Russia and China: An uneasy embrace

The two great powers have much – and little – in common politically, culturally and, importantly, economically. But with the United States lurking, they are more quickly gravitating toward each other.

By JEFF SCHUBERT  , Jeff Schubert is a professor of international business at the Baikal School of BRICS, at Irkutsk National Research Technical University in Russia. Oct 4, 2019

Russia and China: An uneasy embrace

Russian economic policy presently has three main pillars. One is the overriding desire to maintain financial and economic stability and independence. The second most important is a group of “National Projects” to develop the Russian economy and social conditions in the period to 2024. The third is the assumption held by many influential policymakers that Russia’s “pivot to Asia” – particularly China – means that there is less need for structural and institutional reform inside Russia.

This essay will begin by giving an overview of Russia’s present economic situation, and will then examine its domestic economic and relevant foreign policy issues using a framework mainly based on the above three pillars. However, other issues that do not neatly fit into one of these three categories will also be considered if they are important. For example, import replacement largely relates to a desire for economic independence but also has an influence on implementation of aspects of the National Projects, and would also seem to run counter to the notion that the “pivot to Asia” is a major plus for Russia.

In administering such policies, Russian policymakers as a whole find it difficult to finally shake off their own history of centralized planning. This is partly due to the fact that the economic reforms of the 1990s were badly handled, with a great drop in economic output and government-provided services, surging poverty, rigged privatizations and significant criminality. Some of this was inevitable given the highly centralized structure of the Soviet system, but much was also due to the intellectual shortcomings and incompetence of influential reformers and their foreign advisers. Too little thought was given to putting in place an effective institutional and administrative framework – legal, accounting, banking and so forth – that would allow a sensible “capitalist” economic system to effectively function.

Russia’s present-day economic policymakers now appreciate that lack of thought and take a more balanced approach, but cannot resist attempting to exert centralized control with comprehensive numerical targets and nowfashionable Key Performance Indicators (KPIs) for almost every activity. The resulting constraint on innovative thinking and decision-making by mid- and lower-level officials will be a drag on Russia’s economic performance.

When combined with thoughts of past Soviet technological achievements and the desire to escape the so-called resources curse, the result of this planning tradition has been a series of government-directed projects to almost magically develop the Russian economy. The first was Skolkovo, which was announced by President Dmitry Medvedev in 2009. Later, President Vladimir Putin was to push the National Technology Initiative project aimed at making Russia a leader in Fourth Industrial Revolution sectors. These projects still exist with their KPIs but have now been joined by the National Projects.

Overview of the present situation

Ratings agency Fitch upgraded Russia in August, saying that it “has a credible and consistent policy framework that will deliver improved macroeconomic stability, reduce the impact of oil price volatility on the economy, and support increased resilience to external shocks.” It added that Russia’s “strengthened policy mix, underpinned by a more flexible exchange rate, a strong commitment to inflation targeting and a prudent strategy, and its robust fiscal and external balance sheets, will help the nation to cope with heightened sanctions risk.”

The most successful Russian economic policy has been that related to its external financial position. Its balance of payments current account is positive and equal to about 6 percent of GDP (although changes in oil prices can significantly affect this). Gross international reserves (including gold) are around $530 billion (equal to about 18 months of imports), which is exceeded only by China, Japan and Switzerland. Russia has very little external official debt. It has been diversifying its foreign exchange holdings away from the US dollar, and is trying to conduct more of its international trade in other currencies and is having some minor success in this.

Oil and gas accounted for 58 percent of total export income in 2018. Besides various metals, wood products and cereals, there is growth in some technology-orientated exports. According to the software association Russoft, exports of Russian IT products and services reached $10 billion in 2018. There are also claims that the Russian nanotechnology industry is the third-largest non-resource exporter after armaments and IT. Rosatom is the world’s largest nuclear reactor builder, with lower prices, state-of-the-art technology and concessional financing, and is said to have orders at a similar level to those for defense products.

