The last four months of 2011 were both ordinary and extraordinary for Beijing and Moscow. There was certainly business as usual as top leaders and bureaucrats frequented each other’s countries for scheduled meetings. The world around them, however, was riddled with crises and conflicts. Some (Libya and Syria) had seriously undermined their respective interests; others (Iran and North Korea) were potentially more volatile, and even dangerous, for the region and the world. Regardless, 2011 was a year full of anniversaries with symbolic and substantive implications for not only China and Russia, but also much of the rest of the world.

Prime Minister – future/past President – Putin in Beijing

Russian Prime Minister Putin traveled to China on Oct. 11-12 to attend the 16^th Regular Meeting of the Prime Ministers of Russia and China. Economic issues were the focus for this scheduled meeting between Putin and Chinese Premier Wen Jiabao. Of the Russian delegation, 160 of the 250 members were top business leaders. A total of 16 economic and trade agreements worth more than $7 billion were signed a day before Putin’s visit in the areas of finance (one project worth $4 billion, including $1.0 billion into the Russian Direct Investment Fund, founded in June with backing from Putin and Russian President Dmitry Medvedev), investment (four projects worth $90 million), trade (five projects worth $2.55 billion), and 10 other projects ($380 million) including aerospace, biochemistry, IT, renewable energy, etc.

The annual meeting took place against the backdrop of China becoming Russia’s largest trade partner in 2010 ($59.3 billion in total trade volume, which was 9.6 percent of Russia’s foreign trade). In 2011, bilateral trade increased by more than 30 percent to $80 billion. While in Beijing, Putin and his Chinese hosts tried to “optimize trade structures” by increasing the proportion of electro-mechanical and high-tech products in bilateral trade volume. The goal is to lift bilateral trade to $100 billion by 2015 and $200 billion by 2020. The two leaders identified 13 areas of cooperation including investment, special economic zone and high-tech park creation and management, finance, Customs, Far East/Siberia economic projects, cross-border transportation infrastructure, high-technology cooperation from commercialization to research and development, aerospace, environmental protection, agriculture, forestry, and labor migration.

Among the documents signed was the first-ever Cooperative Memorandum for Economic Modernization. The origin of the document was Russia’s Modernization Partnership program with the EU in 2010. China has “long proposed creating an analogous program,” according to Russian sources. During President Medvedev’s visit to China in September 2010, the two sides finally agreed to develop such an agreement. Until recently, Moscow was skeptical of the level of Chinese technological development and tended to consider Western countries exclusively as its source for advanced technologies for modernizing its economy. Until this point, the only Asian country with which Russia had signed a modernization memorandum was South Korea in November 2010 during Medvedev’s visit to Seoul.

Several developments in 2011 seemed to have pushed Russia to alter its perception of China. The successful test flight of China’s fourth-generation stealth fighter/bomber in January and its first aircraft carrier (the refurbished Soviet carrier Varyag) began its sea trial in August. On Sept. 29, China successfully launched the Tiangong #1 space station, which was followed by a successful space docking with Shenzhou #8 on Nov. 2.  On Dec. 27, China’s Beidou satellite navigation system began initial operations.

But long before these high-profile and high-technology breakthroughs, Sino-Russian bilateral trade gave indications that China’s economy was more dynamic, comprehensive, and innovative than Russia’s. Russian sources indicate that in the last few years, more than 70 percent of the value of Russian exports to China consisted of minerals, timber, and pulp and paper goods, while the share of machinery and equipment has not exceeded 5 percent. On the other hand, more than half of Russia’s imports from China have been machinery and technology output. Russia also noticed that China’s public and private investments in R&D have been growing by 20 percent annually, and in the last five years, 126 science parks/cities have been built in China while Russia’s main hi-tech city, Skolkovo, exists largely on paper. This final “reckoning” by the Russians is apparently a recent phenomenon as Prime Minister Putin was “extremely surprised” by a statement made by Texas Pacific Group head David Bonderman at an October investment forum that US economic leadership would be taken over by China. To this, Putin asked, “Do we have to switch our gold and foreign reserves to yuan now and China to dollars? An interesting situation … a sort of a nest-doll. An uneasy situation.”

