On November 5, 2018, Prime Minister Dmitry Medvedev will make an official visit to China, during which he will attend the opening of the first China International Import Expo (CIIE 2018) and hold his 23rd meeting with Prime Minister Li Keqiang.
On the one hand, the visit is designed to boost China’s reforms and openness amid the rise of international protectionism and trade tensions between the United States and China. On the other hand, Russia will have an opportunity, which it is ready to use, to take over the US niche on the Chinese market. Dmitry Medvedev said the talks will focus on trade, energy cooperation, the development of infrastructure and coordination of positions on global issues, including international trade and protectionism.
The leaders of Russia and China said more than once that relations between their countries are the best ever in their history. Over the past 20 years, bilateral trade and economic cooperation have been growing rapidly. According to Russia’s customs statistics, bilateral trade reached $87 billion in 2017, an increase of 31.5 percent from 2016. China’s General Administration of Customs reports that bilateral trade amounted to $77.2 billion in January-September 2018, up 25.7 percent year on year. It is expected that yearend trade between Russia and China will grow record-high and reach $100 billion in 2018.
However, China has been Russia’s largest trade partner for eight years, whereas Russia only holds 14th place among China’s trade partners.
The reason for this is that trade between Russia and China strongly depends on the international market and the structure of Russia’s foreign trade. Russia’s main exports to China are crude oil, raw materials and timber (nearly 80 percent of the total), while China mostly delivers machine-building goods and textiles to Russia (60 percent). This structure explains the low monetary value of bilateral trade.
Investment: while China’s overall investment abroad decreased in 2017, its direct investment in Russia grew by 72 percent and reached $2.2 billion, including direct non-financial investment, which went up 36.8 percent. According to the Central Bank of Russia, on January 1, 2018, China’s outstanding direct investment in Russia amounted to $4.2 billion. China’s National Bureau of Statistics reported that by late 2016 the country’s accumulated foreign direct investment in Russia reached $13 billion. The total value of construction contracts signed between Russian and Chinese companies amounted to $7.8 billion in 2017. This flow of investment between Russia and China is absolutely inadequate given their relations of comprehensive partnership and strategic cooperation.
The two countries have been unable to increase direct investment into one another’s economy because of lack of mutual understanding. Russia as a national state is rooted in Europe. When Russia’s strategy of Greater Europe aimed at its integration into Europe came across western Greater Europe’s turn towards the East, Russia had to turn towards the East as well in search of closer cooperation with China. However, Russia does not know how China has changed over the past 50 years. Over the 40 years of reforms and openness, the Chinese business has learned to work with Western partners. Likewise, Chinese business does not know Russia either, and the chaos that swept Russia in the 1990s deterred it from investing in Russia. In other words, the current relationship between the Russian and Chinese businesses is not an easy one, which is creating many problems that are only heightening Chinese investors’ apprehension of Russia.
Therefore, the alignment of the Belt and Road initiative with the Eurasian Economic Union (EAEU) would help simplify and liberalize mutual trade and investments. The development of investment cooperation can be boosted by signing an investment agreement between China and Russia.
The agreement they signed long ago has become obsolete. The structure of bilateral trade has largely improved over the past years, yet it is not entirely satisfactory yet. The partners should increase the volume of value added goods and apply novel trade methods, for example, facilitate the diversification of Russia’s exports and e-commerce. They should open the door to each other’s direct investment in a larger number of industries, with a focus on the energy sector, infrastructure, agriculture and high technology.
Russia has a program of industrial development through 2020, while China is implementing the Made in China 2025 program. Given that both partners have unique advantages in the sphere of industrial development, they should look for points of contact and for new models to strengthen their industrial cooperation. They should also deepen their financial interaction, increasing the volume of swap deals between their central banks so as to promote mutual settlement in the national currencies for cross-border transactions; facilitate loans between commercial banks; open access to one another’s insurance markets and capital markets for financing purposes; as well as to cooperate in the creation and implementation of a system of financial transactions, settlement and payments in order to avoid the Americans’ control of their financial flows.
If China and Russia join forces in attaining the above goals, they are certain to win the US-provoked trade war.