A “fiscal rule” aims for a primary budget deficit of 0.5 percent of GDP between 2019 and 2024 at a benchmark oil price of $40 per barrel (which is adjusted upward to take account of some specific factors). If actual oil prices exceed the calculated benchmark, the extra government revenues should be used to buy foreign exchange that is saved in the National Welfare Fund until the liquid part of it reaches 7 percent of GDP (which may occur in late 2019). The International Monetary Fund, in its August 2019 Article IV Consultation report, urges the Russian government to “refrain from quasi-fiscal activities through the NWF and continue investing NWF assets into high-quality foreign assets” even after the 7 percent level is reached.

In 2018, direct oil and gas revenues equaled 46 percent of total federal government revenues, so changes in prices can have a very significant direct effect on the budget; and even more so if indirect effects are taken into account. Internally, the financial position has been strengthened by changes in taxation policy and improved administration, and better control over the use of profits of stateowned companies.

This fixation with financial issues means that lower government spending is partly responsible for very slow economic growth. The exception is probably defense spending. The Stockholm International Peace Research Institute says that Russian defense spending equaled 3.9 percent of GDP in 2018, but it may be much higher than this as 17 percent of total federal budget spending was classified as secret.

According to IMF estimates, sanctions have reduced Russian annual GDP growth by about 0.2 percent since 2014, with tight fiscal and monetary policies responsible for another 0.3 percent. Real GDP is expected to grow by less than 2 percent in 2019. In current price terms, Russia’s annual GDP is roughly equal in size to that of South Korea (just outside the top 10 countries), but use of the contentious Purchasing Power Parity adjustment means that it is almost twice the size of South Korea (and possibly number five or six in the world).

Inflation is running at about 4 percent despite the implicit policy of preferring a weak ruble in order to assist with import substitution and to encourage exports. Russia’s official unemployment rate is about 5 percent. It is estimated that up to 20 percent of employed Russians work in the “shadow” or “gray” economy and may account for about one-third of GDP.

Disparities in regional development and incomes are an issue in any country of substantial size, whether it be developed or underdeveloped. These disparities may reflect natural or historical factors as well as the quality of regional government, and Russia is no different. Nevertheless, the difference in the level of income and quality of infrastructure between Moscow and other regions is striking. The streets of central Moscow are almost paved with gold (in reality it is granite) when compared to the often decrepit streets in Russia’s regional cities. The city of Moscow’s per capita annual budget is reportedly seventimes the average of other large cities

Corruption seeps into almost all areas of Russian life, is resentfully tolerated by most of the population and officially ignored if it helps achieve some official objectives.

The federal government has justifiably moved to bring some order to sometimes chaotic regional spending and debt financing. But rather than using underlying principles, it is using its now ubiquitous KPI approach to give regional governors specific targets on such things as labor productivity and housing affordability. While it is claimed that the regions have had some input into these KPI targets, the bureaucratic view from Moscow is unlikely to best suit regional needs.

The reform-minded Federal Anti-Monopoly Service says that the “state is no longer simply setting the rules of engagement, but attempting to regulate the whole economic system of the country; new trends are evident at both federal and regional levels, where authorities are interfering in local business relations and engaging in regional protectionism.” FAS said that before the 1998 financial crisis, the state’s share of GDP was about 25 percent, but rose to between 60 and 70 percent in 2017-18. Other estimates are lower, with the IMF saying it is about 33 percent if looked at through consolidated government budgets, but 50 to 70 percent if it includes quasi-state companies or private companies too close to the authorities to take independent decisions.

On the financial sector side, reform has been better, with the Russian Central Bank reducing the number of Russian banks from more than 4,500 at its peak to less than 500. Many of the eliminated have been entities set up to benefit owners at the expense of depositors. Corruption seeps into almost all areas of Russian life, is resentfully tolerated by most of the population and officially ignored if it helps achieve some official objectives. This does not necessarily mean that individual Russians must deal with it each day, but there are myriad possibilities: favorable health reports, admission to education institutions (including those run by the military), awarding of official contracts at inflated prices to friends and family members and so forth.

