Russia-China Cooperation: Too Well-Matched Not to Integrate

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By Marina Romanova

russia-china-cooperation-too-well-matchedOn the cusp of 2017, Sino-Russian political relations are still ahead of two nations’trade and economic cooperation.

Russia’s worsened relationship with the west after the annexation of Crimea has further pushed Russia’s leadership into China’s arms.In 2014, European Union-Russian trade stood at US$377 billion, making the bloc Moscow’s most important economic relationship. That fell to US$235 billion last year.

After Western sanctions were imposed in 2014, Moscow and Beijing had declared that they would increase their bilateral trade to US$100 billion during 2016 and to US$200 billion by 2020.

Instead, two-way trade between the countries fell by 28 percent during 2015 to just US$68 billion, and bilateral trade has been slow to recover during 2016.

Two countries trade fell by another 5 percent year-on-year to US$28 billion in the first six months of 2016, mainly because of plummeting prices for commodities such as oil, gas, lumber, metal and coal, Russia’s main exports to China.

However, in the long run, the countries’ current and yet to comepolitical affinity,as well as geographic proximity and their geopolitical ambitions,make Moscow and Beijing too well-matched not to integrate, according to the expert community.

Recent Evolution in Sino-Russian Cooperation

In 1995 trade exchange between both countries amounted to US$4.3 billion, in 2005 this rose to US$20.3 billion and in 2008 to US$55.9 billion. However, in 2009 the value of Sino-Russian trade dropped to US$39.5 billion dollars owing to the international economic crisis. Nonetheless, the development of trade relations between the two countries regained its positive dynamic in 2010 and bilateral trade exchange reached US$59.3 billion. China became Russia’s main trading partner with share equal to 9.5 percent. In 2011 and 2012, bilateral exchange continued on an upward trend reaching US$87.5 billion in 2012.

At the same time, China’s investment only accounts for 1 percent of total foreign investment into Russia, Sergey Razov, then Russia’s Ambassador to China, said on December 22, 2011. By comparison, German companies took the lead with 13 percent of investment projects and the biggest source of Russia’s foreign direct investment jobs in 2010, according to the available statistics.

russia-china-cooperationSince 2011, China has become Russia’s largest trade partner, importing mostly energy and timber, while Russia was China’s 13th and 9th as of 2013 largest trade partner, importing a wide range of mostly finished industrial goods.

In2012, China’s share in Russia’s trade exchange reached 10.5 percent, overtaking the Netherlands and Germany, whose quotas of Russian foreign exchange were 9.9 percent and 8.8 percent respectively. Whereas in 2012, Russia’s exports to China represented 6.8 percent of total sales abroad, imports from China constituted 16.6 percent.

The Sino-Russian economic cooperation has been enlarging year in year out. Trade volumes between Russia and China were growing at double digits every year since the Russian domestic financial crisis in 1998 (even despite of the Global Financial Crisis of 2008).

To sum up, the bigger picture of two nation’s trade volume indicates modest yet gradual development of economic cooperation. According to Russia-China Investment Fund, bilateral trade volume between the two countries, which amounted to US$15.8 billion in 2003, has increased more than 6 times over the 10 years, reaching US$95.3 billion in 2014.

The two neighbors and BRIC members mainly cooperate in the fields of oil, natural gas, nuclear energy, coal, electric power, timber and weaponry.

Russia constitutes a relatively small share of China’s total exports or imports (less than 0.4 percent in 2015), which is a consequence of the two economies’ very different sizes nowadays. However, this year Moscow and Beijing managed to hammer outsignificant deals between two countriesfinancial institutions and contracts in oil and gas industries.

For instance, one of the largest Russia’s lender Vnesheconombank (VEB) signed an agreement with China’s Development Bank to borrow nearly a US$1billion (RNB6 billion) for 15 years, Russia Today reports. Russian state-run VTB also sealed several deals with the Chinese lender on trade financing in yuan’s for three and five years. The mentioned financial agreements could unlock FDI opportunities for Russia’s capital-starved economy under Western sanctions, earlier this December extendedby another six months.

Russia’s oil giant Rosneft and China’s Beijing Gas Group signed a cooperation agreement to sell a 20 percent stake in Verkhnechonskneftegaz, which is exploring a large oil and gas field in Eastern Siberia. Rosneft controls 99.94 percent of the company.

A framework agreement was reached between Russian petrochemical leader Sibur, China’s Silk Road Fund and China Development Bank. The deal includes the sale of share in the Russian company.

Military Cooperation

Moscow-Beijing military cooperation is going strong. The two powers hold regular exercises, and Russia sells China state-of-the-art weaponry such as S-400 missile defense systems. The deal will reportedly cost US$3 billion. In November 2015, the two concluded a US$2 billion deal for the purchase of 24 Su-35 fighter planes.

trade-has-demonstrated-substantial-growthLast September China and Russia naval exercises in the South China Sea were defined by the Beijing’s Defense Ministry as “routine” one, the Reuters reports.

