Russian Economic Reform

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Russia and China: what sort of “relationship”?

Published on September 06 2014
Posted by: jeff

In June I spent some time in Moscow talking to Russian banks about financial developments in China,  where I am conducting research on “Opportunities and challenges in developing an international financial centre (IFC): Learnings relevant to Shanghai” for the Shanghai Institute of International Financial Centre (SIIFC), Shanghai University of Finance and Economics.

I decided to go to Moscow for several reasons.

Firstly, I had just presented an “interim report” at a conference in Shanghai which included quite a bit of material on the failure of Moscow to develop as an IFC (as a “learning” that Shanghai should take note of), and there were some issues I wanted to follow-up on for the “final report”.

Secondly, I knew from my time living in Moscow that people at all levels of society know very little about China other than that they can buy Chinese goods (often on-line). The contrast to Sydney, for example, is very striking. There are virtually no Chinese people (except for a few tourists) to be seen on the streets of Moscow, and Russian language business newspapers have very few articles about China (whereas Australian business newspapers each day have many articles). Moreover, I think that Russians in general feels less comfortable with Chinese at an individual level than Australians; perhaps a reflection of little personal contact and the antipathy often felt by Russians to Asian faces from Central Asia. Indeed, one morning in early 2013 my native Chinese Mandarin teacher in Moscow (living there with her boy-friend who was studying Russian) called me to say that she could not come to give me a lesson because there was a police operation near her apartment and she did not want to leave it because the police “target Asians”.

Thirdly, Russians and Chinese generally (leaving aside border zones and places like the Russian Far East) have tended to almost avoid looking at each other (“both sides have their noses in the air, looking down at the other”, in the words of one Moscow banker). Educated Russians tend to look to Europe and its individual countries as examples of the life that they would like to live, while educated Chinese are more focused on the USA. However, it seemed to me that following events in the Ukraine and the seas around China, both Russia and China are to some degree falling out of love with Europe and the US respectively. Thus, there would seem to be opportunities for neutral parties, such as myself, to help Russia and China come closer together in the financial services sphere.

I found that many Russian banks are indeed interested in financial developments in China, but are even more confused than Australian financial sector participants about where things may be going. (Having said this, many people working on financial sector issues in Shanghai are also confused.) Thus, they are struggling to understand how to take advantage of the opportunities in China that they instinctively feel must be there.

From what I have written so far, it should be clear that I do not expect Russia and China to easily cuddle up to each other – except where it results from their increasingly negative attitudes to Europe and the US!

Of course, Russia is rich in resources, but apart from energy the relationship is unlikely to become particularly strong. Indeed, it is only in recent years that Russian policy makers have started to seriously think about selling Russian resources to China (and the development of the Russian Far East). While Australian economic policy makers have been thinking about the rise of China for several decades, Russia in the 1990s and the early years of this century has been consumed with the fallout from the collapse of the USSR. But, as China continues to develop its growth will become less resource intensive; thus, in my view, Russia has basically missed the boat when it comes to the China boom.

However, this does not mean that Russia should be written-off as a “declining power” that “will only get weaker with time”, as John J. Mearsheimer has written is an article, “Why the Ukraine Crisis Is the West’s Fault”, for “Foreign Affairs” magazine.

I keep reading this view in various articles and commentary, although I suspect that very few people who make this claim know much about the workings of the Russian economy other than it is very commodity dependent, has significant demographic issues, and has many “oligarchs”. However, the reality is that in many ways the Russian economy now has many institutional features and economic structures similar to successful economies such as Australia (which also has a significant, although less, dependency on commodities).

There are reasonably well structured Russian banking, taxation, commercial law, and competition law systems – with the always ongoing debate about these similar to the debates in Australia. Where these structures are deficient is usually the result of corruption.

The expenditure side of the budgetary system is too opaque, and massive amounts are needlessly spent on unproductive prestige projects such as for the APEC Summit and the Winter Olympics. Once again, corruption makes this expenditure even more wasteful than it would be in a place such as Australia.

Cronyism in securing government sector jobs is rife, with few penalties for incompetence at the highest levels.

Corruption and cronyism, combined with an increasingly rigid political system under Vladimir Putin, mean that many talented young people want to leave Russia. Private sector investment, both domestic and truly foreign, is similarly impeded.

Good government, even over a period of five years, could markedly reduce the scale of these deficiencies and bring quite painless improvements in productivity and GDP. A further five years of good government could radically transform Russia.

Unfortunately, I do not see it happening while Putin remains president. As I have argued on this site (and on www.jeffschubert.com), Putin’s first two terms as president brought net benefits to Russia (after the disastrous Yeltsin years), but he is now a hindrance to Russia’s economic (and political) development.

This is particularly the case given the events in the Ukraine (although, in my view, the annexation of Crimea – but not subsequent events in Eastern Ukraine – could be justified on both Russian national security grounds and the wishes of the population to escape the perpetually incompetent and corrupt Ukrainian government).

But, longer term, Russian should not be considered a “declining power” to the extent that Mearsheimer suggests.

Mearsheimer also wrote that “current U.S. policy … is only driving Moscow and Beijing closer together” and that the “United States will also someday need Russia’s help containing a rising China”.

I certainly agree with the basic thrust of the Mearsheimer article: that the expansion of NATO towards Russia’s borders was a major contributing factor to the present events in the Ukraine.

And, I agree that about the general effect of “current US policy” on the relationship between Moscow and Beijing.

However, I have some trouble understanding what “help” Russia will give the US as it pursues its (unwise, in my view) policy of “containing” China. Just as there will be limits to how close Beijing and Moscow will become, any Russian “help” for the US will only be a side benefit of Russia’s own attempts to preserve its sphere of interest in Central Asia.