It is impossible to know what the real cost is to the economy. According to Investigative Committee of Russia chief Alexander Bastrykin: “There’s no end in sight, billions are stolen. It’s a very simple scheme: the money is first moved abroad, then the family leaves, and then the defendant follows.”

The World Bank’s Ease of Doing Business Index covers the regulatory environment for business. Russia was ranked 120 in 2011, and Putin set a target of getting into the top 20, and is now at 31 mainly because of much easier electricity connection procedures. The Ministry of Economic Development has a program of “transformation of the business climate” with detailed KPIs linked to the Ease of Doing Business Index sub-categories. This road map of KPIs includes such detail as “clarifying compliance with fire regulations in the construction and installation of doorframes.”

While China has used special economic zones as pilot or testing areas for wider economic reform, in Russia they have become both an alternative to wider economic reform and are aimed at particular regions or economic sectors. There are reportedly hundreds of them, with many existing only on paper. The most famous is Skolkovo, which claims to house more than 1,000 “start-ups” and claims such “international partners” as Boeing, IBM and Microsoft. Skolkovo claims that it is a financial success, but getting to the truth of such claims in Russia can be difficult and they should be taken with a grain of salt. Two offshore zones – “Special Administrative Areas” – established for the purpose of
tempting foreign-based Russian businesses back to home have yet to catch on, with few companies moving their legal home.

Foreign sanctions related to the events in the Ukraine, the poisoning of the Skripal family in Britain and alleged interference in US elections coincided with a justifiable feeling in Russia that it needed to put  more effort into promoting nonresource production. However, rather than starting with the idea that extensive principle-based efforts were needed to boost productivity, Russia’s latest choice has been an import substitution policy that has added to often arbitrary regulations rather than reduced them.

Initially the policy lacked detail, but eventually lists began to appear indicating what items could be purchased abroad by government departments and state-owned companies – only with the agreement of an import committee. Agreement was only to be given if there were not Russian-produced substitutes at a reasonable price. Besides defining exactly what a “Russian” product is, it is often very difficult to make usefulness comparisons in advanced technology products, for example computer software and complex machinery.

While this policy has received some support from various Russian manufacturers, there has been a lot of buyer resistance. Many prospective buyers have manipulated their specified product requirements to ensure that only foreign products will do, while some have simply refused to buy any products at all. One high-profile dispute has involved large Russian state-owned electricity generating companies refusing to consider gas turbines that were not produced by GE or Siemens. 

The main National Projects documentation does talk about import substitution, but less so than might be expected, and this probably reflects recognition that much of the import substitution policy is unrealistic and counterproductive to Russia’s development. The domestic food sector has arguably benefitted from import substitution, but it is hard to separate the effect of this policy from that of the price increases of imported food following the large ruble devaluation.

In July, Russia’s prosecutor-general complained that “import substitution in the defense industry remains a problem” as “instances of noncompliance with the ban to purchase foreign equipment whose counterparts are manufactured in Russia continue to be revealed.” This is hardly surprising. Andrey Frolov, editor in chief of Arms Export magazine, writing in late 2017, said “one of the main problems with import substitution is the lack of a modern machinery base for the production of goods to replace those previously acquired from abroad.”

National projects

A May 2018 presidential decree on National Projects spending (totaling about $400 billion, or about 3 percent of GDP annually) in the 2019 to 2024 period relates to health care, education, the demographic situation (including increasing the fertility rate), culture (including strengthening Russian civic and national identity feelings), roads, city living conditions, ecology, science, promotion of small and medium-sized enterprises, the digital economy, labor productivity and international economic cooperation and exports. In addition to these 12 National Projects, there is another concerning very large-scale modernization and expansion of large infrastructure such as pipelines, transportation and ports (especially in the Russian Far East).

