Is China Investing Much in Russia?

09.06.2017

It is common knowledge that Chinese businesses are unwilling to invest in the Russian economy. Last year, in fact, China invested over $170 billion in different countries but Russia seems to have missed it all. The notorious absence of Chinese investments is reason enough for drawing global conclusions regarding the Russian investment climate and the Far Eastern development strategy. This may also invite a pessimistic assessment of the outcome of the “pivot to the East” and the “connectivity” policy.

All these conclusions are about an alternative reality. In actuality, China is one of the big investors in the Russian economy, even though Chinese investments face serious impediments and problems. But these problems are typical of countries with the development level and economic structure of Russia.

To resolve this, it is necessary not so much to improve the investment climate or grant special preferences to Chinese investors (although it is this that China will always insist on), as it is for Russia to understand the specifics of the Chinese investment model as well as its constraints and shortcomings. Russia would also do well to maintain rivalry in its foreign ties in Asia Pacific by stepping up cooperation with Japan, South Korea and, as far as possible, with the United States.

The high level of political relations between Moscow and Beijing, China’s strategic interest in Russia are, in all evidence, directly reflected in the scale of Chinese investment, and they bring real benefits to the Russian economy. In this sense, the declarative political aspects of the Russian “pivot” policy, which have been repeatedly ridiculed and criticized, are actually quite positive.

At the same time, there are clear problems with how the cooperation process is managed and how the basic data on China’s economic presence is collected, particularly at the regional level.

What do we know about Chinese investment in Russia?

Russian Central Bank statistics indicate that Chinese direct investment of all types amounted to $645 million in 2015 and $350 million in 2016. This information is based on Russia’s balance of payments. Thus, we can calculate the exact overall figure of investment in Russia from all over the world ($32 billion in 2016, including $19 billion in the form of shareholdings).

But we are unable to identify investment sources in this way, particularly if it comes from developing countries, such as China. The fact that this misleading Russian statistics on Chinese investment continues to pop up in the media and even scientific publications is lamentable.

Both countries’ main investment partners are offshore like the Bahamas, the Virgin Islands, Hong Kong, the Netherlands, Singapore, the Cayman Islands, and others. Chinese statisticians try to take this factor into consideration as they analyze outgoing investment, but they are not very efficient in this regard.

A relatively reliable source on Chinese direct investment abroad is the annual almanacs on China's investment cooperation, published in the fall of each year, which give a bisection of the situation at the end of hte previous year. According to the 2016 almanac, the total amount of Chinese investment abroad was $145.67 billion.

Of that number, 116.35 billion or 80 percent was in five offshore jurisdictions, Hong Kong, the Nethernalnds, Cayman Islands, British Virgin Islands and Bermuda Islands. The fate of these moneys is unknewn, a considerably part of them could return to China, for example, through Hong Jong, which is traditionally the main source of direct investment into China, which others can use to acquire assets abread. As such, the rest of the world competed for the remaining 20% of Chinese investment, from the point of view of statistics.

According to Chinese statistics, direct investment in the Russian economy totaled about $2.96 billion in 2015. The total accumulated amount was 14.02 billion. This made Russia the third country in Europe by accumulated investment after the Netherlands and the UK, and the second in attracting them for the year.

Regarding investment in 2016, there are several controversial statements from the Chinese side. In December 2016, a representative of the PRC Ministry of Commerce talkes about a bright moment of 2016 being investment of over $14 billion into Russia. 

At the same time, in December he named a number of $34 billion, not mentioned before. At the end of 2016, the Chinese ambassador to Russia said $10 billion. The Chinese Minister of Commerce in February 2017 said that Chinese accumulated investment into Russia is at $42 billion.

As a result, Chinese official statistical indicators on investment into Russia differ from that of Russian statistics by several times. From the point of view in Chinese statistics, Russia is one of their main recipients in Europe.

The Chinese themselves admit that their statistics are clearly flawed. The sanctions, in place since 2014, are also a factor that prevents Chinese businesses from bragging about their investment in Russia.

As far as we can understand, the Chinese government made attempts to calculate the investment in Russia by polling major companies. Last year, the Chinese told the Russian Ministry of Economic Development that accumulated investment totaled $32 or $33 billion.

