Russia Eyes China with Concern – 8/11/16

After an economic slowdown in China triggered a collapse in the price of oil, the Kremlin has paid more attention than ever to its largest trading partner.

Squeezed by the crash in oil prices and Western sanctions, Russia has looked for ways to ween its economy off neighbors resentful of illegal forays into Ukraine, the Middle East, and even U.S. elections. China originally seemed like a good option when its growth rate was still steady and it was free to spend hundreds of billions of dollars on Russian energy projects. Imports of Russian crude last year jumped 28% making it China’s largest supplier on an annual basis after Saudi Arabia. Few other countries have the need or desire to tie themselves to Russian oil and gas.

For better or worse, Russia’s fate is tied closer to China’s than ever. A 1% slowdown in the Chinese economy would translate into a deceleration of about half as much in Russia’s gross domestic product, according to Bank of Russia First Deputy Governor Ksenia Yudaeva. Coming off a GDP contraction of 3.7% in 2015, Russia is not in a position where they can blithely accept losses.

After a slowdown in China came in 2016 and triggered a collapse in oil prices, the yuan fluctuations, capital outflows, and stock market panic that followed only exacerbated fears about China’s economy. The nation’s GDP supposedly grew at 6.7% in the first quarter of the year, in line with the government’s growth target range, but many economists still have their doubts about China’s notoriously unreliable, government-guided economic indicators.

Russian officials are clearly nervous that a hard landing for China would mean trouble for Russia right before parliamentary and presidential elections.

“The Bank of Russia is monitoring the situation in China and will take measures to maintain financial stability if needed,” said Yudaeva, speaking for the Bank of Russia.

Though it is hard to say what form those measures would actually take, Russia’s central bank has a 150-billion-yuan ($23 billion) swap agreement with People’s Bank of China, signed in 2014 to facilitate direct settlement between the ruble and the yuan, avoiding use of the dollar.

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