At the more absurd level, yearly targets for the “Science” National Project include the number of articles by Russian researchers published in international scientific journals and the proportion of Russian scientific researchers aged 39 or less, while the “Culture” National Project calls for 900 domestically produced pianos to be provided to children’s art schools by 2024 and 140 new war memorials. The “International Cooperation and Exports” National Project has specific numerical export targets for various industry sectors (for example, an increase in agricultural exports to $45 billion and “service” exports to $100 billion). However, the “Productivity” and “Digitalization” National Projects will potentially have a bigger impact on Russia and its place in the world.

An article published earlier this year by the Association of European Businesses in Russia painted a dismal picture of labor productivity and suggested that Scandinavian senior managers in Russia estimate that they need more than twice the number of employees than they would have in an equivalent Western Europe business. “Investments in technology, production facilities, support systems, etc are one side of the coin, but the success of these investments depends on the ‘soft’ side of the coin – ie the ability to adapt management, middle and operational management, and other employees’ skills and culture in order to ensure improved productivity.” The article said that many Russian companies lack these soft skills.

In May, Morgan Stanley announced that it was leaving Russia, and its long-time head said: “International firms operate on the principle of a meritocracy; your career and compensation are calculated on the basis of what you do, and not on the basis of who is behind you – your mom or dad. Russian companies are more hierarchical, they operate on the principle of a one-man-show; they are feudal states. Russian people don’t believe in institutions, they believe in individuals and their ability to give orders and exercise control. The system suppresses initiative. The risk of doing something is higher than the risk of not doing anything.”

While this statement is an oversimplification, there is a certain truth to it.

After a slow start, Russia is learning to use digitalization to take more effective advantage of its rich natural resource base. At the consumer level, government-owned Sberbank has digitally transformed itself during the last half decade, while many government services are now available online. The Federal Tax Service now monitors VAT-related spending in real time across Russia, and this has
significantly increased tax compliance and receipts. The “Digital Economy” National Project includes yearly targets for such things as Russia’s share in world exports of data processing and storage services, and for “state bodies, local government and organizations to use predominantly domestic software.”

Russia is as anxious as any country to take advantage of the mooted benefits of 5G technology. Like many countries it will have concerns that 5G increases the possibilities for spying or disrupting critical infrastructure. But while some other countries focus on the possibility of harmful Chinese products, Russia will be more accepting of these because it wants closer relations with China, and because other possible 5G suppliers are in countries that are friendlier to the United States than to Russia.

5G has also become an import substitution policy target and the usual government lists of domestically produced products are being put forward. However, the overall technology of 5G is in many ways still being developed – which makes the lists more than usually problematic – and the state-owned Rostec industrial conglomerate, which wants to take the lead on this, is realistic enough to know that it needs foreign partners such as Huawei, Nokia and Cisco.

The results of the National Projects are very unlikely to meet official expectations for a number of reasons. First, many of the targets are clearly arbitrary and there will inevitably be areas where they contradict each other. The sheer centrally imposed KPI detail and lack of responsibility at the coalface for performance means that misallocation of resources will be very significant. However, as of the middle of 2019 there finally seemed to be some recognition of problems associated with such detailed annual implementation targets, and some flexibility has been given to “project committees” and responsible government ministers to vary them while leaving the ultimate 2024 targets unchanged.

Second, while slightly more than half of the total spending is due to the federal budget, much of this is actually not “new spending” but is on account of existing previously announced federal projects. The IMF says that during the 2019-24 period, federal spending is planned to be increased by 1.1 percent annually. The remaining funding sources – regional budgets, “extra-budgetary funds” and “extra-budgetary sources” – are often vaguely defined and will not easily be realized, even though Russia’s large state-owned business will be pressured to contribute. In an attempt to ensure that funds are spent effectively and to reduce the possibilities of money being stolen, the Audit Chamber (under ex-finance minister Alexei Kudrin) is making an effort to increase oversight of spending on what he initially referred to as “numbers and indicators dancing.”

Third, the business community is immensely cynical, as was very evident at the Sberbank Business Breakfast held at the June St. Petersburg International Economic Forum. Much to the frustration of the Russian finance minister, Anton Siluanov, there was a clearly expressed lack of business confidence in the National Projects. Moreover, security service officials were specifically attacked for their various interventions that severely damaged business confidence, both domestic and that of potential foreign investors.