Still, many Russian experts are convinced that the lag behind China is connected not to a lower level of technological development in Russia but to its inability to put them into production.  Therefore, it is rational and advantageous to combine Russia’s technology with China’s industrial base. The wording of the Modernization Partnership Agreement, therefore, reflects these perceived comparative advantages of Russia and China without indicating who was going to modernize whom. “We are expecting the process to be bidirectional,” sources in the Russian government said.  Moscow was calculating that Russia would help China develop its nuclear power, space, and aircraft industries; Beijing would help Moscow in high-speed rail transport, shipbuilding, alternative energy and power-generation equipment.

While the two sides hammered out a modernization agreement that promises more space for integrating Russian science with Chinese manufacturing capability, China and Russia continued their marathon-like wrestling for oil and gas pricing, an area in which the two sides actually have more room for cooperation. Although Putin’s visit finally brought to an end the pricing conflict concerning the Skovorodino-Daqing pipeline’s transportation fees, the two sides failed again, after more than five years of negotiations, to reach an agreement on the pricing issue for the proposed Russian gas supply to China. “We are close to the final stage of work on gas supplies to the Chinese market,” Putin told journalists shortly after his China trip. Russian Deputy Prime Minister Igor Sechin went further, stating that the two countries were “standing on the threshold of gas delivery agreements,” which could eventually see almost 70 billion cubic meters of Russian gas sent to China annually over the 30-year period. It remains to be seen how the two sides would bridge the price gap of $100 per 1,000 cubic meters as of November 2010. Meanwhile, China has been rapidly expanding its energy cooperation with Turkmenistan and other Central Asian states. During his official visit to China on Nov. 22-25, Turkmen President Gurbanguly Berdimuhamedow agreed to increase annual gas supplies to China from the current 40 billion to 65 billion cubic meters “in the near future.” “We have never politicized economic cooperation,” Berdimuhamedow told the Chinese media ahead of his visit.

Beyond economic issues, the prime ministers also pushed for more social/humanitarian interactions and exchanges. 2012 will be China’s “Russian Tourism Year in China” to be reciprocated by Russia’s “Chinese Tourism in Russia” in 2013. The joint border inspection issue was also discussed, alongside regional and global issues. Overall, the 16^th Prime Ministers Meeting was described as one with “significant outcomes” and was conducted in a “friendly, mutual understanding and constructive atmosphere.” Following the meeting, Putin was received by President Hu Jintao on Oct. 12, and had a “deep exchange” regarding many important issues with “broad consensus.”

Prime Minister Putin’s “working visit” to Beijing, was by no means routine and ordinary. “The significance of this trip exceeds that of a normal prime minister-level visit,” said Zhao Huasheng, director at the Center for Russia and Central Asia Studies at Shanghai’s Fudan University.  It was Putin’s first foreign trip since he revealed plans to reclaim Russia’s presidency (a tenure that could last 12 years), which would mean that he would outlast the next generation of Chinese leaders beyond Hu Jintao and Wen Jiabao. Moreover, Putin would continue to help Russia recover from the “greatest geopolitical catastrophe of the century” (meaning the demise of the Soviet Union, according to Putin’s 2005 statement). Indeed, the last few months of 2011 witnessed some major steps toward that goal as Putin pushed to operationalize a “Customs Union” (Russia, Belarus and Kazakhstan) on July 1, take the next logical step by establishing the “Common Economic Space” (CES) on Jan. 1, 2012, toward the final destination of creating the “Eurasian Economic Union (EEU) in 2015.

