Russian bears

Putin trades oil for BFF status

“Everything is just fine, please don’t worry,” Vladimir Putin told reporters at his end-of-year press conference. “I have people who love me.”

The Russian president was responding to a question about his personal life. But in political terms Putin needs a little more love from overseas – and China is where he hopes to find it most.

Despite the plummeting rouble, Putin has tried to sound confident about Russia’s prospects, telling reporters that trade with China will pass $90 billion this year.

But the evidence from Chinese territories near the Russian border is that trading conditions are tough. Chinese vendors are asking for payment in dollars or renminbi in cities like Suifenhe, for instance, despite its designation as a pilot zone for roubles to be accepted alongside the yuan (see WiC221). Also because of the rouble’s decline, fewer Russian customers have been crossing into China too – a garment trader tells Xinhua that the conditions are the worst for a decade. “In this period in previous years, I was busy purchasing for next spring’s sales,” he complained. “Now I have nothing to do but stay at my shop staring at the piled-up inventory.”

Other Chinese exporters have been reporting a similar struggle. “Demand has been badly hit,” a fruit and vegetable trader in Gansu admitted to CBN. “Russian customers are still talking about buying but they are very strict with the pricing. Their offers are now so low that our profits are very small. Some traders have already suspended exports.”

Some Chinese carmakers are hurting too, especially Geely. Its shares tumbled the most in 12 years last month after reporting currency losses and slower sales in Russia, its biggest overseas market at about 27% of exports in volume terms.

Shenzhen-based BYD also got the jitters, prompting the biggest-ever single-day drop in its share price (see page 6). BYD insisted its sales to Russia were immaterial, but investors still headed for the exits.

If the rouble’s slump continues, Chinese strategists might be hoping for further leverage in negotiating longer-term energy deals for Russian oil and natural gas (see WiC253). Perhaps Putin will sell more Russian assets too, hoping to generate enough cash to ride out the storm.

But there is speculation that the Chinese could offer more if the rout worsens. One option is to trigger the Rmb150 billion ($24.12 billion) swap deal signed by the two central banks last October, which allows for direct exchange of renminbi for roubles, rather than via the dollar. It was designed to reduce reliance on the greenback should Russia and China ever need to respond to a liquidity crunch. Activating it more proactively as a sign of support for the rouble would be the first time that China has tried to use its currency to bail out another country in crisis, the South China Morning Post claims. This follows signs that Beijing is a little less reluctant to serve as a lender of last resort, after providing $2.3 billion to Argentina as part of a currency swap, plus a further $4 billion to Venezuela last year.

Suggestions from Chinese officials that the Russian swap deal could be expanded provided a brief boost for the beleaguered Kremlin, with the rouble rising 4.9%. China’s Minister of Commerce Gao Hucheng did his bit to be reassuring too, claiming that the two countries could still achieve this year’s trade target, and that cooperation on energy and manufacturing projects wouldn’t be greatly affected.

The Chinese media was supportive too, invoking geopolitical logic for helping out their neighbour. This included the Global Times, which warned that it would be “foolish” to neglect Beijing-Moscow relations. “China and Russia have precious strategic resources for each other,” it cautioned. “If Moscow-Beijing ties break down, Washington will be more ruthless to Beijing.”

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