Added to disillusionment with China, other complications have arisen due to US-China trade dispute, sanctions on Russia since 2014 in the backdrop of its invasion of Crimea and most recently Ukraine in 2022. The events have not only disrupted the existing global industrial supply chain, but also opened the possibility of emergence of new supply chains involving emerging markets like India and industrialized countries including Japan, South Korea and some ASEAN and EU countries. In the emerging new geo-political order, as China and Russia are being increasingly alienated and marginalized for their so-called misadventures in the Indo-Pacific and Europe respectively, they have no option but to come in closer economic ties and seek complementarities. Nevertheless, there are serious limitations of any trade model relying on the value chains of only two countries in the medium and long terms instead of a multilateral free trade model.

A recent paper titled Characteristics and Prospects of China-Russia Trade Cooperation from the Perspective of Global Industrial Chain was posted on the social media handle of the Institute of Economic and Political Studies and Global Strategic Think Tank of the Chinese Academy of Social Sciences (CASS) in late March. The co-authored paper claims that an analysis of value-added trade has shown strong complementarities between China and Russia. It also notes that at present the two countries face the triple challenges: (1) impact of epidemic, (2) geo-political conflict and (3) global environmental policy which present opportunities for China and Russia trade cooperation. Contrary to exaggeration of complementarity between them, there are real limitations to this new-found realization. It is because the claim in the CASS paper fails to appreciate the nature of the two economies and various asymmetries in their product lines and export baskets, apart from strategic concerns.

China, according to the paper, is in the middle and lower reaches of global value chains and its exports contain a certain amount of foreign value added, while Russia mainly exports raw materials such as oil and timber, which are upstream in the value chain, and part of its value added is contained in the exports of downstream countries. China may benefit from Russian raw materials including oil, but Russia does not have diversified intermediate products of Chinese interest such as micro-chips, which is very important for its electronics industries as Bejing is trying to scale up in the global supply chain from low-end to high-end tech products. Even in areas like Artificial Intelligence (AI) and 5G, Russia has got little to offer, the areas in which China intends to dominate global supply chain in future.

The increased sanctions on Russia might have compelled it to enhance its economic ties with China, but the two countries have overlapping spheres of influence in Central Asia as well as trade partnerships in Europe. Russia’s willingness to integrate into Asia-Pacific economy has increased, but China would find it difficult to cede its political and economic space to Russia. One of the biggest problems facing Russia is economic sanctions as well as its exclusion from the Swift mechanism. For the time being, China may supply some essential products to Russia based on Yuan-Rouble trade or barter basis, but this would not be enough for Russia to endure the western sanctions beyond a limit.

"Russia and China are talking about increased economic complementarity between them because it suits them strategically and help them endure the turbulent geo-political environment. But they are aware that their economic complementarity is not enough to alter the geo-political and geo-economic matrix."

Although with over USD 100 billion of bilateral trade China has become Russia’s largest trade partner and remained so in 12 consecutive years, the two countries would not find it easy to realize the target of doubling it to USD 200 billion by 2024, given the irrelevant and narrow basket of exportable to each other. It is also a matter to watch for how long and how much Russia would shift its trade direction from Europe, especially from Germany to China, particularly its energy and other products mainly raw materials. The only visible and steadily growing cooperation between Russia and China is in the fields of energy, aerospace and infrastructure. This is not enough for complementarity over a wider spectrum on a sustained basis. Russia needs diversification of its product lines, especially intermediate capital goods and other consumer goods including durables goods to take the complementarity to a higher level. Whether China would help Russia in diversification of its product lines is thinking about impossible.

The signing of a comprehensive strategic and cooperative partnership for the New Era in 2019 has generally failed to take off beyond the compulsion of being together to face the sanctions and Western measures to isolate these two countries. The advanced economies are betting on emptying the Russian foreign exchange, stocks of food and other essential items including armaments through sanctions and economic isolation, but this path has chances to turn into a zero-sum game for the Western advanced nations. Instead of exploring peaceful means to settle dispute through dialogue and negotiation, Western economic and military assistance to Ukraine would only fuel and aggravate the battle for hegemony further and the new geo-economic order and supply chain would suffer immense shock. The global resources could have been better deployed and used for sustainable development and promoting alternative supply chains keeping the emerging economies like India at the centre along with leading industrialized nations like South Korea, Japan and the ASEAN countries.

Much of China’s dominance in the global supply chain is based on the dependence of developing countries as well as Beijing’s focus on R&D and the BRI. Russia may be subdued by measures for its isolation, but by then the geo-economy might be ruptured irreparably. The recent growth forecasts by global institutions are indications global slowdown. Russia and China are talking about increased economic complementarity between them because it suits them strategically and help them endure the turbulent geo-political environment. But they are aware that their economic complementarity is not enough to alter the geo-political and geo-economic matrix, while their being together poses increased threat to the global supply chains, which eventually may lead to war-led disruptions weighing heavily on the West.

Economic sanctions, protectionism and diversion of previous resources to war are great threats to global economy and supply chains. Neither China and Russia nor the West could compensate the economic losses by seeking new complementarities and trading in a closed loop. It's time to restore free trade and shuffle resources from war to sustainable development, green technology and building infrastructure, the areas in which all the stakeholders in global power have failed utterly!