Russia’s “three strikes” in 2011 for reintegrating the former Soviet republics were at least partially driven and facilitated by the global financial crisis. The idea of the Eurasian Economic Union, however, was first dreamed up more than a decade earlier by Kazakh President Nursultan. After Putin was first elected president in 2001, he had sought ways to reunite the former Soviet republics, at least partially. In reality, there have been tangible results from such an economic arrangement. The trade volume within the Customs Union framework reportedly grew nearly 40 percent in the first half of 2011. As a result, several Commonwealth of Independent States (CIS) member states, including Kyrgyzstan and Tajikistan, have shown interest in Russia’s ambitious plan. Regardless of its future, particularly its interface with Russia’s newly acquired World Trade Organization (WTO) membership, the move would strengthen Russia’s position in dealing with a rapidly expanding Chinese economy, which has already made significant inroads into those former Soviet republics through bilateral or multilateral mechanisms such as the SCO.

SCO prime ministers in St Petersburg: convergent and divergent interests

The 10^th SCO Prime Ministers Meeting in St Petersburg on Nov. 7, 2011 was held against the backdrop of weak recovery and a general economic slowdown around the world. Although the SCO region has enjoyed relative stability and growth, there were no reasons for the heads of government to relax, particularly in the midst of uncertainty in the world financial and raw materials markets.

The ongoing financial crisis in the world’s richest nations (Europe and the US) is obviously affecting the SCO nations to the extent that the SCO Prime Ministers Meeting issued, for the first time, a “joint declaration on economic situation in the world and the SCO region.” Expressing concern over the uncertainty and instability of the world’s economy, the document said SCO member states should further strengthen economic cooperation in a bid to minimize the negative effects of the global crisis on their countries’ banking and financial sectors. Meanwhile, the declaration vowed to continue encouraging investment and advancing mutually beneficial projects among member states. The prime ministers also agreed to tap the economic potential and consolidate the financial and monetary systems of member states.

One key issue for the ministers was the creation of an SCO Special Account and the SCO Development Bank (SCODB). Both were prominently addressed in the declaration and the joint communiqué issued shortly after the meeting. The idea of a SCODB was first raised by Premier Wen Jiabao at the Ninth Prime Ministers Meeting. The goal was to promote construction of a regional financing system. Wen brought the concept up again because finance ministers and central bank governors of the SCO member states found it necessary to coordinate in a closer and more timely manner in times of financial instability and uncertainty in the global economy. “A multi-level and multi-channel fundraising system should be established to strengthen financial support to regional economical [sic] cooperation programs,” Wen said. In his “nine proposals” at the meeting, Wen urged others to facilitate free transit of goods, capital, and services through the SCO territories along with faster development of regional infrastructure networks for transportation, energy, and communication. In turn, China would commit itself to offer soft loans in support of those infrastructure projects in the SCO states.

Several SCO members including Kyrgyzstan, Tajikistan, and Kazakhstan supported the idea of SCODB. Prime Minister Putin, however, appeared more interested in establishing the SCO special account as an instrument for financing SCO projects. Citing “serious challenges” for the existing SCO interbank consortium (SCOIC) that was established in 2005, Putin favored “a medium-term strategy” for SCOIC’s development, meaning strengthening the existing infrastructure while introducing “innovations” of various kinds.

Putin’s caution was understandable given the fact that such a banking mechanism as SCODB would further strengthen China’s economic presence in Central Asia. There is no question that once the proposal is approved and implemented, it will facilitate greater convenience for enterprises from the SCO member states, including Russia, in their operation for financing, settlements and guarantees. The proposed SCODB will also improve the position of the yuan among the SCO’s five other members in the areas of expanding local exchange and settlement cooperation, an important step to raising the currency’s status in the world.  Despite Russia’s apparent reservation, the joint communiqué states that the SCODB issue will be further discussed at the second SCO Finance Ministers and Central Bank Governors Meeting in China in 2012 and that such a mechanism will be ready to be approved at the SCO’s next heads of state annual conference scheduled to be held in China in June 2012.

SCODB is not the only issue over which China and Russia seemed to have divergent interests. One of the most publicized topics by Russia both before and during the St. Petersburg Prime Ministers Meeting was the creation of a SCO energy club (SCOEC); the idea originated with then-President Putin back in 2007. Over the next few years, the club generated considerable public chatter about the possibility of a Russian-led “OPEC for gas” trilateral entente consisting of Russia, Kazakhstan, and Turkmenistan. Russia’s initiative points to such an arrangement among energy producers to control supply, and more importantly, prices.

