Russia Looking To Fast Track Chinese Product Replacement Alternatives

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By Chris Devonshire-Ellis

The EU’s import future to Russia is regarded as finished, with import substitution planning now underway with China

Russian and Chinese government representatives and businessmen have made it crystal clear at the St. Petersburg International Economic Union that they regard EU-Russia trade as dead and that import substitution programmes will be worked out between the two countries to replace all previously EU sourced products.

Speaking at the Russia-China Forum, Chairman and Senior Executives of the Institute of Far Eastern Studies of the Russian Academy of Sciences, the Union of Chinese Entrepreneurs in Russia; the Trade Representative of the Russian Federation in the People’s Republic of China, the Russian-Chinese Business Council, the Chamber of Commerce and Industry of the Russian Federation, the Russian Union of Industrialists and Entrepreneurs, the China Council for the Promotion of International Trade, Chinese-Russian Business Council, Russian Railways and China International Capital Corporation Limited were all present. Zhang Hanhui, Ambassador Extraordinary and Plenipotentiary of the People’s Republic of China to Russia also joined via conference call from Beijing.

EU Exports to Russia Are Dead

The meeting was a stark realization that Russian trade with neighboring Europe is effectively dead and it will not return. Speaking on the EU sanctions issue, it was mentioned that while the EU had recently issued a ‘sixth wave’ of sanctions upon Russia, the business community was expecting this to continue, proceeding to a ‘ninth wave’ in due course. No-one on the Russian side had any expectations or plans for any development or reinstatement of EU exports to Russia. This aspect was made very clear.

Import Substitutions From China

However, far from being phased by this extraordinary turn of events – which means that any European business hopes or resuscitating exports to Russia are now completely out of the question – thoughts have rapidly turned to the concept of import substitution of previously EU sourced products and commodities from China. The panel was mainly preoccupied with developing the trade relationships to allow this to occur in a systematic and structured manner.

Russia-China Trade 2022 January-May

Bilateral trade in 2022 thus far has reached US$65 billion and has shown an increase of 28% over the same period last year. There are still some underlying issues that are deflating what would be a larger volume: the Zero-Covid policy, and an interim development period of switching all cross-border trade to digital systems, and mutually acceptable product recognition systems. These are expected to be resolved by the year end, with the implication being that 2023’s bilateral trade volumes will be higher still and continue a fast growth trajectory.

Institutionalizing Russia-China Trade

Various mechanisms are being deployed to align Russian and Chinese product manufacturing, although to me it felt that it would be the Chinese rather than the Russians in the driving seat.

Secondary Sanctions Risks 

There are some issues for Chinese SOEs as Multinationals being caught up in the secondary sanctions trap, where US disapproval of certain Russia trade could lead to Chinese companies being directly sanctioned. With the US capable of moving very fast in terms of sanctions imposition, this means high risk for Chinese MNCs in the Russian market: valuable investments made today could be worthless in a few months. This means that Chinese investment into Russia will be cautious.

Production Cooperation 

Much was made of the potential for ‘production cooperation’, although again I had the sense that the Chinese would want to manage this. There is no doubting the keenness of the Russians however. There are three main components to this.

Firstly, to replace high-technologies previously sourced from the EU with a combination of Russian and Chinese expertise. Requests were made to ‘share’ certain development secrets, and I have no doubt that there will be some horse-trading between the two governments in terms of sectors that either party has technological superiority. Balancing the extent of this is very much a G2G issue, although it is worth remarking that both China and Russia are jointly developing 5G for example. There is also no doubt that the Chinese are bargaining with a strong hand – they know that Russia needs certain high-tech capabilities and it will suit them in certain cases to extract a high price in technology swaps or to keep Russia dependent.

Secondly, it makes sense in several industry sectors to combine resources and technical expertise to jointly develop new products and technologies to minimize the risk of developing similar and competing products. It is a better strategy to pool resources and both sides seem keen to explore this avenue.

Thirdly, there are definite industry sectors where cooperation and collaboration are underway and will be fast-tracked. One area is aviation, where the aerospace component parts industry has become far more diversified in terms of global suppliers. China and Russia are already working on jointly developing aircraft, and with basic aircraft technology remaining somewhat static right now until next-generation engine technologies come online, the ability to manufacture existing component parts is spreading across Asia – India for example is a major player. With the contemporary airline industry dominated by Boeing and Airbus, and with the benefits of significant downstream manufacturing, a jointly Russia-Chinese aircraft would be type of project that both benefit from and can globally compete with the US and EU. More of these types of industry collaborations can be expected.

Joint Industrial Development Parks

There are a handful of Russia-China joint development parks, with the most notable being the “China-Shanghai Cooperation Organisation Local Economic & Trade Cooperation Demonstration Area” based in Qingdao. This new concept brings together mutually beneficial investing manufacturers from the Shanghai Cooperation Organisation (SCO) member states, which includes Russia as well as numerous other Central Asia and related countries. The concept is to match component part manufacturers in one zone so as to align the expertise and products from all, into one location where a specific finished product can be produced.

Both sides committed to establishing other ‘Russia/China’ Technological parks in each other’s countries.

New Russia-China Trade Corridors

Russian Railways discussed the Far Eastern development of Russian railways, with proposals already with the government for expansions of routes from the Trans-Siberian and Baikal-Amur routes. Khabarovsk will be a beneficiary here, while cross border trade ports between Russia and China’s Heilongjiang Province are also likely to boom, as well as extra capacity being put into place in Mongolia on the Trans-Mongolian line between Irkutsk and Beijing. 100 million tonnes, or 50% of all global rail traffic was shipped between Russia and China last year. Border checks and customs procedures are all being digitized in a process that should be completed by the year end, allowing for faster delivery times.

Summary

The need for Russia to replace EU component parts is an issue that one expects the Chinese will effectively manage, although Russia has other market options too, not least India. However, the sheer depth of the Chinese manufacturing industry and the variety of high-quality engineered products it can manufacture are beyond compare.

The interesting aspect about the components that Russia needs right now in 2022 and 2023 is that much of this will shortly be old technology – petrol-driven cars for example. Both countries are keen to develop the new technologies – gas driven vehicles, and hybrid EV/gas engines suitable not just in the automotive industry but within rail and even aircraft.

One gets the feeling that the new, non-European Russia will have very large Chinese component parts to it. Brussels trade losses will be Beijing’s gain, and while Brussels now has policy increasingly directed from Washington, the same, but possibly to a lesser degree, will finalize the relationship between Moscow and Beijing.

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About Us

Russia Briefing is written and produced by Dezan Shira & Associates. During these uncertain times and sanctions imposition, our firm assists Russian companies relocate to Asia, and provides financial and sanctions compliance services to foreign companies operating in Russia. We also provide market research and advisory services to foreign exporters interested in Russia as the economy looks to replace Western sourced products. Please contact us at russia@dezshira.com or visit us at www.dezshira.com.