Sino-Russian ‘Bad Dates’ and Chinese Relations with ‘Abandonment Child’ of Moscow

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By Marina Romanova

Sino-Russian series of bad dates
Chinese-American international energy consultant Edward Chow once said that the Russian-Chinese energy relationship isn’t a marriage, but rather “a series of bad dates.” As far as their energy relationship goes – also keeping in mind the two rather extreme types of relationship of ‘honeymoon’ (1950s) and ‘divorce’ (1960s and 1970s) between Beijing and Moscow – the whole Sino-Russian strategic partner can be described with this kind of metaphor.

Chinese businessmen and bureaucrats are playing a part in almost every Russian investment round-table and economic forum. And it wouldn’t be too much to say that almost every presentation by Chinese participants contains some words about Russia’s “investment unattractiveness” as one of the main reasons not to invest in the Russian economy.

China’s investment only accounts for 1 percent of total foreign investment into Russia, Sergey Razov, 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 latest statistics.

Russia’s 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 relations.

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

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

The truth, however, is that the Sino-Russian economic cooperation has been enlarging year in year out. Trade volumes between Russia and China are growing at double digits every year since the Russian domestic financial crisis in 1998 (even despite of the Global Financial Crisis of 2008) and were expected to reach a record high of US$78 billion by the end of 2011, according to the Embassy of Russian Federation in Beijing estimations.

Since last year, China has become Russia’s largest trade partner, importing mostly energy and timber, while Russia is currently China’s 13th largest trade partner, importing a wide range of mostly finished industrial goods.

Last October, during Russian Prime Minister Vladimir Putin’s official China visit, the two sides signed off on trade deals worth US$7 billion, demonstrating a tangible effort to move beyond energy-based economic ties.

However, considering the volume of Chinese investment, Sino-Russian economic cooperation is still far from where Russia would like it to be and the price Russia is asking for its oil is far larger than what China is willing to pay.

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.”

The two neighbors and BRIC members mainly cooperate in the fields of oil, natural gas, nuclear energy, coal, electric power, timber and weaponry, where not businesses, but rather bureaucrats and state-run monopolies like Rosneft and Chinese CNPC, dominate. Consequently, politics are involved in each negotiation between Chinese and Russian partners holding up commercial deals.

And this is why, very much like a divorced couple, the never-ending clash over the two counties’ recriminations has become sort of a differential peculiarity of Sino-Russian dialogue.

But there are other fields and other Russian regions far from Moscow where Sino-Russian relations aren’t shaded that much by politics and the aforementioned peculiarity. Such areas include the Russian Far East and Siberia, where ordinary people (not just government officials and monopolies) from the two countries cooperate and trade.

Russian Far East, Siberia and Northern China
More than 20 percent of trade between the two nations is accounted for by shuttle trade, with important implications for investments by Chinese small and medium-sized enterprises, which are settled mostly in the Russian Far East and Siberia.

Moreover, for the last year Northern China has invested in Russia’s Far Eastern and Siberian development much more than the Russian federal government.

Chinese investors have set up 34 special Chinese zones in the Amur Region and the Primorye and Khabarovsk territories, as well as in the Jewish Autonomous Region, investing about US$3 billion in total during 2010. This compares with less than US$1 billion allocated for these regions by Moscow for the same period of time.

As for trade volumes between two countries, one-third of the expected record high US$78 billion for 2011, mentioned above, is accounted for in the Russian Far Eastern regions which mostly cooperate with the Chinese provinces of Heilongjiang, Jilin and Liaoning. Consider that only 5 percent (6.3 million) of the total Russian population lives in the Far East, and one-third appears to be a significant figure indeed.

According to the study of L. Krkoska and Y. Korniyenko titled China’s Investments in Russia: Where Do They Go And How Important Are They? the volume of Chinese investments in Russia is likely to be underestimated, mainly due to the use of off-shore vehicles based in the Cayman Islands, Hong Kong, and the Virgin Islands. In addition, many Chinese investors prefer to establish fully-owned companies with the minimum statutory capital of 10,000 rubles (around US$350), which are likely to require significantly higher financing. Examples of such nominally small, and very likely undervalued, investments in Russia are sawmills and other wood processing plants.

EBRD data says that about 80 percent of Chinese investments are in the Far East and Siberia. The remaining 20 percent of enterprises are operating in Central Russia, out of which half, or about 10 percent of total Chinese investments in Russia, are established in Moscow, the Moscow region and St. Petersburg.

There were more than 1,500 joint ventures with Chinese capital in Russia at the end of 2010. Most of these are trading firms set up in border areas of the Far East and Siberia, although there were over 200 joint ventures in manufacturing. According to EBRD estimations, half of the enterprises with majority Chinese capital in Russia are in wholesale and retail trade, 25 percent of which is in trade in wood and construction materials and another 25 percent in food and clothing, and services (restaurants, letting and traveling agencies, repair services).

The highest share of majority Chinese owned companies, exceeding one-third of the total, is active in wholesale and retail trade – 75 percent of which is concentrated in the Far East and Siberia. These are mostly micro and small enterprises active in open markets.

The forestry sector is one of the key targets of Chinese investment, given that Russia’s timber reserves account for one-quarter of the world’s total, most of them located in the Far East and Siberia, and trade in timber accounts for 10 percent of the total trade between the two nations.

Russia has become the number one supplier to China, accounting for approximately 50 percent of China’s total timber imports. Roughly 90 percent of Russian timber exports to date are unprocessed logs, with most of the processing capacity located at the Chinese side of the Russia-China border.

For example, in the Irkutsk Region, 152 joint Russian-Chinese wood processing companies are registered, some of them fully owned by Chinese investors. There are also reportedly a large number of Chinese entrepreneurs involved in illegal logging. Estimates of the extent of illegal logging in Siberia and the Russian Far East published in the local press range from 20 percent to 70 percent of the total, depending on the definition and methodology used.

As experts from the two countries pointed out, and as quoted figures suggest, Chinese mostly invest in the Russian Far East and Siberia, which is geographically coherent and economically sound, but not exactly where the Russians would like it.

The Far East and Siberia are too far from Moscow and very close to Beijing. The direct distance from the Russian capital to the Far Eastern city of Vladivostok is 6,430 kilometers, while it is only 1,331 kilometers between Beijing and Vladivostok.

How will it go in 2012?
A recent Stockholm International Peace Research Institute report China’s Energy and Security Relations with Russia: Hopes, Frustrations and Uncertainties concluded that, “while relations will remain close at the diplomatic level, the two cornerstones of the partnership over the past two decades – military and energy cooperation – are crumbling. As a result, Russia’s significance to China will continue to diminish.”

This would suggest that the economic balance between the two nations will continue to shift in favor of the Chinese as well as keep other Sino-Russian cooperation trends.

Its next-door location to China has helped the Russian Far East and Siberia to survive during the harsh 1990s and has helped develop the regional economy. However, Russian scholars consider that inhabitants of the region experience the complex of “unloved and abandonment child” of mother Russia and the Kremlin in particular, which is always busy with its Central regions, where the majority of the population lives. There are only 26.144 million (18.3 percent) of the country’s total 142.9 million people living behind the Ural Mountains.

Considering that generous budget spending paves the way for the presidential elections of next March and last December’s uneasy parliament election, Moscow most probably will not have enough money to compete with Chinese investment in Russia’s far-off regions this year as well.

But there is a great opportunity not to miss funds from China and at the same time to attract some more non-Chinese investment to the region with the help of the 2012 APEC summit, which Russia will host late summer in some of its Far Eastern and Siberian cities including Vladivostok, Khabarovsk and Ulan-Ude.

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