Until now, Beijing has been able to develop, rather successfully, its vast and still rapidly expanding network of energy and raw materials supplies through bilateral arrangements with several Central Asian countries. It is unclear how the club would affect the energy and raw materials security that China seeks. As a result, the idea of such a club had stayed at the talking stage until late September when the “Xi’an Initiative” was launched by energy ministers of China, Kyrgyzstan, Russia, and Tajikistan following a conference of European and Asian energy ministers in the ancient Chinese capital city of Xi’an. In fact, the Chinese participants embraced the idea of a SCOEC by considerably stretching the original setting into an open, multilateral, and transparent mechanism with participants from both energy producers and recipients. The Xi’an initiative aimed at accelerating the launch of the SCOEC by proposing the establishment of a SCOEC senior working group and agreeing to hold its first meeting at the end of October in Moscow. The outcome of the Moscow meeting is unclear. By the time of the meeting in St. Petersburg, however, Putin was still talking about the need to establish “the legal base of the energy club.” However, the Joint Communiqué of the 10^th Prime Ministers Meeting did not mention the issue.

Another issue that went nowhere in St. Petersburg was SCO expansion – In sharp contrast to the pre-conference optimism regarding Indian and Pakistani membership. What was more bizarre was that a week before the meeting, Russian Deputy Foreign Minister Alexei Borodavkin and Chinese counterpart Cheng Guoping met in Moscow and agreed to accelerate the process of enlarging the SCO, namely by granting membership in the organization to India and Pakistan, according to a press release by the Russian Foreign Ministry on Oct. 31, 2011. China’s move to accept India and Pakistan, however, seemed quite different from its long-held concern that SCO expansion may lead to a loss of internal cohesion and efficiency.

Beyond this, the idea of accepting Turkey and the US as SCO “dialogue partners” (Belarus and Sri Lanka are current dialogue partners) was also tossed around. In April 2011, the Turkish foreign minister sent a letter to the SCO general secretary asking to give Turkey dialogue partner status. Although partnership status for Turkey was not opposed by anyone, the US case did meet with opposition, not from Russia and China, who see US interest as a sign of the SCO’s growing influence, but by Central Asian states such as Uzbekistan, according to Russian governmental sources. Shortly before this in June, Kabul filed an official request for observer status in SCO, according to Russian sources.

Given these divergences regarding SCO expansion, the final decision at the St. Petersburg meeting was not to expand. The joint communiqué merely stated that “[T]he Heads of Government attach great importance to the involvement of SCO observer states and dialogue partners in SCO activities and projects in economic and cultural fields. To that end further practical steps will be taken.”

Coordinating for geo-politics

For quite some time, political elites in both Russia and China have tried to change, if not reverse, the state of affairs in which the level of their political cooperation notably outpaces the level of trade and economic interactions.   For better or worse, this is exactly the opposite of China’s relationship with the United States in that their deep and extensive economic intercourse goes hand in hand with political and strategic hedging.

Regardless of the complex geo-economic game between Moscow and Beijing at both bilateral and multilateral levels, the two sides in the last four months of 2011 closely coordinated their foreign policies regarding a series of international crises such as Syria, Iran, and North Korea. While top leaders met routinely at both bilateral and multilateral events (Wu Bangguo’s official visit to Russia on Sept. 14-18; Putin’s China visit on Oct. 11-12; and Medvedev-Hu meeting at G20 in Cannes on Nov. 3), diplomats were in overdrive as international crises overlapped. On Oct. 4, Russia and China went so far as to cast a rare double veto at the UN Security Council to block a US and European-backed resolution condemning Syria for its crackdown on protesters. Toward the end of the year, Moscow and Beijing again were alarmed by the rapid escalation of the Iran-West confrontation when a US RQ-170 reconnaissance drone ended up in the hands of the Iranians in early December. On Dec. 13, the Secretary of Iran’s Supreme National Security Council Jalili visited Moscow, and on Dec. 29-30, Chinese Vice Foreign Minister Zhai Jun visited Iran for talks in the midst of growing tensions over Tehran’s threat to choke off Middle Eastern oil shipments in retaliation against proposed Western sanctions. Zhai met Iranian Foreign Minister Ali Akbar Salehi and other officials. The brief announcement on China’s Foreign Ministry website simply said that, “[b]oth sides exchanged views on Sino-Iranian relations and regional issues.” Following the death of North Korean leader Kim Jong Il on Dec. 17, Chinese Foreign Minister Yang Jiechi contacted his Russian counterpart and exchanged views. For both sides, post-Kim Jong Il stability on the Korean Peninsula is paramount.

