As risks for recession-hit Russia subside at home, top officials are sounding alarms about another gathering threat.

President Vladimir Putin hosts leaders from across Southeast Asia this week, and policy makers are increasingly turning their focus to perils from China. Any “problems” in the second-biggest economy will feed through to Russia via commodities markets, according to Deputy Finance Minister Maxim Oreshkin. Warning that the world economy isn’t yet prepared for a more flexible yuan, Bank of Russia First Deputy Governor Ksenia Yudaeva said it warrants a global discussion.

Squeezed by the crash in oil prices and Western sanctions over the conflict in Ukraine, Russia has looked to Asia and China, in particular, as it searches for a way out of its longest recession in two decades. Putin’s pivot to the east has brought tie-ups with China that range from hundreds of billions of dollars in contracts signed by Russia’s biggest energy companies, Gazprom PJSC and Rosneft OJSC, to purchases of yuan-denominated bonds by the central bank last year.

“Serious problems in the Chinese economy can easily lead to a repeat of the oil prices we saw at the very start of this year,” Oreshkin said on Wednesday at a conference on emerging markets organized by Credit Suisse Group AG in Moscow. “For economic policy in general, it’s very important to be aware of the risks that stem from China.”

Fortunes Linked

Any shockwaves from China won’t take long to reverberate in Russia. A slowdown of 1 percentage point in the Chinese economy would translate into a deceleration of about half as much in Russia’s gross domestic product, according to Yudaeva.

The prospects for the world’s biggest energy exporter have perked up as the price of oil, Russia’s main export earner, rebounded from a 13-year low reached in January. That’s set the stage for the ruble’s comeback from losses against the dollar that reached 44 percent in 2014 and 20 percent in 2015. The Russian currency is the world’s best performer globally this year with a gain of more than 12 percent.

The energy relationship between the two neighbors -- one of the world’s biggest oil producers next door to the biggest oil user after the U.S. -- has continued to deepen since Russia started sending oil supplies to China from the spur off a pipeline in 2011. Imports of Russian crude last year jumped 28 percent, placing the country as China’s largest supplier on an annual basis after Saudi Arabia.

‘First Victims’

Russia would be one of the “first victims” in case of a “hard landing” by the Asian country’s economy, alongside other developing countries and commodity-producing nations, Nouriel Roubini, chairman of Roubini Global Economics, said at the same conference in Moscow.

After a rocky start to 2016 marked by a sliding yuan, capital outflows and tumbling shares, China’s economy stabilized before resuming its grind toward slower growth in April. GDP rose 6.7 percent in the first quarter from a year earlier, in line with the government’s growth target of 6.5 percent to 7 percent for the full year.

That compares with an annual contraction of 1.2 percent in Russian GDP last quarter, after a 3.7 percent drop in 2015.

China is Russia’s biggest single trade partner, with its share rising to 12.8 percent from 12 percent in 2015. Even so, the overall turnover of goods fell by 26 percent last year to $68.1 billion. That means the countries are far off reaching their target of $100 billion in trade.

On Guard

The Bank of Russia is monitoring the situation in China and will take measures to maintain financial stability if needed, according to Yudaeva. Volatility there will have global consequences, she said.

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. Last year it received 10 million yuan, or 112 million rubles, as part of the arrangement.

Risks in China “can’t just be waved away,” Oreshkin said. “The entire economic policy must be shaped to take into account the possibility of worse growth than the market expects now or even effectively a recession in China. Such a risk can’t be ruled out.”

Source:
courtesy of BLOOMBERG

by Olga Tanas and Andrey Biryukov

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