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China Is Becoming Russia's Economic 'Loan Shark'

On a three-day visit to Moscow, China’s president has inked a number of deals cementing investment in Russia’s floundering economy.
May 8, 2015, 8:48pm
Photo via Kremlin

While the world watches Moscow's ostentatious commemoration of 70th anniversary of the end of World War II this Saturday, the eyes of Russia's politicians and bankers will be firmly fixed on China's President Xi Jinping — or, more specifically, on his pen.

Xi, who will attend the WWII festivities as part of his three-day trip to Moscow, has already inked a number of deals this week cementing China's investment in Russia's floundering economy. While the two countries have played up Xi's budding friendship with Russian President Vladimir Putin, experts say China is playing coy and stands to gain from Russia's desperation. One went so far as to say Beijing has become Moscow's "loan shark."

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Moscow has been hit hard by a combination of low oil prices and economic sanctions imposed by Western countries after its annexation of Crimea last year and for its support of rebels in eastern Ukraine. Since last April, the Kremlin's foreign reserves have fallen by more than $120 billion, partly due to attempts to prop up its currency, the ruble.

As Western investors flee, Russian companies have struggled to obtain financing. To that end, Xi signed a $25 billion deal on Thursday that will allow China to lend to Russian companies at rates lower than what they can access domestically.

On Friday, the two presidents signed a joint statement outlining cooperation on furthering the Eurasian Economic Union and China's ambitious "Silk Road" plan, a series of infrastructure projects across Asia that will extend Beijing's access to the Middle East and beyond.

Related: China Is Planning to Rebuild the Silk Road and Transform Global Trade Routes

Putin said the two projects "means reaching a new level of partnership and actually implies a common economic space on the continent."

China has also expressed interest in financing a $5.2 billion high-speed rail line between Moscow and the Russian city of Kazan.

Xi's visit to Moscow comes a year after the two countries reached a $400 billion deal to pipe 38 billion cubic meters of Russian gas through Siberia and into China starting in 2018. But many aspects of the agreement, including pricing, remain unresolved.

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China has driven a hard line on its gas dealings with Russia, insisting Moscow pony up more for infrastructure costs. Russia is hesitant precisely for the reasons it wants the deal in the first place: draining coffers and a lack of Western investment. Several experts told VICE News that China is happy to let negotiations drag on in an effort to extract lower prices from Russia for the gas.

In a February statement that coincided with the apex of Moscow's economic woes, Russian Deputy Prime Minister Arkady Dvorkovich said he saw "no political obstacles" to allowing China to gain stakes of more than 50 percent in gas and oil fields inside Russia. Anastasia Nesvetailova, director of City University London's City Political Economy Research Center, told VICE News the statement came as a surprise and upset Russia's powerful oligarchs.

Nesvetailova said Dvorkovich's seemingly ad-libbed remarks underscored that Russia seems willing to seek out any suitor, no matter the terms. "It was never followed up by any particular endorsement, but it was quite short-sighted to declare something so politically far reaching," she said.

Observers say China is better positioned in almost every way to benefit as Russia scrambles for liquidity. The $25 billion lending deal is just a drop in the bucket for Beijing, and, in the event of defaults, it will be guaranteed by the Kremlin's Russian Direct Investment Fund.

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Related: China Is Playing Hardball With Russia Over Two Massive Gas Pipeline Projects

"There will be a lot of noise," Nesvetailova said. "One of the intentions behind this noise is to put it on the geopolitical map as a new alliance. But the details matter."

Nesvetailova said even before Russia's current economic crisis and standoff with the West, Putin had watched Europe warily for a number of years. Economic growth in the eurozone has slowed, and member states increasingly rely on alternative energy — not Russian gas. According to the US Energy Information Administration, sales of oil and natural gas accounted for nearly 70 percent of Russia's export revenues in 2013, prior to its economic crisis.

"He had been looking at the East for a while," Nesvetailova said of Putin. "The East is an alternative market — it's his own attempt to diversify the economy and export market."

Recent polls suggest Russians view the Chinese as friends of Moscow, but — at least from a business perspective — China seems to be playing hardball.

'China is playing a wonderful game. They are extremely shrewd negotiators and Russia is in a rather desperate situation.'

"The Chinese do have the upper hand in all of this," Nesvetailova said. "China is playing a wonderful game. They are extremely shrewd negotiators and Russia is in a rather desperate situation."

In April, Russia approved a deal to sell China the S-400 air defense system, the first sale of the technology outside Russia. The system will allow China to vastly expand its aerial strike range over the Pacific.

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Mark Galeotti, a professor at New York University's Center for Global Affairs, told VICE News that many in Russia's defense industry bristled at the sale over concerns that the Chinese would be able to reverse-engineer the system and produce its own variants. The move, Galeotti said, underscored the dynamics at play: Russia's immediate need for deals, and China's long-term strategy.

Related: As Its Profits Tank, the EU Is Going After Russia's Money Making Energy Behemoth

Galeotti added that Xi's interests in Russia are still narrow, and not altruistic. China, he said, is increasingly becoming Russia's "loan shark."

"At the moment, Russia needs Chinese money and Chinese investment," Galeotti said. "China does not do favors."

Galeotti said that despite the rhetoric and deal making, both countries — particularly China — remain concerned about their relationship with the West. For Beijing, export markets in Europe and the US are still paramount.

Russian military leaders are also wary of China's rising power in Asia, something that the sale of the air defense system would abet. In an embarrassing and perhaps symbolic turn of events, one of Russia's most advanced tanks, the T-14 Armada, stalled in central Moscow during rehearsals for Saturday's parade and had to be towed away.

"Although Moscow and Beijing share certain interests, there are massive amounts of mutual suspicion," Galeotti said.

On Friday the two countries tried to allay those concerns, agreeing on a cyber-security arrangement and promising to work together against technology that could "destabilize the internal political and socio-economic atmosphere," and "disturb public order," according to a statement posted on the Russian government's website.

Follow Samuel Oakford on Twitter: @samueloakford