Russia China Sino-Russian Silk Road
The map of the Silk Road at the Itchan Kala, Khiva, Uzbekistan. Itchan Kala is the walled inner town of the city of Khiva. Since 1990 it has been protected as a World Heritage Site. The old town retains more than 50 historic monuments and more than 250 old houses, dating from 18th and 19th century

Harangued by the West, Russia is focusing like never before on the East.

Fifteen years ago the Chinese and Russian governments signed the somewhat ironically-named Treaty of Good Neighborliness and Friendly Cooperation. But the measure has had precious little to show for itself since its declaration at the opening of the 21st century – that is, until now.

While trade between China and Russia shrank by more than 28% last year, several new initiatives are quickly boosting economic ties. The most significant is a joint cooperation agreement between China’s Silk Road Economic Belt initiative and Russia’s Eurasian Economic Union.

On this week’s Emerging Opportunities radio show, ISS Risk analyst Phill Hynes provides insight into Russia and China’s deepening relationship, and independent currency strategist Olivier Desbarres, formerly of Barclays and Credit Suisse, reflects on China’s economic outlook, in conversation with Frontera Managing Editor Gavin Serkin and presenter Juliette Foster.

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Phill: The way Russia is tapping into China’s Silk Road Economic Belt initiative shows Russia’s realignment strategy – to re-establish itself as the primary influencer in Central Asia.

Russia has tried to create an economic union within Central Asia. China, at the same time, is in the embryonic stages of its Silk Road and Belt strategy.

More recently, in September of last year, Russia and China agreed a framework where Russia would provide the security apparatus to ensure the stability of China’s aspirations. China is obviously going to build out the infrastructure and finance the whole thing.

This gives Russia a platform back into Central Asia that had diminished over the past few decades, since the collapse of the Soviet Empire.

Russia is making forays into many different areas. Syria is an example. What’s less obvious for people is its resurgence in other places and its ongoing realignment with China. This symbiotic relationship between China and Russia is strengthening, on a security level, Russia’s grip on the Eurasian continent.

Russia China Sino-Russian Silk Road

Gavin: And is that Sino-Russian relationship something that we haven’t seen before?

Phill: There’s kind of a love-hate relationship between Russia and China. But this is an interesting resurgence, because it signals stability for at least the next decade, without question.

So, this alignment will surely create a different geopolitical dynamic. China’s globalization strategy and Russia’s realignment toward the East will have a profound impact on the Eurasian continent.

And actually, North Korea will likely play a pivotal future role in this evolution. At some point the DPRK will become more politically stable. Most Western watchers think the DPRK is a fanatical hermit state, but they have quietly been building much stronger relations with the Russians in recent years. And North Korea sits squarely in one of the most interesting places on Earth right now – as the land bridge between Russia, China and South Korea.

Juliette: Olivier, from what Phill had to say, what conclusions do you draw, and how is this likely to impact on the markets, particularly in relation to that renewed relationship between China and Russia?

Olivier: Well, I think the direct impact on individual economies and individual currencies isn’t always immediate or that potent.

But what I think the issue of North Korea, ISIS, and the renewed relationship between Russia and China does, is add to this list of known unknowns.

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We don’t know what’s going to happen to commodity prices after the talks failed between Saudi Arabia and other OPEC countries. We don’t know what the Federal Reserve is going to do in the next few months. We don’t know how the U.K. will vote in the EU referendum in a couple of months’ time. We don’t know how these political scandals in Brazil, South Africa and Malaysia will play out.

So, if you’re adding to this list of uncertainty, this is going to make markets nervous. We know from a historical perspective that markets despise uncertainty, and this could cause investors to vote with their feet and exit markets where they feel that this list of known unknowns is simply getting too long and too heavy, relative to the returns that they can expect by either being invested in rates, currencies or equities.

Russia China Sino-Russian Silk Road

Gavin: Staying focused on China, we’ve seen a series of economic growth numbers last week that appeared to show that the slowdown isn’t nearly as severe as many had feared. The world’s second biggest economy had a seasonally-adjusted trade surplus of around $164 billion for the first quarter, which is close to a record high. And PMI indexes, which measure manufacturing output, rose to the highest in at least nine months. There’s been a strong pick-up as well in loans and investments, with loans in the local currency jumping 25% year-on-year in the first quarter. So, is China’s crisis over?

Olivier: That is really the million-dollar question for emerging markets, alongside what the Federal Reserve will do in the next few months.

I think the picture in China has always been more nuanced than markets perhaps wanted us to believe. Certainly, the China bears have had to somewhat correct their view in recent weeks, because the numbers which have come out have been stronger than expected and shown an economy that isn’t falling over the cliff, that’s not having the famous hard landing, but is slowing at a normal pace, and you would expect that at this stage of economic development.

So, from a cyclical perspective, China certainly looks a little bit healthier than it did a few months ago, and I think that really has helped the emerging markets story.

Having said that, the improvement we’re seeing in the trade numbers come from a very low base. The PMI numbers are still reasonably soft, from a long-term historical perspective.

And, I think perhaps most importantly, we’ve seen this pickup in new loans, and that really shows that the government is putting pressure on the state-owned banks to lend, to invest in the steel, construction and residential fields.

And that is, to some extent, solving the short-term problem of this slowdown in growth but, in my opinion, it’s stirring up some much bigger problems further down the line in the form of bad loans.

Listen to the full interview with Phill Hynes and Olivier Desbarres here:

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Further analysis from Phill Hynes on Frontera News:

The Uranium Shakedown: How Mongolia and Russia Conspired Against Western Investors

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