Breakfast attendees obviously had in mind the experience of Michael Calvey, a longtime American investor in Russia through his investment fund Baring Vostok, who has been arrested and accused of stealing $40 million from a Russian bank. It is widely accepted that the case against him is weak and that certain Russian law enforcement officials are doing the bidding of rival Russian business interests. Pavel Chinsky, head of the Franco-Russian Chamber of Commerce and Industry, has been quoted as saying: “Now no one is safe from what seem to be particularly arbitrary decisions.

It is sometimes very striking how little belief educated Russians have in their government, both at the national and regional levels.

The lack of trust goes both ways. Deputy Prime Minister Maxim Akimov has been quoted as saying, “Officials do not trust private business, and private business does not trust the state.” More generally, it is sometimes very striking how little belief educated Russians have in their government, both at the national and regional levels. Rather than trying to help with positive suggestions, as does happen
in many “Western” countries, the mood inclines toward looking after oneself and one’s immediate environment and being morose in relation to the rest.

China

Some Russian policymakers hold that the country’s “pivot to Asia” – particularly China – means that there is less need for Russian structural and institutional reform. They point to the successes of the Chinese economy and, in their view, the failures of the Western liberal economic model (particularly
since the financial crisis in 2008). While they tend to exaggerate both these successes and failures, it is clearly better in their view for Russia to align itself with China. Many in Russia also believe that economic sanctions on Russia will not be lifted as long as Vladimir Putin is in power, and may even last longer, so whatever the ultimate results of the pivot, Russia needs to be self-sufficient as much as possible.

On the other hand, advocates of significant Russian reform are more likely to be economic policymakers and those businesspeople not benefiting from present policies. However, economy-related political events in Europe (around Brexit) and the United States (the aggressive “America First” trade and investment-related policies of President Donald J Trump) suggesting “liberal failure” do
not help their cause. When considering Russia’s relationship with China, it is necessary to take a layered approach. The relationship is strongest at the top political level and weakest at the non-energy business level, with the military relationship somewhere between. Russia wants to limit Chinese involvement in Central Asia and so sought to promote the Eurasian Economic Union (EAEU) – albeit led by Russia – as China’s economic partner in Eurasia. Besides Russia, the EAEU includes Belarus, Armenia, Kazakhstan and Kyrgyzstan. The EAEU, which has formally existed since 2014, is basically a customs union with a few bells and whistles, the most notable of which is the free movement of labor. Russia would like the EAEU to have a greater political component, but the other countries are opposed to this.

China’s initial preference was to distance itself from the EAEU relationship in favor of an expanded economic role for the Shanghai Cooperation Organization (SCO), but Russia rejected this because it would have meant individual EAEU countries that are also SCO members having a status equal to itself in a relationship with China. China’s initial Belt and Road Initiative (BRI) successes, particularly the May 2017 “Forum” that was attended by a large number of world leaders, gave China a boost in confidence and it seemed to feel that it did not really need the SCO or a relationship with the EAEU. However, more recent, less clear BRI successes, a general international backlash against some of China’s policies (Xinjiang, South China Sea), and Trump’s increasingly aggressive approach to Beijing have led China to, at least publicly, accept more Russia’s ideas on the nature of a  closer relationship.

Speaking at an early June meeting with Putin, President Xi Jinping said that he and Putin “agreed to continue our work on integrating the BRI with the EAEU. We will support each other in the BRI and the Greater Eurasia partnership.” Such words coming directly from Xi are a significant change from earlier vague and procedural affirmations by China of this connection, but it also risks signaling to countries such as Kazakhstan that future relations with China are largely dependent on how Russia sees things. So, China will not go too far with this change in approach unless absolutely pushed by other factors. Russia has consistently emphasized the economic aspects of the Greater Eurasian partnership idea, but there is no doubt that the increasingly bad relationship of both Russia and China with the United States will lead to increased consideration of national security realities.

