Russia and China have embraced each other in a “limitless partnership” but that relationship remains fairly one-sided. Russia’s economy continues to become increasingly dependent on that of China.

Russian President Vladimir Putin is in Beijing for two days to celebrate the10th anniversary of the launch of China’s Belt and Road Initiative (BRI). But he brought a big business delegation with him and half the Russian cabinet as the two countries continued to work in integrating their economies.

The headline deal from the BRI confab was their largest ever grain supply deal, worth around $25.7bn for 70mn tonnes of grain and vegetables. China has been gradually opening up its domestic market to more and more Russian agricultural products, throwing Moscow a lifeline as a result.

China has also increased its dependence on Russian oil and gas. In the first half of 2023, the share of Russian oil exports in Chinese imports amounted to 18.6%, or 31% over the last 18 months. Russia is the largest oil supplier to China after Saudi Arabia (16.5% share) and Iraq (10.5%), The Bell reports.

Pre-war in 2021, Russia exported 118.5mn tonnes of oil through seaports, 35.9mn tonnes through the Druzhba oil pipeline to Europe, 40mn tonnes through transit pipelines through Kazakhstan to China. But since the war started all those shares have risen.

In the last few weeks, oil exports to China by sea have been greater than to India (1.3mn b/d versus 1.2mn b/d), and when pipelines are taken into account, China takes all of 26% of Russian oil exports and 38% of all its maritime exports.

Their status as the main buyer allows China to dictate terms and receive discounts. In June, oil for China was higher than the price ceiling of $60 per barrel, but lower than the Brent price (by an average of 10% for the first half of the year).

In 2022, Russia increased pipeline gas exports through the Power of Siberia by one and a half times, to 15.5bn cubic metres, and this year 22bn cubic metres will be exported via the pipeline.

All this is incomparable with the 150bcm that used to be sold to the European market. Gazprom is counting on another 50bcm per year when the Power of Siberia 2 is eventually built.

Beijing has become Moscow's main trading partner: the share of Chinese merchandise imports is 40%. Before the war it was about 25%. In terms of imports, Russia has become, if not the economy that's most dependent on China, then the second after North Korea. The volume of trade has grown exponentially from the $3bn of trade turnover the two countries had in 1995 and is on course to easily reach the target of $200bn this year that Xi and Putin set before the war. (chart)

And the pace of trade growth is accelerating. Russia-China trade in January-September 2023 grew 29.5% to $176.4bn, China's General Administration of Customs said. China supplied goods to Russia worth $81.4bn, an increase of 56.9% on the same period in 2022; deliveries from Russia to China increased by 12.7% to $94.9bn.

On a month-on-month basis September also saw an acceleration. Chinese shipments to Russia in September rose 21% to $9.6bn from a year earlier, accelerating from 16% growth in August, Reuters calculations based on customs data show. Imports by China from Russia also rose 8% to $11.53bn in September y/y after rising 3% in August.

Bilateral trade value surged to $21.18bn in September, the highest since February 2022 when Russia began the war in Ukraine, according to data by the Chinese General Administration of Customs, Reuters reports.

More importantly, the nature of Sino-Russian trade has changed dramatically. China is usually very careful not to use its manufacturing might to run large trade surpluses with its partners, to avoid placing undue pressure on their current accounts that could get their government into financial trouble.

China has followed this policy for more than two decades with Russia, increasing its exports to Russia in line with the rise of Russian exports to China, but with a modest trade surplus in China’s favour.

That has changed dramatically since the war in Ukraine broke out, with Russia's trade surplus with China leaping to $38bn last year and on course to be the same amount this year. That has handed Russia a very useful new source of income to fund its war machine and is a de facto subsidy for the Russian economy, funded by Beijing. (chart)

But this new dependence comes at the cost of exposing Russia to China’s increasing economic problems. China’s economy has failed to fully bounce back from last year’s COVID lockdown and a financial sector and housing crisis could be in the cards as both sectors come under increasing economic pressure this year.

“Now Russia is very vulnerable to any problems in the Chinese economy or its production, whatever they may be, and finding a replacement for such imports (technology, equipment, etc.) in other countries is difficult,” senior economist at BOFIT Heli Simola told The Bell.

The yuanization of the Russian economy continues. During January-July 2023, the volume of yuan trading increased 6.5 times compared to the same period a year earlier. The average turnover of trading in the ruble/yuan currency pair has increased more than 100 times since the beginning of 2022. In the first half of 2023, 25% of Russia’s trade turnover with other countries (excluding China itself) was serviced in yuan.

In total, the share of currencies of “friendly countries” in exports in July 2023 was 72% (versus 15% at the beginning of 2022).