Deputy Minister of Economic Development Stanislav Voskresensky went on record as saying that not long ago Russia and China were implementing 17 joint projects worth a total of $15 billion that had been launched in recent years. This figure did not include some major deals related to Chinese investment in strategic companies in the fuel and energy sector.

Considering the extremely confuddled stamtents of Chinese leadership and the lack of reliable statistics from Russia, it can be assumed that Chine is already one of the large investors into ruyssia, but the true volume of Chinese investment is unknown to both China and Russia.

Is this a lot or a little?

First, it is necessary to decide on a comparison base. To assess the efficiency of the Russian effort to attract Chinese investment, it makes sense to compare Chinese investment in Russia with investment in economies similar to the Russian economy both in terms of development levels and, desirably, structure-wise.

This is not done frequently. Usually the relatively modest scale of investment in Russia is compared with the overall volume of Chinese investment abroad, 80% of which is sent offshore, or with nominally huge Chinese deals in US markets, on one hand, and in countries like Kazakhstan, Nigeria, Ethiopia or Pakistan, on the other.

Meanwhile, if we don’t count investment in the offshores, it may appear that the recipients of Chinese investment fall into three main categories: advanced North American and European countries; the poorest countries in Africa, Southeast and South Asia; and the “single commodity” suppliers of raw materials like Saudi Arabia or Kazakhstan.

In advanced countries, the Chinese often buy established businesses with cutting-edge technology and/or strong international brands.

In all other cases, the Chinese seek to control raw material assets and key infrastructure, or they outsource to countries with cheap labor and weak state regulation.

This strategy does not include mid-level countries with diversified industrial sectors who are attempting, like China, to implement priority development strategies. Many of these industries are direct rivals of Chinese companies and, like in China, enjoy state protection.

The traditional Chinese model of investing in underdeveloped countries – ones involving the large-scale importation of Chinese workforce, equipment, and materials while disregarding local standards – will not be accepted here. On the other hand, they have no established companies with international brands for the Chinese to buy. Nor are there high quality institutions or legal environment characteristic of advanced countries. As a result, Chinese investors are frustrated, and are blaming the investment climate and other variables.

As of mid-2016, for example, the accumulated Chinese investment in Poland totaled a mere $462 million, Romania $741 million, and Hungary, a backbone country for Chinese business in Central Europe, $2.1 billion. Moreover, Poland and Romania are popular sites for EU-oriented industrial companies. Poland is also known for the high level of its macroeconomic policy: it is the only economy in the EU that grew in 2009.

There is also a failed Polish-Chinese mega project. In the late 2000s, the Chinese made a bid to build a highway between Warsaw and Berlin but had to withdraw after failing to live up to European rules and standards.

Brazil, a BRICS member, with a somewhat lower development level than Russia’s and exempt from sanctions (even if hit by a bad economic crisis) received about $2.26 billion in Chinese investment in 2015, which is less than the Russian figure.

At the same time, a total of $2.8 billion was channeled to underdeveloped Venezuela. But this is not the primary reason for drawing conclusions about Venezuela’s positive investment climate and policy of attracting investment.

Thus, China is emerging as the biggest one of the largest investors into Russia. Given its role as Russia’s major trade partner (second only to the EU), with its share continuing to increase in recent years, this creates a level of interdependence that should not be underestimated.

The Chinese factor helps Russia endure the current economic crisis and its conflict with the West. But Russia lacks effective tools for the centralized collection of data on the level of Chinese business presence and Chinese aspirations in the country. If they aren’t created soon, it may come at a cost to us.

In reality, the amount of Chinese investment in the Russian economy is greater than could be expected, given the Chinese investment model, the structure of the Russian economy, the sanctions, the collapse of energy prices, and other factors. In all evidence, the political factor is of no small importance either as a Chinese investment booster.

An obstacle to further growth of Chinese investment is obviously not so much the Russian investment climate as a lack of clear understanding in the Chinese private business community as to how to operate in countries with mid-level development like Russia. Therefore, it will be important to channel the necessary information and establish personal contacts between the heads of private businesses in both countries in order to generate a certain number of “success stories.” 

Views expressed are of individual Members and Contributors, rather than the Club's, unless explicitly stated otherwise.

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