“This is a routine exercise between the two armed forces, aimed at strengthening the developing China-Russia strategic cooperative partnership,” China’s defense ministry spokesman Yang Yujun told a regular monthly news conference. “The exercise is not directed against third parties,” he added. Last year, they held joint military drills in the Sea of Japan and the Mediterranean.

China is the world’s second-biggest military spender, with a US$215bn budget last year, according to the Stockholm International Peace Research Institute. It was the third-biggest importer of weapons between 2011 and 2015, while Russia was the second-biggest arms exporter.

Sophisticated and Nuanced Relations

Before the so-called Russia’s pivot to Asia, the country main mindset and chief fear is that China will transform the whole country into nothing more than a mere supplier of raw materials.

“Russians … instead of seeing our vast population and rapid economic growth as a golden economic opportunity, their military and security ministries still look at us and feel nervous,” Yu Bin, senior research fellow for the Shanghai Association of American Studies, writes in one of his article about Sino-Russian ties.

International academia has also contributed to the concept of a so-called “yellow terror” broadly exploited by Russian politicians.

russian-attitudes-toward-china“Russia has not only conceded its failure, but also has allowed China to begin consolidating a new economic and security order in Asia at Russia’s expense, including in the Russian Far East. To the degree that these trends continue along present lines, Russia will become China’s junior partner and supplier of raw materials, not an independent power in Asia,” Stephen Blank, Professor of National Security Affairs at the U.S. Army War College, writes in his new book Toward a New Chinese Order in Asia: Russia’s Failure.

Russia’s investment unattractiveness, pervasive corruption, infrastructural underdevelopment, and technological backwardness have been pointed out by the Chinese since the mid-1990s until now.

Most recently, one of the top Chinese businessmen Tao Ran, the chairman of construction and power company Sirius Holding, mentioned certain “inefficiencies of administration” — a thinly veiled reference to Russia’s notoriously inefficient and corrupt bureaucracy during the Eastern Economic Forum business conference held in Vladivostok last September.

Ever since, Russians in their turn have habitually complained of Chinese stealing their technologies, infringing on Russian legislation, breaching contracts, as well as Chinese dumping and protectionism methods.

Nevertheless, habitual reciprocal reproaches do not exhaustingly reflect the reality of Sino-Russian cooperation either. As Professor Yu Bin rightly mentioned, over the past 20 years, China’s relations with Russia have become far more “sophisticated and nuanced.”

AsJune Teufel Dreyer writes in his article, published by the Philadelphia-based Foreign Policy Research Institute, “sharing common authoritarian values and a common adversary in the United States, the PRC and Russia can be expected to continue to cooperate in the near term on what Chinese media describe as mutual benefit.”

China-EAEU Free Trade Agreement and One Belt Initiative

Russia and China, to each own good and particular standpoint, are actively promoting mega-Eurasian trade zone. Russia is dreaming to launch Eurasian Economic Union – China free trade agreement, while China pushing its economic geopoliticking through One Belt One Road economic cooperation frame.

januariy92After three years of negotiations, on January, 2nd 2016 South Korea agreed an FTA with China. China’s Ministry of Commerce then announced its intention to use the China-Korea FTA as a model for additional FTAs with sixty-five countries along the Silk Road economic corridors. China has set a goal of US$2.5 trillion in trade with Silk Road countries by 2025.

Russia’s primary goals is first and foremost to unlock investment and to lure international firms into joint ventures to acquire industrial expertise, share costs, and play catch-up with more competitive manufacturers. China is thirsty for energy and raw materials from Russia to fuel its economic growth.

China is also seeks to build institutional links and to break down barriers to cooperation between China and other nations along the Silk Road economic corridors. And these communities include not only ASEAN, the Shanghai Cooperation Organization, the EU, the South Asian Association for Regional Cooperation (SAARC), the Organization of Islamic Cooperation, but the Russian-led Eurasian Economic Union as well.

The One Belt One Road aims at massive development of economic corridors traversing the Eurasian landmass and all its major peninsular extensions and has a potential to modernize means of the entire economic cooperation in Eurasia, which would not be possible without partnership with its immediate neighbor – Russian Federation, with which PRC shares 4,209.3 km (2,738 miles) long border.

Thus political, economic cooperation and bilateral trade between Russia and China will only grow further down the Silk Road and beyond.

Dezan Shira & Associates provide business establishment and trading company incorporation to Russian businesses wishing to trade with China. Please contact Maria Kotova in our Shanghai office at shanghai@dezshira.com or visit us at www.dezshira.com

 

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