South African leaders at the annual BRICS summit in the Russian republic of Bashkortostan. The conference took place at a time when Russia's rift with the West over Ukraine has sparked some concerns that Moscow might turn its back on the West and pivot towards Asia, both economically and politically.

Since Japan has joined the West in imposing economic sanctions against Russia, and India's trade with Russia remains small by comparison, the Kremlin's turn to Asia has in essence been a turn to China. In the months following the escalation of the crisis in Ukraine, Moscow announced plans for a number of projects with China - ranging from a new method of inter-bank transfers, to a joint credit agency - that seek to create a shared financial and economic infrastructure between the two countries that would allow them to function independently of Western-dominated financial institutions.

China and Russia were also among the countries involved in creating alternatives to the Western-dominated World Bank and International Monetary Fund, namely, the New Development Bank (NDB), which will finance infrastructure and other projects in the BRICS states, and a related $100 billion dollar special currency reserve fund that is meant to provide member countries with protection against global liquidity risks.

The most substantial developments, however, happened in the energy sector, including the signing of a landmark $400 billion natural gas supply deal in May 2014, involving the construction of a roughly 2000-mile gas pipeline from eastern Siberia to northeast China. In November the two countries agreed to construct a second major gas pipeline from western Siberia to China's Xinjiang province, along the so-called "Altai" route. Unlike the eastern Siberian pipeline, the "Altai" pipeline would tap the same gas fields in western Siberia that currently supply Europe, potentially giving Moscow the ability to shift gas supplies east or west at will.

Moscow also took the unprecedented step of opening parts of its upstream oil and gas sector to direct Chinese investment, specifically the vast Vankor oil and gas field in northern Siberia. Moscow had avoided this move in the past because it didn't want to grant China influence over its strategically important domestic energy industry. It took similar steps in other sectors that had previously been closed off to Chinese investors, including automobile production.

Chinese companies have stepped in to provide Russian companies with technology that they can no longer access as a result of Western sanctions, and Chinese banks have become an important source of loans for sanctions-stricken Russian businesses.

But more than a year after the two countries initiated most of their bilateral projects, there has been no significant progress, and some projects have been abandoned altogether.

China has been much more interested in developing the Asian Infrastructure Investment Bank (AIIB), which Moscow was hesitant to join. Compared with its more tepid involvement in the drawn-out process of creating the NDB, where it enjoys no privileged voting rights vis-à-vis other members, Beijing aggressively pursued the AIIB project and made a concerted diplomatic effort to involve as many states as possible. Russia repeatedly rejected Chinese invitations to join the bank, but eventually signed up in March, just days before the deadline to become a founding member.

Even in the energy sector, the two countries have struggled to carry out their plans. Although they began constructing the eastern pipeline in September 2014, energy analysts have recently doubted whether gas shipments can begin in 2018 as scheduled, due to a disagreement over a $25 billion pre-payment to finance pipeline construction that China had pledged. In September Gazprom a official said that the question of the payment was still "hanging in the air."

The two countries have yet to agree on the exact route, construction financing and, above all, the price of gas supplies on the western "Altai" gas pipeline project. Beijing is unlikely to offer Moscow attractive prices for gas imports through the pipeline, since it would deliver gas to remote regions of China that are already well-supplied by Central Asian gas pipelines and far away from China's eastern industrial heartland where gas demand is highest.

Meanwhile, China and Russia have so far also been unable to agree on the price for the proposed Chinese stake in the Vankor oil and gas field.

The limited progress of Sino-Russian economic initiatives is consistent with Beijing's broader response to the Ukraine crisis. Although China's state-controlled media has expressed understanding for Moscow's actions in Ukraine, and senior Chinese officials have publicly opposed the West's sanctions against Russia, Beijing has refused to provide diplomatic support to Moscow where it matters most. The Chinese leadership has not formally recognized the annexation of Crimea. It did not vote with Russia on Ukraine-related resolutions in the UN Security Council and General Assembly, and it was quick to develop good relations with the new authorities in Ukraine.

A few days after the overthrow of the Yanukovych government, the Chinese Foreign Ministry said that China "respects the independent choice made by the Ukrainian people," and Beijing has since deepened cooperation with Kiev in agriculture and other sectors.

Moreover, China's relentless economic expansion in the former Soviet republics of Kazakhstan, Kyrgyzstan, Tajikistan, Turkmenistan and Uzbekistan is causing concern in Moscow. Central Asia analysts warn that the Kremlin's strong-arm tactics in Ukraine - such as spurring separatist unrest among the region's ethnic Russian population, or using its military bases in the region as launch pads for covert military operations - might in the future be directed against China's interests in countries such as Kazakhstan, Kyrgyzstan or Tajikistan.

China and Russia are often depicted as having closed ranks in response to the Ukraine crisis. But they've made little progress in the bilateral economic and financial projects that they've announced with considerable fanfare.

The recent warming in Sino-Russian relations should not be overstated. It does not mark a tectonic shift in international relations, and Moscow's renewed romance with Beijing has little potential to break its deepening international isolation.

© (c) Copyright Thomson Reuters 2015.