Tuesday, November 25, 2008

China-Russia: Limiting the Fallout

Reading with interest reports coming from the APEC summit in Peru about the meetings between China's president Hu Jintao and Russia's president Dimitry Medvedev, about the "strategic action plan" they discusssed during the sidelines of the G-20 summit in Washington. It sounds like an economic version of Bismarck's "reinsurance treaty" system. In the energy sphere, it sounds like China is guaranteeing purchases of Russian energy which in turn guarantees Russia a set amount of income and gives Russia the financing to proceed with field and infrastructure development. China gets energy security, Russia doesn't have to turn to skittish international credit markets for financing. Whether, over time, both China and Russia work to developed a system that helps to shield both from negative consequences in the international global economy will be interesting to observe.

Nick: I’m having trouble finding reports on that. However, unless the two sides agree on upper and lower limits for transaction prices or more broadly a formula that sets prices that differs from prevailing market levels, I don’t see how a bilateral agreement on what is a fungible, globally-traded commodity could “shield both from negative consequences in the international global economy”. I can understand that “guaranteeing purchases” would give Russia the confidence to go ahead with infrastructure investments, but are you sure that whichever Russian entity that undertakes the infrastructure investment will need foreign financing, even with oil prices down to $50?

I suspect that anything happening here beyond confidence building for infrastructure investment is just politics.
It does reflect, however, a growing unease in both Moscow and Beijing with trusting their economic security to the market--even if the measures proposed aren't practical.
Post a Comment

<< Home

This page is powered by Blogger. Isn't yours?