In the words of President Medvedev, “Russia and China have been holding vigorous political dialogue at all levels, which allows them to effectively coordinate their positions within multilateral organizations and formats such as the UN, the G20, the APEC, the SCO (Shanghai Cooperation Organization), and BRICS (Brazil, Russia, India, China and South Africa).”

2011: best and worst of times?

“It was the best of times, it was the worst of times; it was the epoch of belief, it was the epoch of incredulity.” While any student of English literature would immediately relate this verse to Charles Dickens’ timeless novel A Tale of Two Cities (1859) about the 1789 French Revolution, it was actually cited by the official Chinese Xinhua News Agency to describe 2011 as “a year of turmoil and great changes.” Indeed, 2011 began and closed with waves of protests and civil wars in many Arabic and North African countries. In between, the 9.0-magnitude earthquake and tsunami in Japan caused one of the worst nuclear disasters in history in March; Osama Bin Laden was killed in May; the debt crises in Europe and the US worsened; Iran and the West edged toward war; and North Korea leader Kim Jong Il suddenly died.

Many of these events had little to do with China and Russia. Neither state could reverse the course of events once they were set in motion. In some cases, such as Egypt and Libya, both Moscow and Beijing lost a considerable amount of their tangible interests as the dust of revolution finally settled. 2011, however, may not be that “bad” if one’s time frame is measured by decades. Indeed, the year 2011 happened to be one of multiple anniversaries for China and Russia. Ten years ago, SCO was founded (June 15); China and Russia signed the Treaty of Good-Neighborliness and Friendly Cooperation (July 16); terrorist attacks occurred in New York (Sept 11); China entered the WTO (Sept. 17); and Jim O’Neill of Goldman Sachs coined the term BRIC (emerging economies of Brazil, Russia, India, and China).

A decade later, the US has finally left Iraq and Europe is drowning in its growing pains and profligacy. Meanwhile, Russia and China decided to make their “strategic partnership” more “comprehensive” (June 2011), meaning broadened and deepened ties despite many imperfections and even frustrations in their bilateral relations. The SCO has been institutionalized and is able to attract more applicants for membership and partnership; the BRIC was formally launched in 2009 and in 2010 gained an additional “S” (South Africa) to become BRICS. In contrast to the financial turmoil in much of the developed world, China and Russia (finally in the WTO after 16 years of negotiations) were in much better shape as 2011 came to a close.

Russia still in search of itself 20 years after

The path to the future, however, is not clearly marked for the two Eurasian powers. Part of the reason lies in the diverse interpretations and perceptions of the collapse of the Soviet Union 20 years before. Unlike the ahistorical and arrogant “end-of-history” assertion among some Western intelligencia, history never ends for Russia and China.

At the height of his popularity at home, President Putin declared in 2005 that the collapse of the Soviet Union was “the greatest geopolitical catastrophe of the 20th century.” At the end of 2011, however, Putin’s legitimacy and his anticipated role swapping with Medvedev in March 2012 were questioned in the wake of the Dec. 4 Duma election. Mikhail Gorbachev, the last Soviet leader who has been a strong longtime supporter of Putin, publicly challenged the legality of the election and demanded a rerun. The liberal Moscow Times went so far as to coin the term “Brezhnev Syndrome” to describe Putin’s mentality. The ghost of the past, therefore, is haunting Russia again before Putin assumes his new/old job in 2012.

