China Will Help Russia Economically But On Its Own Terms

Wheat infected by dwarf bunt virus. Photo credit: Peggy Greb, USDA Agricultural Research Service, licenced under Creative Commons Attribution 3.0 License.

THE TIMING OF the announcement by China’s customs authorities that they would approve all Russian wheat and barley imports — just hours after Russia launched its invasion of Ukraine — seems barely coincidental.

It also underlines how China is acting in its national interest as much as supporting its neighbour.

Presidents Xi Jinping and Vladimir Putin agreed to the end of the import ban when the latter attended the Beijing Winter Olympic Games earlier this month.

State media is suggesting that shows there is no connection between lifting the import ban and the invasion of Ukraine. However, that line raises more questions than it answers about how much Xi and Putin discussed Russia’s plans in advance.

Russia is the world’s largest wheat exporter, with around an 18% global market share. It has been excluded from the Chinese market because of concerns about introducing dwarf bunt fungus (seen in the photograph above) — a disease that can stunt wheat and other crops, reducing yields by up to three-quarters.

China often cites phytosanitary reasons to justify non-tariff barriers to trade, but the fungus is a serious threat; hitherto, China had zero tolerance for dwarf bunt spores in imported grain. Putin agreed that Russia would suspend wheat shipments to China if the contaminants were found.

For Russia, the agreement offered the reassurance of a secure buyer to mitigate possible Western sanctions. For China, it will mean a supply of cheap wheat to offset the looming shortages caused by flooding that disrupted last year’s sowing season across one-third of the country’s wheat acreage. Food security is a priority concern for Xi.

With 1.4 billion mouths to feed and rising use of wheat for animal feed, China is already the world’s largest wheat market, accounting for shy of one-fifth of the world’s consumption. It has somewhat opaque import quotas established when it first joined the World Trade Organization in 2001 that were intended to open up the market. Imports are running at well below allowable volumes. There is headroom to expand imports from Russia.

Some reports suggest that this new trade will be settled in yuan, not the dollars customary in commodities trading. That will be easier as some of the imported wheat will come from Chinese-owned farms in Russia’s Far East that up until now could only sell their produce in the domestic Russian market.

The two countries’ central banks agreed a three-year $24 billion currency swap in 2014 to facilitate trade financing in yuan. This has been renewed twice since. One effect has been to reduce the dollar’s share of financing of Russia’s exports to China from almost all of it in 2013 to around 40%.

In January, Russia’s state-owned Gazprom signed a 30-year contract to supply natural gas to China’s northeast from the Russian Far East. This will be priced in euros to avoid using dollars. Beijing insisted on favourable terms given Moscow’s desire to diversify its export markets for its energy since the sanctions imposed for Russia’s annexation of Crimea in 2014, which also produced a cut-price supply contract.

Russia has been building up its reserves of euros and yuan at the expense of the dollar since the imposition of the sanctions for annexing Crimea. Since 2017, the yuan’s share of Russia’s foreign-currency reserves has risen to 13% from 3% and the euro’s share to 32% from 22%, while the dollar’s share has fallen to 16% in 2021 from 46% in 2017.

The two countries’ central banks agreed a three-year $24 billion currency swap in 2014 to facilitate trade financing in yuan. This has been renewed twice since. One effect has been to reduce the dollar’s share of financing of Russia’s exports to China to around 40%, against almost all of it in 2013.

When they met earlier this month, Xi and Putin said they aimed to raise their countries’ bilateral trade to $250 billion from $140 billion last year. China will dictate the terms with a hard head more than a friendly heart.

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3 Comments

Filed under Agriculture, China-Russia, Energy, Trade

3 responses to “China Will Help Russia Economically But On Its Own Terms

  1. Pingback: US Reminds China It Is Still Taking Care Of Business | China Bystander

  2. Pingback: The Longer The Ukraine Crisis, The More Of A Non-Player China Becomes | China Bystander

  3. Pingback: China-Russia Trade Slows In March | China Bystander

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