Sino-Russian relations as a deterrent factor of the G2 conflict: prospects and policy recommendations

Brambila Martinez Francisco Javier Postgraduate student, Institute of Civil Service and Administration, Russian Presidential Academy of National Economy and Public Administration 119571, Russia, Moscow, Prospekt Vernadskogo, 82 francisco.brambila@mail.ru Other publications by this author

Globalization and the Global Power Distribution Struggle

Engineered Globalization vs. globalization processes

Despite the market-based features of all global interactions, global processes remain subject to an institutional scrutiny that oversees the management of policies under a fixed range of qualitative measures. The studies around globalization are stagnated around the organizational nature and capacity of stakeholders to respond to controlled events, rather than the proportions and mechanisms behind a virtual organizational space that delivers equilibrium.

Although claims around the passive nature of the virtual organizational space grants an equal transactional language for all stakeholders, fluctuations that go beyond competition and the rule of law, often appear in the preference of super-actors. Due to the lack of concurrence, it is evident that the virtual organizational space is in fact a political construct that operates on behalf of an Engineered Globalization, an attempt to capture the Post-Cold War global state of affairs under a political umbrella by contrast to globalization processes as a natural expansion of markets.

Notwithstanding, considering that not even a hegemonic global distribution of power would have the capacity to keep the pace of managing all aspects of globalization, specific policies were to be implemented, not only allow for the expansion of the virtual organizational space in a controlled manner, but to manage all stakeholders under the premises of developmental superiority and good practices.

New actors and the new globalization processes

Considering that a hegemonic global distribution of power through an Engineered Globalization scheme retains supremacy, two questions arise: first, concerning the ability of emerging powers to undermine the hegemonic power distribution; second, regarding the ability of new actors to challenge the engineered vs. causal balance of globalization in favour of a natural order.

The diversification of industries and physical expansion of trade due to the geographical distribution of resources did not only become the basis of development for both contesting power systems, but also initiated a new struggle for cooperation with third-party nations.

The success of the emerging powers can be attributed to the apolitical nature of their cooperation, superior to the Western institutional ideology with a long history of political interference. I.e. the collectivization of multiple stakeholders under a centralized order was inefficient facing a fluid organizational under a competitive advantage scheme.

This new set of paradigms on the global architecture, ultimately demonstrated that global policy wasn’t dependant on policy brokers but on the causal effects that their specific actions arose. The vestigial nature of such global actions, allowed contesting powers to reorganize their strategic advantages for a common interest on a direction exhausted by the hegemonic power distribution.

Regionalization and new global processes

Considering that the Engineered Globalization was defeated by the natural globalization processes due to the appearance of competition in a wider power distribution scheme, it seems to open a new set of questions concerning the direction and balance of the global order.

First, the Hegemonic distribution of power is contracting while seeking to retain its global dominance. The first question is how to break the hegemonic distribution of power through a peaceful transition.

Although the combination of coercive means and power would only result in a global conflict, the globalization’s natural needs for trade and international cooperation may be sufficient to challenge the West.

Second, the current struggle for a wider distribution of global power can be understood as a flexible process. On the one hand, it contemplates the expansion of new powers on post-colonial regions, on the other hand, national interests may clash within the general census of certain regionalized alliances.

Although with limited experience, it seems that the Russian-Chinese conflict resolution around the Tajikistan issue citing reasons for national security, and a range of wider cooperation agreement prospects on equal terms may provide the necessary incentives for crisis management.

Third, when struggle for a wider power distribution involves interaction with post-colonialist countries as a symbol of dominance. As of August 2017, the US debt to China is over $1.2 Trillion USD (Amadeo, 2018), moreover, the prospects of Chinese investments on the Nuclear energy market in the United Kingdom seems to the benefit of both parties.

The future of the Global Power Distribution: Russia and the G2

The Rise of China

Without a doubts the rise of China is considered by many as one of mankind’s biggest events; the size of its economy has quadrupled since the launch of its 1970’s market reforms (Yao, 2018), furthermore, prospects of growth will double well over the next decade. Constituting itself as the world’s manufacturing center, it consumes a third of the global supply of iron, steel and coal; with foreign reserves worth over 1 trillion USD and an aggressive diplomatic policy followed by a military spending of over 18 percent (Xiang, 2017), it rivals only the Soviet Union as a military and economic rival of the United States, setting a new questions on the future of the global distribution of power.

The G2 (China + EU) prospects

It is often claimed that the diminishing role of the United States to retain its central role in global governance may in fact set the conditions for a strategic China-EU relations; nevertheless, whereas it is cited that Trump’s administration advocacy for protectionism with proposed penalties for companies which manufacture their products abroad, not joining the consensus regarding climate change under the Paris Agreement framework, threats to cancel the North American Free Trade Agreement and vastly reduce the State Department’s budget are Washington’s global influence suicide strategy, the EU seems to perform poorly.

