January 23, 2019

China-Russia Cooperation Presents a Fresh Threat to the United States

By Ashley Feng:

In early November, at the longstanding annual meeting of the Russian and Chinese foreign ministers, Russian Prime Minister Dmitry Medvedev said in order to counter “some countries’ unfriendly actions,” Russia and China “must join forces to preserve international regulation in this [international trade] sphere.” The increased economic cooperation between Russia and China has deepened in the past two years, and as U.S. foreign policy toward both countries becomes more aggressive, this trend will accelerate. Increased cooperation will also have significant national security implications for the United States.

Both China and Russia loathe the global reach of the United States’ financial system and are actively looking for ways to circumvent it. One of the key consequences of such circumvention is the potential decreased effectiveness of U.S. coercive economic tools, including sanctions.

Increased bilateral trade and economic cooperation between China and Russia is a long-term, sleeper issue that U.S policymakers should pay closer attention to.

In the past ten years, Chinese and Russian trade has increased by 37 percent, with trade levels between the two countries expected to exceed $100 billion in 2018. The two economies are complementary, with Russian raw materials flowing to China in exchange for manufactured goods. As of 2016, China has been Russia’s primary trade partner.

Concerns about the increased use of the renminbi in trade over the dollar are slowly being realized. Shortly after the November meeting, Anton Siluanov, the Russian Minister of Finance and First Deputy Prime Minister, announced that China and Russia were in talks to develop payment settlement and clearing mechanisms in rubles and renminbi. A week later, for the first time, RusHydro, essentially a state-owned enterprise, issued bonds worth almost $31 million denominated in renminbi, with reports indicating that the company may issue additional future capital investments in renminbi. This followed earlier comments from Russian President Vladimir Putin, after he and Chinese President Xi Jinping met in September, that Russia and China “confirmed their interest in using national currencies more actively in reciprocal meetings.”

Russia is also slowly replacing the U.S. dollar in its reserves—in 2018, the percentage of renminbi in total Russian central bank holdings increased from 5 to 15 percent in light of U.S. sanctions. The gradual replacement of the dollar by the renminbi would better insulate Russia and China from U.S. actions meant to punish both countries for aggressive actions like the annexation of Crimea or economic espionage.

Increased bilateral economic cooperation isn’t just limited to currency. As U.S.-China trade tensions continue, China is turning to Russia to replace top imports from the United States. China and Russia also advanced dialogues in November to increase Russian exports of frozen poultry, milk, and soybeans and agreed to cooperate more on civil aviation projects. These four commodities were some of the top exports from the U.S. to China before the imposition of aluminum and steel tariffs last year. These examples signal China and Russia’s accommodation of each other’s priorities and projects instead of intensifying competition between the two countries.

Increased bilateral trade and economic cooperation between China and Russia is a long-term, sleeper issue that U.S policymakers should pay closer attention to. Gradual replacement of U.S. commodities and the use of the dollar in Russia-China relations could greatly reduce the effect of U.S. coercive economic actions. U.S. leverage in this domain is linked to its jurisdiction, so the less used the dollar is, the less leverage the United States will have over these strategic rivals.

The United States cannot convince Russia or China to continue buying or trading in U.S. dollars. However, to ensure U.S. products have markets to be exported to, the U.S. administration should stop needlessly renegotiating old free trade agreements. Rather, it should explore the possibility of a free trade agreement with fast growing regions, such as Southeast Asia. This can be a powerful hedge to manage Russia and China’s increasingly economic ties and the ill effects for U.S. security.

Ashley Feng is a Research Assistant for the Energy, Economics, and Security Program at the Center for a New American Security, focusing on East Asia and China.

Read the full CNAS "U.S. Strategies to Counter Russia" commentary series below:

Embedding Sanctions in U.S. Russia Strategy

Prospects for Transatlantic Cooperation on Russia Policy

Russian Domestic Politics and Greater Russia-China Cooperation

Russia’s Macroeconomic Vulnerabilities

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