Putin / Xi SPIEF Meeting Could Pave The Way For A Russia-China Free Trade Agreement

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Op/Ed by Chris Devonshire-Ellis

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Russia’s space industry can compete with US hi-technology with Chinese investment

Talk in Beijing this past few days has concentrated on President Xi’s upcoming visit to Russia , where he will attend the St. Petersburg International Economic Forum (SPIEF) from 6th-8th June. With the United States imposing sanctions upon Russia, and increased tariffs on thousands of Chinese products entering the US, analysts in China feel the potential for a Russia-China Free Trade Agreement is high. Certainly the view from both sides is that they need to disengage from the United States in trade terms, and in part in global institutional terms as well.

On the trade side, China in particular has condemned the disruption caused to supply chains with sudden actions taken without warning by the US over the supplies of products to Huawei. It has also announced that it is considering an ‘unreliable entities’ list to combat foreign firms that cut supplies to China, and that details will be announced shortly.

Another way to secure non-US supply chains is for China to encourage trade with other large manufacturing nations instead, and especially those given to the development of IT and future-use technologies such as blockchain and 5G. Russia fits the bill, so would India. With Presidents Putin and Xi meeting together with a large trade ministerial delegation, the time would appear to be right for China to reach out to Russia and engage with it in more depth on specific products. The trend is already there – Russia-China bilateral trade hit US$100 billion in 2018 and is expected to grow at 20% per annum for the next five years. Although much of that is in oil and gas supplies, China will be looking to Russia to contribute more in technological advances. That fits in with the Kremlins view of Russian development.

Zhang Jianrong, a senior expert on Russia at the Shanghai Academy of Social Sciences, was quoted in China’s Global Times last week as saying “There have been some concerns from the Russian side over a free trade agreement (FTA), but now the timing could not be better.”

The structure of a Russia-China FTA could also follow different paths. That could either be a deal between Russia and China directly, or it could involve a restructuring of the existing Free Trade Agreement that China signed early last year with the Eurasian Economic Union (EAEU), which also includes Armenia, Belarus, Kazakhstan and Kyrgyzstan. Although that agreement did not contain provisions for the reduction of tariffs, the FTA does exist and would be an amendment to an existing treaty rather than a complete new set of negotiations. Studies will also have been carried out on the EAEU-China FTA to examine various workable trade scenarios. Negotiations and ratification will be required by all the involved Governments to get that off the ground, while the major sticking point would be the flow of cheap Chinese products into as yet still locally protected markets. Beijing will need to be smart to provide sweeteners for delaying or negating this, and phase in some aspects of a deal while encouraging immediate EAEU production of the products it needs.

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Yet another way this could pan out is via the Shanghai Cooperation Organization (SCO) which includes China, India, Kazakhstan, Kyrgyzstan, Pakistan, Russia, Tajikistan and Uzbekistan. Iran is also waiting in the wings. Chinese Premier Li Keqiang proposed at the Shanghai Cooperation Organization (SCO) meeting in Tajikistan in October last year to begin a feasibility study on building an FTZ among SCO member countries. However with numerous members and not all of them seeing eye-to-eye, structuring a Free Trade Agreement amongst the SCO members at this current time, and in good speed to assist China’s decoupling from US trade may be deemed too complicated at present. That could change however if the US continues its tariff threats towards India, and may also drive Delhi into the I.T. development arms of Moscow, if not Beijing.

The key issues over China and a proposed Free Trade Agreement with Russia is whether Russia has the capability to supply China with the technologies it needs to replace those it has been purchasing from the United States, and to be able to conduct a full audit of Russian capabilities. China will be prepared to spend the money to do this as it regards the issue as an important aspect of both its national and international development. Much of this revolves around the development of semi-conductors and the rare earths needed within them. Yet here the United States may have inadvertently lent a hand, as they stopped supplying Russia with important component parts, including for satellites, in early 2014 when sanctions were introduced. All that did was encourage Russia to make its own, and they did just that, with the assistance of China’s Aerospace, Science and Industry Corporation, although China charged them for the service. That move may now pay dividends for both Russia and China as now it is China that is in need.

The focus of this will be upon Russia’s Silicon Valley, which is largely based in Zelenograd, a city about 40km outside of Moscow. Zelenograd already has Free Trade and Special Economic Zones devoted to computers and electronics, which would fit a proposed Free Trade Agreement very well. In terms of advanced electronics, it is worth remembering that Russia is currently the only nation with an on-going operational Space industry, and continues to develop technologies for the International Space Station, which it largely built and continues to operate. A Russia-China Free Trade Agreement can be expected to concentrate on such technologies as China looks to roll out its 5G network, in addition to a huge increase of investment by China into Russia to both secure and speed up this development. That would start to move China away from the uncertainty problems the United States is causing, would suit both Moscow and Beijing, as well as give a hard lesson to Washington’s trade hawks. A deal can almost certainly be expected to be on the cards.

 

About Us

Russia Briefing is produced by Dezan Shira & Associates. The firm advises international businesses on investing, setting up businesses and administering them throughout the Eurasian region, including Russia, China, India & ASEAN, and maintains offices and partners in each of these countries and regions. For assistance with investing in Russia, or for Russian businesses wishing to invest in Asia, please contact Maria Kotova at maria.kotova@dezshira.com or visit us at www.dezshira.com.

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