Existential threats from an increasing number of Eurosceptic states who claim to be treated unfairly and unheard in a German dominated union, rogue nationalist regimes with provocative legislation that threatens freedom of expression coupled with a disastrous fiscal policy, unemployment, terrorism and failed foreign policy can’t coexist in an overly complex bureaucratic system.

Whereas the lack of Strategic competition is often referred to as a deterrent of hostility, such as the lack of structural distrust such as EU’s limited presence in South East Asia without treaty allies or military presence that may counter China, a strategic Sino-EU alliance is unlikely for two reasons; first, the conception around the lack of a Strategic Competition based on a military framework is erroneous as EU trade policies may very well have geopolitical implications against China’s interests, particularly in the Middle East and Africa. Second, the EU static system is neither trustworthy nor efficient by dealing with international agreements, special after the European Union’s failure to achieve a free trade agreement with Canada, both high-regulation, high-wage, green friendly economies due to institutional capacity (Ljunggren, 2016).

The G2 (China + USA) prospects

There are two main currents regarding an America-China world dominated system; the first one includes the fall of the American era, where the Western-oriented world order is replaced by one increasingly dominated by the East (Shi-Kupfer, 2017). This concept carries the idea that is the US hegemonic position erodes, China will with its growing influence reshape the rules and institutions of the international system to serve its interest, effectively becoming China a security threat to the Global Hegemonic power distribution enforcing states.

The second current believes that the United States will be able to retain its leadership of the Western Order to contain China, preventing it from taking critical strategic decisions through its influence.

Wherever any of this notions are valid, or one as a part of the other, it is worth mentioning that the US debt to China is over 1.2 trillion USD, 19 percent of the 6.3 trillion USD in Treasury bills, notes and bonds held by foreign countries (U.S Treasury, 2018); this means that the yuan is always low relative to the dollar a part of an economic strategy to keep its export prices competitive, furthermore allowing China to reach the position of America’s largest banker, allowing for political leverage.

Whereas this monetary policy is in synchronization with strategic foreign investment on key industries as a strategy to buy its competitors thereafter disarticulating them, the power struggle between the United States and China will continue without competitors as the G2.

Russian-Chinese Foreign Policy framework

If we were to understand the current level of Russia-Chinese relations, a contextual approach based on the ratification of the 2014 Strategic Approach between the two nations in the aftermath of the US-EU sanctions on Russia would not only point out to a new form of trade and security agreements but a formal alliance in pursuit for a wider Global Power Distribution.

Whereas a new set of Russian-Chinese Foreign Policy strategies require a high degree of state capacity of both nations to plan and execute new levels of economic cooperation under a fixed geopolitical dimension, an increasingly soft-hard power balanced Russia and major institutionalized and rising economic Chinese superpower, both seem to cooperate on an acupuncture-like areas of specialization, rather under a set of formal agreements.

Although the origins and the executive nature of this cooperation framework remain unclear as to whether engineered or sporadic, they seem to answer not to mutually exclusive interest but to a mixture of both, direct and indirect commonly defined interest in the global arena. This suggest a two face policy which contains first, a political partnership which follows core principles such as of a political and security dimension under a Global Power Distribution struggle to contain certain seemingly hostile military-defence alliances such as for Russia NATO and China the US and Japan.

Second, Russia’s Foreign Policy transformation from a system of cooperation to one of fusion; that is, a non-ideological foreign policy-based strategy to dominate specific contexts through trade agreements and political mediation with specific distribution of power struggle objectives. If although recent scenarios include the Middle East, that is the mediation of the Iran-Israel through the Syrian intervention, affairs, now Saudi and Qatar through high technology military cooperation, presents prospects for dialogue as far as SE Asia between China and semi US-aligned nations such as Indonesia, and full members of western coalitions such as China, North and South Korea seem to introduce an alternative to the western conflict resolution practices, and allowing for a covert Chinese participation without bearing the risks of an international backlash, such as with the Syrian Russian-Chinese involvement (Zhou, 2017).

Policy recommendations under the current trends of the Sino-Russian cooperation

1.Preservation of the Soviet Higher Education competitive areas, export of high technology-based products, services and the key to Russian Institutions.

According to WENR, 54 percent of 25 to 64 year old Russians held tertiary degrees as of 2015, making the country one of the most educated in the world (ROSOBRNDZOR, 2018). Although Russia has a distinguished academic tradition, many talented academics, and government backing to join the top ranks of global research universities, there are two fundamental structural barriers to success, created by the traditional separation of “academic science” and “applied R&D” from the universities and placing them in specialized academies.

