The Corner

As the World Turns

In a fine report on the Russian sanctions, the (leftish) European think-tank Bruegel notes this interesting point (my emphasis added):

FDI (Foreign Direct Investment] flows from Europe [into Russia]  have been shrinking significantly in the last three quarters up to March 2014. This occurred probably in anticipation of escalating tensions, and speeded up during the first quarter of 2014, when the first wave of sanctions was agreed.  More interestingly, FDI flows from Asia – mostly China – picked up to high levels during the same period and literally [literally?] exploded in the first quarter of 2014. During the first three months of 2014, European net FDI inflows to Russia amounted to 2.9 USD billion (2 billion of which coming from the euro area), i.e. down 63% year on year. Asian net FDI flows to Russia were instead 1.2 USD billion (1 billion of which coming from China), i.e. up 560% year on year.

This is not the only sign suggesting that Russia might have been re-orienting the geography of its capital flows over the latest months (something I already looked at here). Figure 4 shows the amount of loans to Russia non-financial corporations and households from foreign lenders, over the period 2007-2014Q1. These are net loans (i.e. disbursement net of repayments) so they can be taken as a proxy of the new lending. The data for the first quarter of 2014 is not properly comparable with the previous – annual – points, but it is nevertheless striking. It shows the expected negative net new lending by European lenders and the – less expected – positive and big net new lending by Chinese lenders. As a comparison, China net new lending to Russian NFCs and Households was 13 USD billion for the sole first quarter of 2014, compared to 7.5 USD billions for the entire 2013.

Then note this from Forbes:

Given Russia’s already unsavory business reputation, Russia’s national champion companies could not borrow long even before the sanctions. Hence, they are faced with formidable refinancing challenges now that the spigot has been shut off. Russia must refinance almost $160 billion in foreign debt in 2014 alone, a good portion of which belongs to Russia’s national oil company, Rosneft. A striking demonstration of Rosneft’s liquidity crisis is its decision to sell one tenth of its biggest production asset, the Vancor fields of Northern Siberia, to China’s CNPC for a miserly one billion dollars. Vancor, a developed field that requires no major investments, is worth some $100 billion (at four times annual revenue of $25 billion). Industry analysts see no reason for Rosneft to sell a major asset at ten cents on the dollar other than a liquidity crisis….

…It is too early to decide the winners and losers from Russia’s War of Southeast Ukraine. One winner, however, is clear. China has the cash to pick up Russia’s crown jewels at bargain basement prices. If we look down the road, we must ask: How much of the natural riches of Siberia will belong to China ten or twenty years from now? China probably has a better answer to this question than we do.

And then this from the Globalist:

During the age of European colonial expansion in the 19th century, China was forced to cede the Far East and parts of Siberia to Russia. During the last century, in 1960s and early 1970s, there were border tensions and even a number of armed clashes between China and the Soviet Union. As if to “settle” these claims by osmosis, Chinese settlers have been steadily moving into Russia’s remote, economically depressed and underpopulated regions. By asserting its historic sovereignty over Crimea, Russia has set a dangerous precedent for the Chinese as they look over their northern border. Unlike the poor Crimea that Russia just seized, those vast empty spaces of Russia’s Far East are full of all kinds of natural resources. Energy resources are what China’s booming economy craves. And now China’s citizens live there too, much like ex-Soviet Russians residing in Crimea. Russia’s Crimea strategy creates a legal precedent for other countries that have “alternative” border preferences, including China, to follow suit if the relevant opportunities arise. Count on Beijing to bide its time – and, unlike Putin, not to do anything precipitous or unlawful. But when the time comes, it will not hesitate to re-assert its territorial claims against Russia.

I wouldn’t push this too far. Siberia is not the Crimea, and Russia (unlike Ukraine) still has its nukes. But Peking is patient, and on the (very) long view increased Russian dependence on China may come at a high strategic price. That does not look like a good bargain for Russia, but then that should not be too much of a surprise. Putin is a politician with a weakness for the past and a limited sense of the future. Thus the  centerpiece of his foreign policy appears to be the recreation of a Russo-Soviet heartland; he looks to history and turns potential allies into antagonists. The EU may be dominated by Germany, but the idea that it is in any military sense a threat to Russia is ludicrous.

Deutsche Welle:

Retired Bundeswehr officers and defense experts have been swarming the German media voicing their indignation over last weekend’s revelations in Der Spiegel that Germany would not be able to meet its NATO commitments because of hardware shortfalls. The report was a particular embarrassment to German Defense Minister Ursula von der Leyen, who had just been to northern Iraq to meet Kurdish leaders, who Germany is equipping for their fight against Islamist terrorist group “Islamic State.” She later admitted to a German paper that there were significant delays in getting spare parts to military aircraft and that barely a third of Germany’s fleet was in working order.

The Daily Telegraph:

As Air Chief Marshal Sir Michael Graydon, the former Chief of the Air Staff, has pointed out, the RAF had 30 combat squadrons at its disposal at the start of the 1991 conflict; today it has only seven. And demonstrating the exquisite lack of foresight with which our politicians these days approach military issues, the MoD is currently in the process of disbanding one of our three remaining Tornado combat formations, 2 Squadron. This at a time when the ageing fleet provides the only aircraft capable of delivering the pinpoint accuracy required to avoid large numbers of civilian casualties – or collateral damage, as the military planners prefer to call them.

And those are just two stories among so many.

The application of the EU’s “soft power” in Ukraine could, over time, have represented a threat to Putin’s regime (and thus it’s not difficult to see why he would want to push back against it), but in hard-power terms the challenge was somewhere between minimal and non-existent. That is not the case with China, the rival that Putin has now made more formidable still.

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