Russia is not a natural ally of China, has its own fears about Chinese power and the great majority of the Russian elite would prefer a closer relationship with the “West” both in political and economic terms. Moreover, at the more general population level, there is a lot of resentment at what is perceived as Chinese plundering of Russia’s eastern natural resources. However, the United States is now pushing extremely hard against both Russia and China and the die is being recast. While Russia and China will never be allies in the sense of NATO, they will intensify their mutual support and cooperation in a number of areas. While Russia’s interests in East Asia will not always coincide with those of China, for example the emotional bond with Vietnam, China will always be more important. While trade between Russia and China is growing, the main driver is an increase in Russian energy exports. However, people-related interchanges have also been increasing as Chinese tourism into Russia grows quickly and, according to the Ministry of Science and Education, about 30,000 Chinese students study at Russian universities and about 20,000 Russian students study at Chinese universities.

It is often said that Russia is the junior in the relationship, but it should be remembered that Russia has considerable sway over the supply of energy to China. Besides its own direct energy exports, the major Kazakhstan and Turkmenistan deposits that export to China are in or near the Caspian Sea – and Russia will always have the capacity to control this area.

Chinese companies and state-owned funds have invested substantially in Russian energy projects, most recently in Arctic LNG projects, and Chinese banks have lent money. However, the total real investment presence of China in Russia is not easy to calculate, in part because the money is often routed through entities in third countries and various offshore zones. The China Global Investment Tracker suggests that the value of China’s investment in Russia from the beginning of 2005 until mid-2019 was $33 billion. (This is about one-third of investment to Australia, which like Russia is a resourcerich country, and compares to $19 billion in Kazakhstan.)

It is possible that the Russian approach to management, and hence business productivity, could significantly benefit from Chinese FDI management techniques. However, for a number of reasons it is unlikely that the “soft skills” highlighted by the magazine produced by the Association of European Businesses in Russia can be more readily sourced from China.

First, many Chinese business managers have been educated in North America, Australia and Western Europe, and any of their specific Chinese management techniques are likely to be those that are most useful only in the Chinese market. For example, relatively recent poverty in China means that its company managers have been provided with an ample supply of relatively cheap and ambitious employees who are prepared to work very hard and accept conditions that would not be acceptable to most Russian or Western workers.

Second, the most likely language of communication between Russians and Chinese is English, as few are prepared to learn the difficult Russian and Chinese languages. Personal interaction between individual Chinese and Russians is likely to remain relatively limited, and Russia will never be able to provide the large-scale education services to Chinese students that English-speaking countries provide – and which have been such a bonus for business relationships.

Third, despite what some people might hope, general Russian cultural traditions are much closer to those of Europe than Asia; very few of those Russians that do immigrate are going to Asia! Finally, the very high level of Chinese FDI into Australia has not had any noticeable effect on Australian business management practices.

Despite considerable Russian efforts for a closer technology relationship with China, progress has been very modest. Many Russians, with thoughts of past Soviet technology achievements, have often

given the impression that they feel superior in this area, and the main thing that they need from China is money. And money, particularly against the background of sanctioned Russian companies and businesspeople, is something that the Chinese have been wary of giving. On the Chinese side, this is seen as arrogant, particularly given the relative lack of Russian technology development since the collapse of the USSR.

However, some things are changing, and Huawei has certainly been more active in the Russian market after US actions against it and is looking for local collaborators. Overall, it is thus no surprise that Huawei and Russia’s MTS mobile operator have signed a deal to jointly develop 5G in Russia, which is clearly supported by the Russian and Chinese governments.

In the area of military technology, Western defense leaders increasingly emphasize that the impetus for innovation for much of the next generation of military equipment, both hardware and software, will come from the commercial sector. This is particularly true with respect to information technologies, software development, artificial intelligence and robotics. Thus, the United States is working to increase its access to and ability to use technologies being driven by the commercial sector, and the Chinese are doing the same. There has also been an increased American emphasis on international cooperation, which reflects the reality that many foreign countries, particularly allies in Europe and Asia, now possess critical design skills, production capabilities and products versus China, however, they will be less willing than the United States to engage in this way. None of America’s allies are ever going to be a military threat to the United States, whereas China is in a much more vulnerable geographic and economic position. Whatever the exact nature of the present China-Russia relationship, China will always be wary of Russia’s potential as a military adversary.