The first and most fundamental impediment is the “academy of science” system that traditionally has located research in a large number of separate institutes belonging to the Russian Academy of Sciences. Universities have traditionally been tasked with teaching and have had only modest research budgets; public appropriations to universities for research differ from what is allocated to the academies by a factor of three (ROSOBRNDZOR, 2018). The second basic structural impediment is the separation of responsibility for education and research from the universities. The ministry of defence, health and even foreign relations of the Russian Federation (not the ministry of education and science, which oversees the majority of universities) controls both the military R&D, health care system, specialized universities that train medical personnel, and most medical-related research, for instance.

Considering that R&D is an important bridge between the industry and academic institutions as a labour-market driven indicator, a reform to either grant additional powers to the Russian Ministry of Education or to develop a comprehensive hybrid plan with defined, would close the gap between industry, education and research significantly.

As stated by the Russian Ministry of Education, as of 2017, about 20,000 Chinese students are studying in Russia under a special quota program by Rossotrudnichestvo (Federal Agency for the Commonwealth of Independent States, Compatriots Living Abroad and International Humanitarian Cooperation), intended to train specialists to aid the intensive bilateral and political economic cooperation between both nations. For the next five years, the Chinese government is planning to increase the number of their students studying in Russia up to 30 to 40 thousand under a newly funded program (ROSOBRNDZOR, 2018).

The elevation of Russia's comprehensive strategic partnership of coordination with China has escalated the high-tech cooperation between the two countries, a shared priority on the agenda of the two governments.

The China Russia Comprehensive Colleges Alliance was officially established in the city of Shenzhen (2015) composed by nearly 20 research institutes, universities and innovative enterprises in mobile technology, new material, information and telecommunication in both China and Russia. The pilot model is a R&D center jointly established by Huawei and several universities in Moscow as the first example of a Russian academic institution and a foreign company with significant success (Korablinov, 2016).

Considering the above mentioned need for a R&D-oriented reform, Chinese investment could incentivize federal action for said improvement.

2. Strategic foreign PPP investment in specialized industries; competitive Russian labour and currency prices are attractive for an export-oriented market, expansion of the PPP system as an alternative for the domestic market protection.

The mechanisms of public-private partnership have been actively developing in the Russian Federation for the last 10 years and are aimed at creating conditions to attract private businesses for the development of public infrastructure. On the grounds of legal practice and current economic conditions and development in Russia, the tools of PPP are adapted in order not only to meet the challenges of infrastructure upgrade and to improve the quality of provided services, but also foreign investment.

The most famous example of Russian PPP is the state corporation Rostec (State Corporation for Assistance to Development, Production and Export of Advanced Technology Industrial Product), which although was founded to consolidate strategically important companies (mostly defence), many of which were bankrupt or near bankruptcy, became the platform for foreign companies to invest in Russia.

Rostec is composed for about 2 million employees form 14 holding companies; eleven holding companies operate in the defense-industry complex and three are involved in civil sectors that supply goods to over 70 countries worldwide (Rostec, 2018). Through a PPP program, foreign companies have legally and financially being successful to establish their production in Russia, particularly the automotive industry through the Knock Down-Kit system, which assured both state protection through direct investment and jobs in the country.

Nevertheless, to diversify from defence and ensure foreign investment special attention should be presented to the civilian market in the same way as the automotive industry, focusing on the “Knock Down-Kit” style for a wider array of products; by establishing a clear, predictable and legitimate institutional framework supported by competent and well-resourced authorities.

Whereas Russia’s foreign interest is to prioritize the East, China is responding positively to the Russian government’s initiative by securing its status of political ally in order to satisfy its resource needs. These goals correspond to the sectors where China invests most, in energy producers and other commodity producers, which make up more than half of the investment volume (Russia-China Investment Fund, 2018).

Although most of the Chinese investments in Russia are based onto agreements at the top level, smaller businesses have showed restraint due to the fact that both the Russian market remains unknown for the Chinese as well as the Chinese for Russians, although there is more and more investment activity between the two states.

A joint initiative to include both governments and the private sector to promote the bilateral investment and educating decision makers and entrepreneurs in both countries is needed to incentivize the morphing of Chinese-Russian tendencies from a political move to an actual adaptation of markets: on the one hand, the ecological demands in China encompass cleaner sources, such as gas; on the other hand, both food products and tourism increases with the Chinese wealthier population, making agriculture and services, sectors of interest for both parties.

3. Incentivize demographic growth; grants for having children; expand the Moscow reconstruction-free housing model all over Russia under the PPP system; incentivize the growth of large urban population areas (post-industrialized economy); incentivize the reduction of remote, small population areas; incentivize the sustainable growth of energy hubs and strategic industrial corridors.

Russia’s economic and political turmoil in the 1990’s became a manifest for a latent depopulation, as natural population gave way to natural decrease in a new demographic crisis; nevertheless, favourable economic and political changes through Russia’s Putin era have placed the country from 1 to 1.8 childbirths per person, between Germany (1.5) and the US (2) (Index Mundi, 2018).

