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Despite Western Warnings, Russia Moves Closer To China – Analysis

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By Pavel Felgenhauer*

The perception of China as a growing and global threat has become a bipartisan issue in Washington that more or less seamlessly persisted through the handover of power from the previous presidential administration to the current one. Indeed, over the past several months, the United States government effectively managed to rally its allies in multiple corners of the world to recognize and stand up to the China challenge (see China Brief, March 25; see EDM, June 21July 6).

Russia in turn, is seen by Washington as an active troublemaker and a potentially deadly nuclear superpower—but one with a relatively small, stagnant economy that is incapable of mass-producing modern warships or any other industrial hardware at China’s level. Western diplomats and political leaders have been increasingly vocal in telling their Russian counterparts to be aware of the potential threat emanating from Beijing. With China’s outreach continuously expanding economically, technologically and militarily, while Russia languishes, the ostensible enhanced strategic partnership between the two Eurasian countries is increasingly lopsided. Their advice to Moscow: look out and distance itself from Beijing or Russia may end up a Chinese dependency or vassal, losing its coveted sovereignty, and maybe even territory, to a not-so-gentle master.

Attempts to teach Russians to understand the potential perils of being too close to China politically, geographically and militarily have been coming from US, European and Japanese officials and academics and, apparently, most recently from US President Joseph Biden himself during his June 16 summit with President Vladimir Putin in Geneva. This prodding raised concerns in Beijing. In an interview last month, reporters from the Global Times (a tabloid under the auspices of the Chinese Communist Party’s flagship People’s Daily) asked the Russian ambassador to China, Andrey Denisov, “Some analysts suggest the Biden administration may take measures to ease tensions with Russia in order to concentrate on dealing with China. Will this strategy alienate Russia from China and draw it closer to the US?” Denisov replied matter of factly: “It can’t happen. I think we’re smarter than what the Americans think” (Global Times, June 13).

Russia (Soviet Union) and China were bitter enemies for decades during the Cold War, following a relatively short period of close alliance in the 1950s. It is notable, therefore, that the present top military/intelligence/diplomatic/political leadership in Russia, with Putin at the helm (all people over 60), grew up and began their respective careers when China was considered an archenemy on par with the United States. In fact, the People’s Republic may even have been “worse” because it could potentially muster a 100-million-plus-strong peasant army to invade and overrun Soviet Siberia and beyond. Suspicion and apprehension of China and its long-term intensions is deep-rooted in the Russian collective psyche (see Commentaries, January 15, 2010; see EDM, February 23, 2021; see Jamestown.org [1][2], September 13, 2016). Still Western attempts to insert wedges into the Moscow-Beijing strategic partnership seem to be failing as real Russian money follows official rhetoric.

On June 3, 2021, during the annual St. Petersburg International Economic Forum, top Russian state officials announced that the government would be shedding US dollars from the account sheet of Russia’s sovereign National Wealth Fund (FNB). And a month later, the Ministry of Finance announced that this currency conversion was complete. The FNB officially stood at 13.6 trillion rubles ($188 billion) as of July 1. The liquid part of the federal fund (not invested into infrastructure and other projects) totals 8.3 trillion rubles (around $115 billion). Thirty-five percent of that sum was previously parked in US Treasury bonds, which have now been sold off. Holdings in British-pound-denominated paper were reduced from 10 percent to 5 percent; while holdings in Japanese yen stayed at 5 percent. Holdings in euro-denominated paper increased from 35 percent to 39.7 percent and doubled in Chinese renminbi, from 15 to 30.4 percent. Some 20.2 percent of the FNB reserves in different Central Bank accounts are, today, denominated in gold bullion. The FNB’s nominal owner is the Russian finance ministry, but it is managed by the Central Bank. Overall, Russian hard currency reserves were valued at $592 billion as of June 25 The Central Bank continues to keep US Treasuries on its balance sheet, though their amount is decreasing. Russia is a major gold producer and exporter; in recent years, the Central Bank has been buying up substantial amounts of gold bullion and keeping it in its vaults. The gold in the FNB is physically held by the Central Bank (Kommersant, July 7).

The elimination of the US dollar from the National Wealth Fund is no small matter. The FNB is formed out of surplus natural resource (oil and so on) export earnings that are predominantly valued in dollars. Russian exporters, who are paid in euros in Europe, convert them there into US dollars, repatriate this money, and sell it at the Moscow currency bourse, where the trade is 80 percent in US dollars and 20 percent in euros. The Central Bank buys up the currency also on behalf of the FNB and then converts it into euros or renminbi, which is actually not a freely convertible currency (Interfax, June 7). None of these operations are financially prudent. Because of the recent decline of the euro and gold against the dollar, the FNB apparently lost up to $2 billion in a single month. Still, the first deputy prime minister and Kremlin insider Andrei Belousov told journalists that the decision to ditch the dollar from the FNB was taken by Russia’s “political leadership” (i.e., Putin) after serious consideration “to avoid the threat of sanctions” (Interfax, June 3).

Apparently, the Kremlin foresees a possible catastrophic worsening of relations with the US and its allies and a possible freeze of Russian assets. The FNB, though managed by the Central Bank, is still owned by the government. The hard currency reserves of the nominally independent Central Bank per se are apparently seen as less vulnerable than government-owned funds. Central Bank reserves could possibly be frozen only if a local standoff escalates into full-scale warfare between Russia and the US. The renminbi and gold, though less easily convertible than US dollars, are seen as safe havens. Euro-denominated paper—primarily German government bonds and notes—are evidently seen as safe as well. Presumably, Germany would be the last Western country to freeze Russian government accounts in its banking system.

The Biden-Putin summit in Geneva last month did not change Russia’s overall threat assessment (see EDM, June 1721), and the costly selling off of US dollars from the FNB proceeded as planned. Rhetoric notwithstanding, Moscow seems wholly serious about maintaining its course of confrontation with the US while closing ranks with China.

*About the author: Dr. Pavel E. Felgenhauer is a Moscow-based defense analyst and columnist for Novaya Gazeta. He served as senior research officer in the Soviet Academy of Sciences, from where he received his Ph.D. Dr. Felgenhauer has published widely on Russian foreign and defense policies, military doctrine, arms trade and the military-industrial complex. He comments regularly in local and international media on Russia’s defense-related problems.

Source: This article was published in the Jamestown Foundation’s Eurasia Daily Monitor Volume: 18 Issue: 108

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The Jamestown Foundation’s mission is to inform and educate policy makers and the broader community about events and trends in those societies which are strategically or tactically important to the United States and which frequently restrict access to such information. Utilizing indigenous and primary sources, Jamestown’s material is delivered without political bias, filter or agenda. It is often the only source of information which should be, but is not always, available through official or intelligence channels, especially in regard to Eurasia and terrorism.

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