Together with the sheer size of its market, this means that there is a certain sense to Chinese high-tech import replacement. There is little evidence that China has a particular wish to form or participate in any technology bloc. Rather, it has to sort of suck in foreign technology in any way that it can and from any place that it can. Independent Russian analysts say that much of the Russian defense industry is built on the modernization of Soviet-era technology. But even if there was to be more technology cooperation with China, the Chinese are unable to provided cuttingedge technology in areas such as machine tools, which are so important in converting ideas into actual weapons. Overall, it is hard to avoid the conclusion that the “pivot to Asia” will disappoint many Russian policymakers.

Conclusion

Russia’s sound macroeconomic position and significant reforms in a number of important areas such as pensions, taxation and aspects of digitalization have been noted. But in other areas it is very unclear what policymakers are trying to achieve.

The ham-fisted approach to import replacement would seem to be at odds with aspects of the National Projects and the supposed economic benefits of Russia’s pivot to Asia. The government expended much political capital on the very unpopular pension reform issue, but is allowing nationalist emotion to dictate events when it comes to some other areas. The National Projects do contain many necessary measures in a variety of areas, but achievement of the overall goals are more likely to be hindered than helped by the obsession with numerical targets and KPIs.

More generally, Russia’s economic advances are being held back by excessive political centralization, which reduces the ability and incentive for large sections of society to contribute ideas and their enthusiasm for improvement. The large state share in the economy and pervasive corruption, which are very often related to each other, show little sign of being seriously addressed and will thus continue to hinder economic performance.

In July, the Russian Central Bank head, Elvira Nabiullina, said that the “the main constraints for development are domestic.” She added: “’Even if National Projects are successfully implemented, for the part that concerns the government, there is no guarantee that they will create a proportionate multiplier effect through the expansion of private investment.” She further added: “We need the protection of private property, independent courts and in particular a judicial settlement of corporate conflicts.”

The 2018 pension reform program increased the retirement age from 60 to 65 for men, and from 55 to 60 for women, in stages between 2019 and 2028, and is expected to give a small boost to the available labor force in the coming years. IMF’s assessment of combined effects of “pension reform and increased investment spending related to the National Projects” is that it could boost the supply-side of the economy and accelerate the growth rate of “potential output” from 1.5 percent to as high as 2 percent by 2024. Average annual GDP growth up to 2014 is expected to be less than 2 percent, while real GDP per capita growth will be higher as Russia’s population falls from around 146 million at present to less than 130 million during the next decade. Despite what the IMF says, the poor state of infrastructure in Russia’s regions means that there is a very good case for using National Welfare Funds to mitigate this.

Russia’s relationship with China is complex and multilayered. It is very close at the Putin Xi level, although less likely to be so at the military and security establishment levels. The non-resource business-level relationship is very weak and will not quickly change.

The erratic and aggressive approach of the United States in almost all possible areas means that China must “pivot” aspects of its own economic and security thoughts to the possible benefits of a closer relationship with Russia. Even if Putin and Xi were suddenly to no longer be leaders, the die has been cast. The China-US relationship is on a weakening trend and the Russia-China relationship on an improving trend – at least for quite a few years.

China has its own very significant economic and security problems that have little to do with Russia, and China’s attitudes toward Russia will always somewhat be hostage to these. Russia’s pivot to Asia is no panacea or substitute for domestic institutional reform. Without such measures, particularly in the areas of a better working legal system and less centralised control, the Russian economy will continue to show anaemic economic growth. The strong financial position of Russia means that newly introduced US financial sanctions will have little effect. The main negative effect of sanctions has been on certain areas of Russia’s technology development.

This article was originally published in ‘Strategic Review’, http://sr.sgpp.ac.id/post/russia-and-china-an-uneasy-embrace

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