Notwithstanding, current paradigms follow the 90’s population crisis due to unfavourable changes in age composition, only to be mitigated by a quick population growth. Whereas the Russian government has envisioned a plan to boost fertility rates, such as the Concept for Demographic Policy in the period until 2025, which as able to push the rate since 2007 from 1.45 to 1.8 in 2016 through, a comprehensive family support package such as employment protection and grants per child bearing, the lack of housing programs due to mostly regulatory and economic issues.

As an example of this, a young couple will have to spend their combined income for 10-12 years to buy a standard two-room flat on the market; furthermore only 3.2% of young people in the country expect to solve their housing problems without the assistance of the state.

Since 2015, both Moscow and the Federal Government launched a program to demolish 8,000 obsolete 5 story buildings from the soviet era in order to tackle housing problems. The buildings will be removed and in an attempt to reorganize the city, buildings of over 25 levels will be built in its place, effectively reducing real estate prices through a PPP program. Old inhabitants will be temporally displaced, and within the course of one year come back to their new apartments for free and a 20% bigger place; the move comes along a 5 Billion dollar infrastructure development plan (MOS, 2017. 13).

Considering that this strategy is both successful for private investment and population growth, it may be the pilot project for the rest of Russia.

Federalization in Russia allows for “pockets” of specialized industrial corridors through Rostec’s involvement; low cost labour in a territorial area proximal to China is allowing not only for energy exports but sets opportunities for high technologies exports.

Whereas China is the second world’s biggest military spender with a $215bn budget (2015) (Dominguez, 2015), it is the third biggest arms importer with Russia being its main provider. Furthermore it is after the 2010 lifting of the informal ban on military exports for intellectual property issues that high-tech industrial military and civilian corridors, appeared in Siberia with the aviation industry occupying a predominant role (RT, 2017). The first results can be attributed to the creation of the China-Russia Commercial Aircraft International Co., Ltd (CRAIC), a joint venture of Commercial Aircraft Corporation of China, Ltd. (COMAC) and Russia's United Aircraft Corporation (UAC), established in Shanghai on May 22nd, 2017.

The Sino-Russian long-range wide body aircraft program is a major strategic cooperation program between companies of both countries in high-tech field under the background of further developing the comprehensive strategic partnership between China and Russia.

4. Continue the expansion of Gold reserves; reduce dependence on the exterior in times of geopolitical turbulence. Expansion of Gold reserves and trade in Roubles and Yuan; develop a joint Russian-Chinese monetary and trade platform.

Concerns about systemic risk, currency wars and the devaluation of the dollar, euro and other major currencies has led to the diversification into gold purchases by large creditor nation central banks such as Russia and China.

As of November, Russia had 1,801 tons of gold accounting for 17.3 percent of all reserves, being the sixth largest gold owner. Since 2001, Russian gold reserves have increased more than 500 percent from 343 tons (Fabrichnaya, 2017).

Whilst the Russian Central Bank has been stocking up on gold reserves it has noticeably not been increasing its foreign exchange reserves, especially the US dollar. This is a similar approach to China who has also been reducing their holdings of and dependence on the dollar due to buying gold makes a country less vulnerable to geopolitics. After the Crimea referendum in the first quarter of 2014, Russia increased its gold reserves by almost 75 percent (Fabrichnaya, 2017).

US dollar hegemony has given the United States unparalleled strategic advantage, notably preventing Russia and China from creating an economic area of integration. For years this has worked in the United States' favour, however since President Putin and Xi terms, both Russia and China have created mechanisms for trading nations to use gold rather than the US dollar in bilateral trade arrangements.

It is thereafter strategic for Russia’s geopolitical interests enforcement and protection to keep investing in Gold.

Bilateral trade between China and Russia was over US$80 billion by the end of 2017, an increase of over 30 percent year-on-year; Russia is the one of the world’s biggest oil and gas producers and the largest source for China, the world’s top energy consumer (Russia-Chinese Investment Fund, 2018).

The growing trade corridor between the two countries has been motivated by four factors: the sanctions imposed by the EU upon Russia, the relative weakness of the ruble, China’s OBOR ambitions, and mutual investment in integrated IT technologies; both China and Russia have established a payment versus payment (PVP) system for Chinese yuan and Russian ruble transactions in a move to reduce risks and improve the efficiency of its foreign exchange transactions.

A full expansion for a common trade and monetary platform would be their currencies being covered by gold is part of a larger already fairly advanced scheme of de-dollarization of their economies.

General conclusions

Whereas the prospects of a global power distribution in the aftermath of a multipolar world imply a high competition among contemporary states,the ability of nations to establish specialized cooperation channels on the basis of mutual geostrategic goals in accordance to their national interest generates the necessary conditions for conflict prevention and resolution.