In contrast to an emerging polarization in Russian assessments of the Soviet collapse and its aftermath, China’s perception has been more diverse. There was a flood of public discussion regarding the causes, process, consequences, and implications of the Soviet collapse. A Renmin Ribao (People’s Daily) analysis by Wang Wei provided a very systematic study of how the Soviet Communist Party itself was instrumental in its demise and seemed to agree with Putin’s “catastrophe” argument. Wu Jianmin, a veteran diplomat, saw that the Soviet collapse provided great opportunities for both China and the world. Many viewed the Soviet collapse as a lesson and that China should forever abandon the Soviet model of development.  An article in Global Times pointed out the fateful shortcomings of radical Soviet changes, and argued that even a huge country like the Soviet Union was vulnerable as it lost its capacity for self-adjustment.

Perhaps the most provocative treatise was a comprehensive overview of the Soviet experience in the 20^th century by Beijing University political scientist Pan Wei. Dismissing the 20-year assessment of the Soviet collapse as being misled by the pro-Western “totalitarian” school or the Soviet-betrayal orthodox, Pan claimed that Soviet collapse was the first case of a huge empire being defeated not by war but by its ideological “disorientation.” Despite all of its shortcomings, the Soviet experiment during much of the 20^th century was both heroic and tragic, and its “genes” would continue to “haunt” Russia and the world for years to come. Pan did not rule out the possibility that with its vast resources, Russia, a descendent of the Soviet empire, would be reborn in the future as something totally new. “The Soviet Union is dead. And long live the Soviet Union!” claimed Pan Wei. In this regard, history has not ended but is open to all models of human development. Xing Guangcheng, a well-respected scholar in the Chinese Academy of Social Sciences, also believed that Russia would eventually come out of the Soviet shadow and develop its own identity, style and space.

Despite these diverse assessments, the consensus was that such an outcome (collapse) should be avoided by both China and Russia in their search for their own identity and place in the world. China closely followed the Duma election and its consequences. Chinese media carried various assessments of the election and its “blowback” against Putin and his party. The official Chinese reaction, however, was quick to express its support for Putin and the official version of the Duma election. Global Times ran an editorial “Russia Won’t Change according to West’s Expectation.”

In actual policy, China and Russia have grown apart. After the Soviet collapse, China accelerated its experiment with the market mechanism, while a “Westernizing” Russia was descending further into its self-induced historical void before Putin reversed a free fall. Two decades later, a democratic Russia (no matter how imperfect it is by Western standards) has been run by the same ruler for the past 12 years (assuming Medvedev is always shadowed by Putin) and this will continue for the next 12 years. In contrast, China as a communist country will in 2012 have a complete change of the guard on the top and perhaps as much as 70 percent of its provincial leaders. It was after the Soviet collapse that Deng Xiaoping set in motion such an institutionalized leadership change. To that point, almost all top leaders in communist countries either died in office or were forcefully removed. The Russians may have to wait for another 12 years before a more predictable leadership change can be worked out.

In the foreseeable future, China will have to live with Russia; be it strong or weak, assertive or not, democratic or autocratic, West-oriented or east-looking, and led by “Putin the Great” (four terms as president) or Putin the “Ghost” (manipulating from behind the scenes). The question is not if, but how. Again, 2011 simply carries too much historical baggage: it was the 100-year anniversary of China’s Republican Revolution (1911) that ended China’s traditional Qing Dynasty. Fully 100 years later, China overtook Japan in 2011 to become the second largest economy in the world. It was also the 90^th anniversary of the founding of the Chinese Communist Party, the 80^th anniversary of Japan’s invasion of China (1931), and the 70^th anniversary of Pearl Harbor (1941).  It was through this century of foreign invasion, revolution, civil war, and domestic turmoil that bilateral relations between China and Russia oscillated between friend and foe. In contrast, the 20 years after the Soviet collapse happened to be a period of rarely seen equality and stability, at least from China’s perspective. With the hindsight of history, all other alternatives seem less desirable and more costly. The challenge for China and Russia is whether such a state of affairs will continue in 2012 and beyond.