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Russia's 'pivot east' has more political substance than economic

Russian President Vladimir Putin (L) greets Chinese President Xi Jinping
Sasha Mordovets | Getty Images
Russian President Vladimir Putin (L) greets Chinese President Xi Jinping

Russia's ties with its eastern neighbor became all the more significant in 2014, shortly after the European Union (EU) and U.S. introduced sanctions on Moscow for their alleged involvement in separatist fighting in eastern Ukraine and the annexation of Crimea.

With Russia's economy pushed into a corner by sanctions which have limited trade and restricted fund raising on international markets, Russia embarked on a so-called "pivot east," emphasizing friendly relations and increased investment between the two emerging market states.

Trading in rhetoric

But analysts say that Russia's pivot east is more rhetorical and political than economically substantial.

"China has, admittedly, become a more important export market for Russia in recent years and is now one of Russia's largest trading partners. But it still only accounts for 10 percent of Russia's total exports, and is significantly smaller than Western Europe," William Jackson, a senior emerging market economist at Capital Economics, told CNBC via email.

Russia, meanwhile, only takes in about 2 percent of China's total exports, he said.

Energy makes up the bulk part of trade, with Russia exporting around 500,000 barrels of crude to China via a direct pipeline daily, Chris Weafer, a senior partner at Macro Advisory, told CNBC by email.

Beijing is also a big buyer of Russia's coal and industrial metals, Weafer added, "otherwise there is little other trade between the two."

While there is "clear political will" for a closer relationship from the top tiers of power, the societal and economic structure of the two economies has made it difficult to implement in practice, Guo Yu, head of Asia at consultancy Verisk Maplecroft, explained to CNBC.

Key investments

Yu's colleague Daragh McDowell, principal Russia analyst at Verisk Maplecroft, explained that a lack of trust is partly to blame for the countries' materially loose cooperation.

"Moscow remains suspicious of foreign ownership in the Russian economy whatever its origin, which is a source of frustration for Chinese business," McDowell said.

That's compounded by weak Russian domestic demand and a struggling economy more broadly, Jackson explained.

While there was a brief spike in Chinese foreign direct investment (FDI) into Russia in early 2014, FDI has otherwise been pretty small, he added.

Some of the most notable deals to take have been large infrastructure projects.

Those include the Power of Siberia pipeline which will help fulfill a 30-year gas supply contract to China. Signed in 2014, it was hailed as Gazprom's biggest contract to date. Additionally, the Yamal LNG project is a liquified natural gas plant in Russia's arctic that's secured $12 billion in financing from The Export-Import Bank of China and China Development Bank earlier this year.

As a result, Chinese investors own 49 percent of the Yamal LNG project, Wefer detailed.

"However, Russia's decision to begin issuing renminbi (yuan) denominated bonds in late 2015 indicates Moscow is keen to create the financial infrastructure for smaller scale, private investment projects to get off the ground," McDowell noted.

Sovereign debt holdings

Chinese state finance is vital for funding major state infrastructure and development projects, McDowell admitted, but analysts say China holds very little, if any, Russian state debt.

Moscow's total foreign debt only amounts to 14 percent of GDP (gross domestic product), and is mainly made up of commercial paper, according to Verisk Maplecroft.

"While it's possible the Chinese Central Bank holds Russian eurobonds, in practical terms the amount is relatively trivial," McDowell said.

Only $50 billion of Russia's $500 billion external debt is sovereign, Weafer explained, and almost none of that is held by China.

Cultural connections

Analysts also say there's relatively few things tying Russian and Chinese cultures together that aren't focused on mutual gains.

"Contemporary Russia and China have a fairly positive relationship, but there's little in the way of underlying 'soft power' attraction holding it together – it's all about getting the best deal that suits each other's interest," McDowell explained.

"As one Chinese businesswoman put it at a conference in Russia recently 'We know that you like our money but you don't really like us,'" he added.

CORRECTION: This article has been updated to reflect that Russia exports around 500,000 barrels of crude to China via a direct pipeline daily.